'I Cashed Out my 401(k) to Start a Business and Paid $70,000 in Taxes and Fees. Here's Why I Have No Regrets'

Six years ago, Trina Spear and her friend spent their weekends sitting in hospital parking lots, selling scrubs out of the trunk of her car.

It was a far cry from the lucrative career she left on Wall Street, where she enjoyed six-figure bonuses. But she had always dreamed of starting her own business, and to do that the then-28-year old quit her job as a hedge-fund associate and moved cross-country to L.A. to start what became the company FIGS.

That wasn't Spear's only bold move: she also cashed out her 401(k) for seed money. By that point, she had built up $140,000 of savings, more than 10 times the average 401(k) balance of $11,800 for 20-somethings, according to Fidelity.

"I always wanted to be an entrepreneur, so it made sense for me," Spear tells Money.

At the start, the company had just two employees: Spear and her friend and co-founder, Heather Hasson, who had previously worked as a fashion designer. Hasson came up with the concept and the design for fashionable scrubs after hearing a friend in the medical industry complain about have to wear the pajama-like outfits to work every day.

She tailored a pair of her friend's scrubs to fit just right, and from there nurses and hospital staff spread the word about the better-fitting option. To save money while the business began to grow, Hasson and Spear shared an apartment and used it as the company's warehouse. They lived with barely any furniture, surrounded by stacks of boxes that they packed and shipped out themselves, sometimes chasing FedEx trucks down the street to get orders out on time.

The two women now run the online retailer out of a real office, not a parking lot, and the apparel company hit a whopping $100 million in sales last year, according to Spear. They say they couldn't have gotten where they are without Spear's retirement savings. Before they hit nine-figures, all they had was that 401(k) and some savings chipped in from Hasson.

Taking a Calculated Risk

Financial advisors universally frown upon cashing out a 401(k) for non-emergencies, but as an entrepreneur who believed in her company, Spear says it was well-worth the gamble.

There were consequences to accessing her retirement savings much sooner than expected. The IRS imposes a 10% penalty on early withdrawals if you take your money out before age 59 ½, on top of the regular income tax that's levied on traditional 401(k) withdrawals. Spear took a 50% hit to her savings as a result, walking away with just $70,000 to start FIGS.

Not only did she lose half of her savings to taxes and fees, she also missed out on the gains that savings--and her subsequent 401(k) contributions, had she remained on the job--would have made in the longest bull market in U.S. history. David Blanchett, head of retirement research at Morningstar Investment Management, estimates that if Spear had continued maxing out her 401(k) over the past seven years instead of liquidating it, her account would have grown to about $525,000 in 2019, assuming an average company match rate of 4.7% for an estimated base salary of $200,000 that would have grown to around $400,000 during that time period. (Spear declined to give her exact salary.)

But for Spear, it was the right choice.

"My net worth is multiples of that now," she says. "I’m a founder of this company, we have north of a billion dollar valuation. I made out well on my decision."

“You should do it if you 100% believe in yourself, believe in your idea, believe in your product, and believe in your company,” says Spear of the decision to liquidate all $140,000 of her retirement account to launch FIGS.

That money allowed her to take the leap from a cushy corporate job to not taking a salary for three years. The risk has paid off so far: the brand has secured well-known investors like former Lululemon CEO Christine McCormick Day, and now has almost 100 employees.

Spear was fortunate to be able to fall back on $50,000 of non-retirement savings built up from her Wall Street job, which she used to pay her day-to-day expenses. That allowed her to inject every penny of the leftover $70,000 from her 401(k) directly into FIGS.

Spear had other advantages as well: she was lucky she could afford to pay off her undergraduate loans and make a significant dent in her business school loans before walking away from Wall Street. Other would-be entrepreneurs who have sizable student loans or other kinds of debt or little savings may need a bigger cushion before making the transition.

Giving Back

Still, Spear feels strongly that with the constantly evolving job market, entrepreneurship can pay off. The average person now has 12 jobs over her lifetime, and pensions are largely a thing of the past.

"I had worked through the recession, literally as the world was falling apart," she says. "It was that unique experience that showed me, oh, you can’t rely on this."

Spear saw the reality that, increasingly, workers need to look out for themselves and not count on a company to provide them with a comfortable career and secure retirement.

"The system is not going to take care of you,” she says. “It’s less of a risk these days to believe in yourself” than assume a smooth trajectory from lifetime employment to Social Security, she believes. (Many experts believe Social Security will remain for generations to come, but benefits may be reduced for future beneficiaries.)

Taking the money out of her 401(k) was a safer move in her eye.

"Having that ability to max out your 401(k) is so important,” Spear emphasizes. “It shows the power of savings...and allows you to rely on yourself.”

Spear has passed that opportunity on to her employees at FIGS — the company encourages everyone to save for retirement (or disrupt a billion-dollar industry themselves one day) by offering a competitive benefits program: at FIGS, all new hires are auto-enrolled in the company's 401(k) plan at a 6% contribution rate, and the company matches 100% of contributions on the first 6% that employees put in. By contrast, the average company match rate is 4.7%, according to Fidelity.

Spear and Hasson also give back to the broader medical profession, donating hundreds of thousands of scrubs to health care professionals in the developing world through their program Threads for Threads.

Spear started saving for retirement again in 2018 and plans to continue maxing out her contribution every year. For 2019, the maximum that employees younger than 50 can contribute to their 401(k) is $19,000, while those 50 and older can contribute an additional $6,000.

Even though most people don't stay at a single company for 30 years anymore, Spear says she isn't going anywhere when it comes to FIGS. While she wants her employees to be self-sufficient when it comes to saving for retirement, she also wants the stylish scrubs company to be a reliable employer where people can build up their 401(k) savings for decades if they choose to.

"I plan to be at the company for the next 30 years," she says. "I want more companies to be like that again."