IRA Financial Blog

ROBS 401k Guide

Beginner's Guide to ROBS Solution

The ROBS 401(k), also known as rollover for business startups, is the only way to buy or finance a business with retirement funds that personally benefit you. The ROBS arrangement typically involves rolling over a prior IRA or 401(k) 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.

Owning their own business is a dream for many. However, not many 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.

Key Points
  • ROBS stands for Rollover Business Startups
  • The ROBS structure is the best way to utilize retirement funds to start a business
  • ROBS can be quite complicated to set up, therefore it is import to work with an expert

What is 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-free 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.

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.

4 Steps to the Rollover as Business Startup Solution

  1. 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.
  2. 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.
  3. The plan participant will rollover IRA or 401(k) plan funds into the 401(k) plan.
  4. 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

Risks when Employing ROBS

While it’s good to know the benefits of this self-directed retirement plan, you should also consider the cons. Of course, this can come with a number of risks. You may already know from research that 50% of new businesses fail after five years. This data comes directly from the Small Business Administration. Unfortunately, most investors who use their retirement funds to venture out in a business use most or all of their retirement funds.

This is very important to consider: if your business doesn’t succeed, you will lose most or all of your entire retirement “nest egg.”

The IRS and the 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.

Prohibited Transactions & Disqualified Persons

You may know of disqualified persons. You, as the IRA holder, are a disqualified person. Your spouse and lineal ascendants and descendants, such as your grandparents, parents, children and even their children, are all disqualified persons. Entities of which a disqualified person owns 50% are also disqualified persons.

Therefore, with most self-directed retirement plans, you are unable to make a transaction that directly or indirectly benefits you or any disqualified person with your retirement funds.

Direct Prohibited Transaction: A direct prohibited transaction involves a disqualified person and his/her retirement account. For example, the IRA holder uses funds from his Self-Directed IRA to purchase an interest in an entity that his father owns.

Indirect Prohibited Transaction: A self-dealing prohibited transaction occurs when an individual uses his or her IRA income or assets for personal gains. For example, the IRA holder uses his Self-Directed Roth IRA funds to make an investment in a company he controls.

While you can invest in a business with your Self-Directed IRA, you cannot be personally involved in that business. This is just another reason the ROBS structure is the best way to use retirement funds to fund your business.


Latest Content

Send Us a Message!