Last Updated on February 6, 2020
Why not use your 401k funds to buy a business and invest in yourself rather than the volatile stock market? With the recent stock market turmoil in the U.S. stock market and the downward trend expected to continue, it may seem safer to use your 401k for the ROBS structure to start or fund a business you can run, manage and even earn a salary from. If you are leaving your job or plan to leave your job and have a qualified 401k retirement plan, this may be a possibility with the Rollover for business startup (ROBS) solution.
401k Retirement Funds and the ROBS Solution
Here’s how it works:
With IRA Financial Group’s Rollover for Business Startups Solution, a new C Corporation is formed which will adopt a 401k Qualified Plan. Your existing retirement funds can then be rolled into the newly adopted 401k Plan tax-free. The 401k will then purchase the stock of the new corporation. The new corporation will then use those funds to purchase a new business or franchise tax-free!
With the IRS compliant ROBS solution, you can use your 401k retirement funds to facilitate in the endeavor of earning a reasonable salary from your new business or franchise. You can also use your new 401k Plan to make high tax-deductible contributions – $56,000 ($62,000 if you are over the age of 50) and even borrow up to $50,000 for any purpose. Click here for current contribution limits.
What does the IRS Say about this?
It may not sound legal to use your 401k to buy a business, however the Internal revenue Code explicitly permits the purchase of corporate stock by a 401k Qualified Plan. The IRS has repeatedly confirmed that the structure is legal but has expressed some concern about the potential for abuse by individuals not being properly advised by tax professionals.
For example, the IRS has documented the following instances of abuse when it comes to using retirement funds to invest in a business:
(i) the employees of the business are not properly informed that a 401k qualified plan has been adopted by the business and that they are eligible to participate
(ii) the individual that established the structure with no intention to use for business purpose and the sole purpose for establishment was to get access to the retirement funds without penalty
(iii) the structure would be used to purchase assets for personal use with the retirement funds.
Because of this, the IRS has stressed that it is imperative that when using retirement funds to establish or finance a new or existing business or franchise, it is necessary to work with qualified tax professionals who have experience in this area and can make sure the structure is established in full compliance with IRS and ERISA rules and procedures.
IRA Financial Rollover for Business Startups Solution
IRA Financial Group’s ROBS Solution is an IRS compliant legal structure that one can use to invest retirement funds into a business they will operate and be employed by. Work with IRA Financial Group’s in-house tax professionals to help establish your IRS compliant Business Acquisition Solution.
The ROBS structure is the only way you will be able to use your retirement fund to legally start or finance a new or existing business tax-free and penalty free! Whereas, with a Self-Directed IRA LLC, an individual can invest retirement funds in a private business, but not a business that he or she would be involved in – that would be considered a prohibited transaction pursuant to Internal Revenue Code 4975. While, with a Solo 401(k), an individual could only borrow up to $50,000 or 50% of his or her account value (whichever is less) and use that loan for any purpose, including starting or financing a business. However, if an individual required more than $50,000 for a business, then the ROBS structure is the only solution that will allow one to use their retirement funds to start or finance a business tax-free and without penalty!
You can learn more about the ROBS solution by downloading the free IRA Financial Rollover for Business Startups info kit.