Rollover as Business Startups, also known as the ROBS solution, is the only legal way to use your retirement funds to invest in your own business.
This structure is completely IRS and ERISA approved, even though you will use retirement funds to benefit yourself, a disqualified person. The Rollover as Business Startups solution takes advantage of an exception under IRC Section 4975(d), also known as qualifying employer securities. It allows you to rollover a prior IRA or 401(k) into a newly established 401(k) plan, which a start-up C corp. business sponsors. You then invest the funds you rollover into the stock of a new C corporation. The benefits of using the ROBS solution includes the ability to invest in yourself while earning a salary from the business – the deciding factor for many entrepreneurs who employ the ROBS structure.
Learn More: What is Rollover Business Solutions (ROBS)?
Although the structure is legal, the IRS does have a few concerns regarding abuses. Let us take the IRS stance to segue into what you should never do with the Rollover as Business Startups solution.
- The ROBS solution allows one to use retirement funds for a new or existing business
- The structure is IRS approved, however it may be scrutinized
- It’s important to understand the rules involved when utilizing ROBS
In a 2008 memorandum, the IRS stated that the ROBS structure is legal, however certain cases reflected that individuals would take retirement funds for the purpose of purchasing a business, but never acted on the purchase. Instead, they used the funds from their retirement for personal use, thus avoiding tax and penalties on the distribution.
After you employ the ROBS structure, IRS may look at your actions more carefully. While it is unlikely to be audited by the IRS because you performed a ROBS, the chances of becoming audited will increase. As a result, you should always remain compliant with IRS rules.
Learn More: Is ROBS Legal?
As most entrepreneurs know, starting or funding a new business is very risky. The Small Business Administration states that half of all new businesses fail within five years. Because of this, the biggest gamble is that you may lose most, or all of your retirement funds. Although you cannot control whether your business will succeed, you can control how much of your retirement savings you put toward that business. As an entrepreneur, you want your business to prosper, and you will do what you can to ensure that it does – but always remember success is no guarantee and act accordingly.
Related: Rollover Business Startup Solution (ROBS) Compliance Rules
Use a Costly Provider to Setup the Structure
Setting up the ROBS structure can be costly and many ROBS providers charge upwards of $5,000 to get you started. If you don’t research ROBS providers, you may end up spending more than you should to set up the structure. IRA Financial charges just $3,500 for setup and $100/month for record-keeping services. While this is still a high fee, our competitive pricing will help you save thousands in setting up your structure.
We also offer the highest level of service. If you’re interested to learn more, contact IRA Financial at 800-472-0646 to speak with a specialist and ask about pricing and additional services for the ROBS structure.
Learn More: Rollover as Business Startups FAQs