Beginner’s Guide to ROBS Solution
ROBS Solution, also known as the rollover for business startups, is the only way to buy or finance a business that personally benefits you. You may know of the prohibited transaction rules and disqualified persons. You, as the IRA holder, is a disqualified person. Therefore, with most Self-Directed retirement plans, you’re unable to make transactions directly or indirectly with your retirement funds. To better explain this, let’s look at the example of Mark Avatar.
Mark A. uses the funds from his Self-Directed retirement account to purchase an interest in an entity his father owns. The problem here is, Mark A. is a disqualified person because he’s the IRA holder. His father is also disqualified because he’s a close family member of the IRA holder. Additionally, the transaction personally benefits one of the disqualified persons – not the individual retirement account.
You can learn more about prohibited transactions and disqualified persons in the Self-Directed IRA LLC Prohibited Transaction Rules.
Beginner’s Guide to ROBS Solution – Qualifying Employer Securities
You may wonder why you don’t receive taxes and penalties by using the ROBS IRA to invest in a new or existing business/franchise. According to IRA Financial Group:
The legality of the ROBS structure is based on an exception to the prohibited transaction rules….which allows a 401(k) plan to buy corporate stock.
This exception is the “qualifying employer securities”. It allows investors to use a 401(k) plan to buy stock in a C corporation. There are just four steps to create a ROBS solution that’s also IRS (Internal Revenue Services) compliant.
- 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 a limited liability towards 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 provides you with income. Additionally, you can invest over $50,000 of your retirement funds.
A Great Self-Directed Retirement Plan for Entrepreneurs
Most entrepreneurs will benefit from the rollover for business startup. 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 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 solution is a very good place to start. But 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 lost most or your entire retirement “nest egg.” While this is a great way for entrepreneurs to launch their business, it’s highly advised to use just a portion of your funds and find alternative avenues if additional funding is necessary.
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 before tax professionals. They have seen instances of abuse when it comes to using IRA funds to invest in a business/franchise. 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).
Which of the three Self-Directed retirement plans best suits your needs? The ROBS (rollover for business startups) solution, or:
Q for You
Would you use most of your retirement funds to invest in a new or existing business/franchise?