Menu Close

IRA Financial Group Blog

5 Benefits of Using Retirement Funds to Buy a Business (ROBS)

Benefits of using your retirement to buy a business
5 Minute Read

There are many benefits of the ROBS (rollover for business startups) Solution, such as the ability to use your retirement funds to buy or finance a business you will have an involvement in. If you need more than $50,000 in funds, the ROBS solution is the only way to legally do this.

With the ROBS solution, you can use your retirement funds to work with another disqualified person. Formerly known at IRA Financial as the Business Acquisition Solution (BACSS), ROBS takes advantage of a tax code in the IRC. This exemption is called the “qualifying employer securities” exemption.

How Does the ROBS Solution Work?

The structure typically involves the following steps:

1. An entrepreneur or existing business owner establishes a new C Corporation.

2. The C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options. This includes employer stock, also known as “qualifying employer securities.”

3. Next, the entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan.

4. Then, the entrepreneur directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value. In other words, the amount that the entrepreneur wishes to invest in the new business.

5. Finally, the C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

What Are the ROBS Benefits?

We’ll provide you with the benefits of ROBS that you can take advantage of when in need of retirement funds to capitalize a personal business venture.

1. Save Money

The primary benefit of using the ROBS Solution is that you can employ ROBS to use your retirement funds to invest in a business you will be personally involved in. You can do this without paying tax on the retirement funds you wish to use as a distribution.

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, using a ROBS solution could save you close to 45% of the distribution amount.

For example, if someone under the age of 59 1/2 was looking to use $100,000 of retirement funds to fund a business and takes a taxable distribution of that amount, that individual will likely pay around 45% of the $100,000. That’s $45,000 in tax to the IRS when declaring the distribution on their tax return.

The tax rate can be lower if the individual is in a lower income tax bracket or the necessary retirement funds were insignificant. But using a ROBS solution will save on paying tax and potential 10% penalty on that amount.

2. Invest in Yourself

The ROBS solution allows you to invest your retirement funds in a business that will be actively run by you, the retirement account holder. As a result, you invest your retirement funds in yourself – not 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 is certainly a risk.

However, it is a risk that you are legally entitled to take as per the Internal Revenue Code.

3. Diversification

Another benefit of the ROBS solution is it helps investors diversify their retirement portfolio. Since the 2018 financial crisis, many financial advisors believe that diversifying your investments is a good way to protect your retirement funds from a market downturn.

It’s not possible to eliminate investment risk altogether, however you can decrease your level of risk. If you invest in different types of investments, like stocks, bonds, real estate and private businesses, this is a way to diversify your retirement portfolio.

There’s a belief that diversification enables a retirement portfolio to grow both when markets boom and returns crumble in one sector. It’s important to work with a financial planner and tax professional when looking at investment options. This is especially important when it comes to using your retirement funds to buy a business.

4. Earn a Salary

In order to participate in a 401(k) Plan, you must be an employee of a business that adopted the plan. This is why, if you own Apple or IBM stock yet do not work for these companies, you can’t participate in their 401(k) plan.

In order to be eligible to participate in the corporation 401(k) Plan, you must become a W-2 employee of the C corporation. It’s important for many entrepreneurs to earn a salary and be involved in a business. For these individuals, the ROBS solution is the better option in comparison to the self-directed IRA.

Read: What You Should Know About The New 20% Pass-Through Tax Deduction

Benefit from having a 401(k) Retirement Plan

You can save toward your own retirement and ensure future security with an employer-sponsored 401(k) Plan.

Below, we offer a few advantages of offering and participating in a 401(k) Plan.

1. Matching Contributions – Many employers will match a portion of your savings

If you don’t participate in a 401(k) Plan, it’s like passing up free money. A safe harbor 401(k) Plan is a popular type of 401(k) Plan for small businesses. It offers employees who participate a 3% matching contribution made by the employer.

Therefore, if the employee earns $40,000 in salary during the year and contributes 3% of the salary ($1,200) to the 401(k) Plan, the employer contributes an additional 3%.

2. Retain Quality Employees

When most business offer retirement benefits, it’s worthwhile for small businesses to compete for talented workers and implement 401(k) benefits. When you offer 401(k) Plan benefits, you’re more likely to retain key employees.

In general, when potential hires consider multiple job offers, they will compare the offers based on:

  1. Corporate culture
  2. Growth opportunities
  3. Benefits packages

4. Easy Administration

401(k) Plan administration is now easier and more cost-effective than ever with the many Internet options available to small employers. Additionally, IRA Financial Group offers record keeping and third-party administration services for your plan. This allows you to spend more time focusing on your business and less on your plan.

5. You Can Participate As Well

You are eligible to participate in the company 401(k) plan if you are an owner or an employee of the company that sponsor’s the 401(k) plan.

Current regulations allow plan participants to contribute up to $19,000 of their income on a pre-tax basis each year. If you’re 50 and over, you can contribute up to $25,000.

In addition to the tax savings for offering the plan and providing matching contributions, you also receive more tax savings for participating in the plan.

This savings can be substantial! An owner in the 35% tax bracket who made the maximum contribution will save approximately $6,500 in taxes for 2019.

Get in Touch

Do you have questions regarding additional ROBS benefits that we didn’t touch on in this article? We encourage you to contact IRA Financial Group directly at 800-472-0646. Or you can fill out the form to speak with a ROBS specialist regarding all of your questions.

Related Articles