- The SECURE Act, recently signed by President Trump, has one key provision that can benefit small business owners.
- One key provision is to increase the credit limitation for small employer pension plan startup costs.
- Individuals who have employed the ROBS structure will benefit, as one aspect of ROBS is using a 401(k) plan to buy stock in a C Corporation.
President Trump recently passed the SECURE Act, which will have both positive and negative impacts on retirement savers. But one thing is certain: if you’re an entrepreneur interested in using the Rollover as Business Startup (ROBS) Solution, you can benefit from some of the SECURE Act’s provisions.
SECURE Act Offers Credit for New 401(k)
The SECURE Act may have upset retirement savers by eliminating the Stretch IRA, which would benefit IRA holders who wished to stretch out the benefits of the IRA deferral by designating a young beneficiary of the IRA. But it has made many strides in the right direction, including the increase of the required minimum distribution (RMD) from 70 1/2 to 72 years of age.
An American Express Survey revealed that 60% of small business owners were not saving enough for retirement. This may be the result of a combination of hurdles business owners face when establishing a 401(k) plan. Many 401(k) policies can be complex and a burden for small business owners who already have plenty job responsibilities.
Fortunately, the SECURE Act has placed considerable emphasis on making it easier and more affordable for a small business to establish a 401(k) plan, and a primary aspect of the ROBS solution is using a 401(k) plan to buy stock in the C Corporation in return for the cash invested from the 401(k) plan. One of the provisions of the SECURE Act is to increase the credit limitation for small employer pension plan startup costs.
This may be just the financial incentive business owners need to establish a 401(k) plan for themselves and their employees. Entrepreneurs employing the ROBS can benefit from the SECURE Act because the credit for establishing a new 401(k) plan will essentially pay off the ROBS structure.
Tax Credit is Better than a Tax Deduction
When it comes down to receiving tax credit or a tax deduction, you always want to go with credit. Credit and deductions both reduce your tax bill, but they take very different routes in doing so.
A tax deduction will reduce how much of your income is subject to taxes, whereas tax credit will reduce the tax you owed dollar for dollar. For example, a tax credit with a $1,500 value reduces your tax bill by $1,500. As opposed to a deduction, tax credit reduces your taxable income subject to tax.
The SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the newest retirement account legislation and perhaps the largest piece of legislation in over a decade. It was designed to help more Americans save for retirement and, as you can see, help small businesses establish a retirement plan for themselves and their employees.
The Rollover as Business Startup Solution is an IRS and ERISA approved structure that allows entrepreneurs to invest retirement funds in a new or existing business/franchise. Because the structure takes advantage of the exemption in the tax code under Internal Revenue Code (IRC) Section 4975(d), business owners and entrepreneurs will not trigger the prohibited transaction rules, thus can use their retirement funds tax and penalty-free.