The Internal Revenue Code pursuant to Section 4975(d)(13) and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.
The Rollover Business Start-up or ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.
Below are the three reasons you may want to consider using a ROBS solution to buy a business or franchise using retirement funds.
- Access Your Retirement Funds Tax-Free & Penalty Free: The primary advantage of establishing a ROBS solution is to be able to use your retirement funds to invest in a business you will be personally involved in without having to pay tax the retirement funds you wish to use as a distribution to tax and potentially penalty. By being able to invest the retirement funds into the business without having to take a taxable distribution and a 10% early distribution penalty if under the age of 59 1/2. Thus, with the ROBS solution you will be able to tap into your retirement account and use the funds to invest in a business you will be personally involved in without triggering a tax or early distribution penalty.
- Work in the Business & Earn a Salary: In order for one to be a participant of a 401(k) Plan, one needs to be an employee of the business, which adopted the plan. This is the reason why if you own Google or Amazon stock but don’t work at those companies, you cannot participate in their company 401(k) plans. Hence, in order to be eligible to participate in the corporation 401(k) plan you must become a W-2 employee of the C Corporation. For many entrepreneurs the ability to earn a salary as well as be actively involved in the business is a popular reason for using a ROBS solution. With the ROBS solution one can invest their retirement funds into a business or franchise without tax or penalty as well as earn a salary from the business.
- Invest in Yourself: The ROBS solution allows one to invest their retirement funds in a business or franchise that they will be personally involved in. Accordingly, one is able to invest their retirement funds in themselves rather than on Wall Street. Of course, not all businesses are successful. According to Bloomberg, close to 80% of new businesses fail in the first 18 months. Hence, investing your hard-earned retirement funds in a new business or franchise is certainly a risk. However, it is a risk that you are legally entitled to take as per the Internal Revenue Code. Using retirement funds to invest in your business is not for everyone, but for those entrepreneurs that would rather invest in themselves than Wall Street, the ROBS solution is a potential tax efficient option.
To learn more about the benefits of the ROBS strategy, please contact a retirement tax expert at 800-472-0646.