Beginners Guide to ROBS 401(k)
Owning their own business is a dream for many. However, few have the cash on hand to do so or cannot procure a loan. If you have funds in your retirement plan, you can use those to get started. ROBS may be your best choice, especially if you want to be involved in the business itself, instead of just as an investor.
ROBS 401(k)
ROBS 401(k), or the Rollover Business Start-up (aka Rollover as Business Startups), is an IRS and ERISA-approved structure. It allows you to invest funds from your retirement account into a new business/franchise. You can remove funds from a Traditional 401(k) or IRA Plan to purchase a new or existing business or franchise tax- and penalty-free.
The 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 sponsors. You then invest the rollover funds in the stock of the new C Corporation.
If you’re an entrepreneur, you’ll benefit in many ways by using the Rollover Business Startup Solution retirement option. With the Rollover Business Startup Solution, you:
Won’t take on debt: You can always invest more money into your business which is crucial for start-ups. Remember, a ROBS isn’t a loan, therefore there’s no debt to repay.
Won’t pay penalties or taxes: With the Rollover Business Startup Solution, you can withdraw funds from your retirement plan before 59 ½ without incurring taxes or penalties.
Receive Funding: Your credit score doesn’t matter, and typically other factors that may go against you aren’t considered. Your business receives funding when it needs funding. If you’re passionate about starting your business and you have a significant retirement “nest egg”, turn this into capital for your new business venture. The ROBS solution allows you to kick-start your new business by accessing the money in your retirement account.
Key Points
- ROBS stands for Rollover Business Startups
- The ROBS structure is the best way to utilize retirement funds to start a business
- ROBS 401(k) can be quite complicated to set up, therefore it is important to work with experts
Benefits of ROBS 401(k)
With the ROBS 401(k), you can do the following:
- Use your retirement funds to invest in a new business tax-free!
- Use your retirement funds to purchase a business or franchise tax-free!
- Use your retirement funds to finance a new or existing business tax-free!
- Earn a reasonable salary from your new or existing business.
- Help grow your business.
- Recapitalize and/or expand your business.
- Maintain a qualified retirement plan and help save for the future.
- Diversify your retirement investment portfolio by investing in your own business as well as stocks and mutual funds.
- Attract and retain quality employees by offering a benefit not commonly found in small business.
- Take advantage of high contribution limits under a 401(k) Plan.
- Enjoy tax benefits generated by using a 401(k) Plan.
- Private Business Funding without consent
- Work directly with our tax and ERISA professionals to establish an IRS and ERISA-compliant structure that works best for you and your business.
How ROBS 401(k) Works
- The business is operated as a C corporation. A C Corp. is treated as an independent entity, so it doesn’t cease to exist. Furthermore, owners and shareholders have limited liability for debts within the business.
- The same business adopts a 401(k) plan. As you may already know, a 401(k) is a retirement savings plan that your employer sponsors.
- The plan participant will rollover IRA or 401(k) plan funds into the 401(k) plan.
- Finally, the 401(k) plan purchases stock in the C corporation in return for the cash investments from the 401(k) plan.
Now, you can invest in a business that also provides you with income. The Solo 401(k) plan has a loan feature that lets you borrow $50,000 or 50% of your account value – whichever is less. If you wanted to use the loan to invest in your business, you couldn’t go over $50,000. With the ROBS Solution, you can use all of the funds within your retirement plan. Just remember, doing this comes with its own set of risks.
A Great Option for Entrepreneurs
Most entrepreneurs will benefit from ROBS 401(k). If you’re investing in a start-up, you have the assurance of investing more money into your business without taking on debt. It’s not a loan, so you don’t have to repay it in the end. Again, there are no penalties or taxes with the ROBS solution. This means you can make a withdrawal before 59 1/2 without the IRS penalizing you for doing so.
If you have significant funding in your retirement account, this can capitalize on your new business venture. It doesn’t matter what your credit score is, and other factors that may prevent you from investing in a new business aren’t considered.
If you plan on leaving your job to start your own business, this beginner’s guide for ROBS 401(k) is a very good place to start.
Related: Best Way to Invest in a Business with Retirement Funds
The IRS and ROBS Solution
Although the IRS does state that the rollover for business structure is legal, it does harbor concerns. First, the IRS stresses the importance of investors receiving proper legal advice from a tax professional. The IRS has witnessed far too many instances of abuse when it comes to using IRA funds to invest in a business/franchise, which the IRS stated in their 2008 Memorandum and again in a 2010 public phone forum.
To prevent this from happening to you, make sure you work with qualified tax professionals who have years of experience in this area. By doing so, you can rest easy that the structure is fully compliant with IRS and ERISA (Employee Retirement Income Security Act) and review the IRS compliance considerations.
Conclusion
ROBS 401(k) is the only legal way to use your retirement to invest in a new or existing business. While ROBS 401(k) has numerous benefits, it also has risks. Hence, it is important to work with a provider who understands how ROBS 401(k) works. To learn more, please contact a ROBS 401(k) expert at 800-472-0646.
