IRA Financial Blog

ROBS Prohibited Transaction Rules

March 14, 2024

What are the ROBS Prohibited Transaction Rules?

The IRS-prohibited transaction rules are not triggered in a rollover business start-up (ROBS) solution. The ROBS solution allows one to use their IRA or rollover 401(k) funds to purchase stock in a C Corporation that they are personally involved in without triggering the IRS-prohibited transaction rules. Whereas, if a Self-Directed IRA was used instead of the ROBS solution, the purchase of corporate stock by the IRA would trigger the IRS prohibited transaction rules if the retirement account owner of their lineal descendants controlled the company.

Before we go further into that, let’s take another look at what the prohibited transaction rules entail. It will help you better understand why no ROBS-prohibited transaction rules are set in place.

If you have a retirement account, then you’re aware of the prohibited transaction rules. These rules don’t describe what you can invest in, only what you cannot invest in. You may also know why the Prohibited Transaction Rules are in place. The IRC doesn’t want you to use the funds in your retirement account for personal gains. The goal of the IRA is to accumulate as many funds until you reach retirement age and then make withdrawals.

Read More: Rollovers as Business Startups

Disqualified Persons

For the sake of clarification, what exactly is a disqualified person? In general, a disqualified person is:

You (the IRA holder)
Your lineal descendants
Any entity controlled by such persons (greater than 50%)

The IRS believes that the IRA holder and his/her lineal descendants are one in the same. However, there are many more disqualified persons than what we have listed. You can review all disqualified persons in Solo 401(k) Prohibited Transaction Rules.

The prohibited transaction rules are also set in place because they protect the IRS revenue-generating rules.

If you use your retirement money to help your children or spouse, the IRS sees this as getting around the distribution rules (the minimum amount you can withdraw from your account each year). You aren’t paying taxes on the IRS accounts and at the same time, you’re benefiting by helping close family relatives.

These rules help the IRS in other ways, as well. For example, if you use your IRA funds and give them to your spouse, it’s as if you’re gaining use of the IRA funds without paying tax or the potential 10% penalty. Then everyone would take advantage of this to avoid paying taxes on their IRA funds.

How does this hurt the IRS?

Let’s look at an excerpt from Turning Retirement Funds into Start-Up Dreams.

“…The IRS would be left with very little tax revenue from the IRA account, and it would also lose tax revenue because of the use of the IRS deduction in the year of contribution…So prohibited transaction rules are actually very important for the IRS.”

The Reason There are No ROBS Prohibited Transaction Rules

As you saw in ROBS Solution – How Can I Benefit and ROBS Solution – How it Works, individuals can break the prohibited transaction rules. Again, that’s because the ROBS solution takes advantage of the ‘qualifying employer securities’ exception in the tax code under IRC Section 4975(d) (13). This is an exception to the IRS prohibited transaction rules that allow the 401(k) to buy qualifying employer securities or stock of a C corporation. Doing so does not trigger the prohibited transaction rules like the self-directed IRA LLC will, for example.

With so many advantages to the ROBS solution, it’s time to think seriously about using it to start or finance your business. At IRA Financial Group, our IRA specialists will establish the ROBS today, and handle all necessary paperwork. Additionally, your assigned specialist will guide you through the process and answer any questions or concerns you may have. Contact us today to get started.

Did You Know?

The ROBS solution can allow you to use funds from your Self-Directed IRA and Solo 401k to purchase a business that you can earn a salary from. It is the only legal way you can do it. You will need a C Corporation to do a Rollover Business Start-Up solution. Contact us today to learn more.