Last Updated on January 23, 2020
Whether you are already utilizing the ROBS structure, or looking for some info about it, it may help to know what types of business you might want to open. We took a survey of our current ROBS clients to find out what businesses they have started. In the following, we’ll briefly describe the structure and go over the top 3 businesses using ROBS. Hopefully, this will give you a good start in deciding what type of business you want. Remember, this article is for educational purposes. Always speak with a financial advisor before deciding on the ROBS structure to see if it’s right for you.
What is ROBS?
The acronym ROBS stands for Rollover Business Startup. Essentially, you roll over current retirement funds into a brand new 401(k) that you can use to start a new business. Funds can also be used to expand a current business. A C Corporation is formed and a 401(k) is set up for the business. You then perform a rollover of current retirement funds. They can come from and IRA, 401(k) or other retirement plan. These funds are used to buy stock in the C Corporation. The sale of the stock gives you the capital you need to start your business.
The Pros of ROBS
No Debt – If you’re looking to start your own business, you most likely need more capital than you have saved. Therefore, you would need to borrow money to get your new business up and running. By using retirement funds, you don’t create more debt since there is no loan to repay.
No Taxes – If your plan is to use retirement funds for the business, using the ROBS structure means you don’t have to pay taxes. Obviously, if you take a loan out, you will have to pay interest on it. Further, you can only borrow half your account balance, up to $50,000. If you withdraw the funds, you will pay taxes on the amount. Lastly, if you are under age 59 1/2, you will be hit with a 10% early withdrawal penalty.
No Credit Check – Although you may have money saved (in or out of your retirement plan), you may not have the best credit. Therefore, even if you obtain a loan, you’ll be hit with higher interest rates. Plus, the loan process can take a long time. When using ROBS, there is no credit check, nor time wasted applying for a loan.
The Cons of ROBS
Retirement at Risk – You’re betting big on yourself when using ROBS. You are using some or all of the savings you have amassed for retirement. If your business fails, that’s not good for your retirement. It’s never a smart idea to risk all of your retirement money in your business. All or nothing is a risk most people should avoid.
Fees – The administration of the ROBS structure can get quite expensive. IRA Financial is on the low end of the scale. Our service costs $2,500 to set up, which is about half the average. Further, monthly administration fees can add up as well. This won’t matter too much when your business thrives.
Earnings – As long as your money is in your retirement, you generally see decent returns. The annual Stock Market gain is about 8%. Once you rollover the funds, you won’t see those returns. Alternatively, you won’t lose money if the market crashes.
Top 3 Business Using ROBS
The top 3 businesses our clients are using with ROBS are franchises, tech startups and motels. Let’s talk a little about each:
Whether are you looking at a giant, national franchise, like McDonald’s, Dunkin’ Donuts or 7-Eleven, or something smaller, such as Cruise Planners or Jazzercise, there’s a franchise for every budget. Franchises are popular since they are backed by national companies. You are paying for a brand and all that comes with it. However, they come with a steep price. A national chain like Taco Bell, has a franchise fee of $25,00-$45,000. Further, the initial investment can be upwards of #2 million. A smaller franchise, like JAN-PRO, comes with a franchise fee as low as $2,520. The initial investment ranges from $3,985 to $51,605. See more numbers here.
Obviously, the name brand recognition is why the franchise is such a great opportunity. The community within the organization is also quite helpful to new franchisees. The capital needed for a franchise is why ROBS is so attractive to our clients.
Technology is invading every facet of our lives. Remember when a computer was the “tech-iest” thing you could own? Now, most of us have one in our pocket or on our wrist. Everyone is looking for the next big thing, or how to make current tech even better. Startups are created all the time by inspired people with the knowledge to make this happen. For many, the goal is to come up with something great and then sell it for a big profit. For others, it’s more about the actual work than it is for the dollar signs. Wherever you fit in, ROBS can help defray the costs needed to get the equipment and staff needed.
Startups are quite risky if you don’t have your finger on the pulse of technology. Blockchain (think cryptocurrencies), virtual reality and intelligent apps are among the cutting edge of the latest tech out there. Software, hardware or a combination of both offers lots of opportunities for real profits.
You may know that real estate is the most popular alternative asset held in retirement accounts. What you may not know, at least according to our clients, real estate is popular with the ROBS structure. While several real estate ventures were seen in the survey, motels topped the list. Motels varied from smaller, boutique ones to three dozen unit motels. Several people combined their motel investment with first on our list and invested in a franchise motel.
Like with any real estate investment, many factors should be considered. Location, cost, state of the property and potential income are all important for motel investments.
Top 3 Businesses Using ROBS – Conclusion
When utilizing the ROBS structure, it’s important that all rules and regulations are followed. You must work with a provider, such as IRA Financial, that knows the ins and outs of the plan. Choosing the right business is just as important. You must do your due diligence to make sure your business succeeds. Your retirement is counting on it!
If you have any questions, feel free to reach out to one of our ROBS experts @ 800.472.0646.