ROBS Solution – C Corporation
You want to use your retirement funds to invest in a new business that adopts a 401(k) Plan. First, you will need a C corporation. A C corporation is the most common type of corporation in the United States. As a corporation, it doesn’t cease to exist even when the owner or shareholder leaves the corp. or passes away.
How Does the ROBS Solution Work?
We went into detail on how rollovers as business startups work when we explored the benefits of the ROBS solution. To finance your business with your retirement funds, you need to do this through the ROBS. The reason is, it takes advantage of an exception in the tax code, known as ‘qualifying employer securities’.
Therefore, this differs from a traditional IRA. As you may know, with an IRA you are unable to withdraw funds from your retirement account (until you reach age of retirement), without paying or incurring fees. However with this avenue, the ‘qualifying employer securities’ exemption allows you to do so. But let’s assume you were to use a self-directed IRA. As a disqualified person, you will trigger the prohibited transaction rules.
In five simple steps, here’s how you can open a ROBS:
- Form a C corporation
- Create a 401(k) for the C corp.
- Transfer funds from your personal retirement account to the C corp. 401(k) account
- Use your 401(k) Plan to buy stock in the C corporation
- Use finances from ROBS to start/finance your business
This solution basically requires that your prior IRA or 401(k) rolls over to your newly established 401(k) plan. And an existing or newly established C corp. must sponsor this newly established 401(k).
Above are the five steps to open a ROBS, but there are just three essential components you need.
The three ROBS components include:
- Retirement funds available for roll over
- A C corporation
- A newly established 401(k) Plan
Cons to Consider
To begin explaining how this solution can harm you, we’ll pull a quote out of Turning Retirement Funds into Start-Up Dreams.
“Even though the ROBS solution is 100% legal per the IRS, it is probably my least favorite self-directed retirement solution…I think the idea of using a majority of your hard-earned retirement funds to invest in a business is a risky and a potentially self-defeating proposition…The ROBS solution should be looked at as a last resort when there are no other options available.”
Strong words, but valid, nevertheless. As we mentioned in the benefits of using the ROBS solution, 50% of new businesses fail within the first five years, according to the Small Business Administration. And most people who use the solution use most, or all their retirement savings to invest in their new business venture.
If you are looking into the ROBS solution, it’s much wiser to invest just a portion of your retirement funds to start/finance your business. That way, you don’t list your entire nest egg. Questions or concerns? Speak with one of our IRA specialists today.
If you have any questions or concerns, the IRA specialists at IRA Financial are just a phone call or email away. If you choose to establish a ROBS, you will be assigned a specialist who will complete all the necessary paperwork for you and guide you along the way.