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Can I Buy a Business with my Retirement Account?

ROBS to buy a business

Buy a Business with Your Retirement Account

IRA Financial has two great solutions that allow you to buy a business with your retirement account. Each of our solutions is a little different. The first solution is to use your IRA. The second solution is Rollover Business Startups (401k Business Financing). Despite the differences, each solution allows you to purchase a new or existing business with your retirement account.

Benefits of Using Retirement Funds to Buy a Business

Using your retirement funds to buy a business has multiple benefits. Although there are different ways to achieve this goal, some of the benefits of using your retirement funds to buy a business include:

Access to Capital: Unlike using a loan, using funds in your retirement account to buy a business does not require a waiting period, underwriting, or exposure to interest rates.

Starting a Business with no Debt: Starting a business with debt can be detrimental to the business’s long-term health. However starting a business without having to take on debt can free up capital, reduce your stress, and allow you to give yourself the time and energy to help the business grow.

Tax Benefits: Depending on the structure and whether it’s a new or existing business, there may be tax benefits to using your retirement funds to buy a business.

Using Your IRA to Buy a Business

If you plan to leave your job and you have an IRA or 401(k) retirement plan, why not use your IRA funds to invest in yourself? This is a much safer route than going into a volatile stock market you may not understand. Stop using putting your funds into traditional investments. Use your IRA funds for a business you can run, manage, and even earn a salary from. If you plan to invest in yourself and start a business, the ROBS 401(k) may be right for you.

Previously known as the Business Acquisition Solution (BACSS) at IRA Financial, you may already know the structure, but let’s briefly recap the foundation of ROBS 401(k) and how it can benefit you. With ROBS 401(k), a C Corporation is formed which will adopt a 401(k) Qualified Plan. Your existing retirement funds can then roll into the new 401(k) Plan tax-free. The 401(k) Plan will then purchase the stock of the new corporation. Finally, the new corporation will use those funds to purchase a new business or franchise tax-free!

With the IRS ROBS Solution, you can earn a reasonable salary from your new business or franchise. You can also use your new 401(k) Plan to make high tax-deductible contributions. Additionally, you can borrow up to $50,000 for any purpose. If you are over the age of 50, you can borrow up to $62,000.

Learn More: What is ROBS 401(k)?

Advantages of the ROBS 401(k) Solution

The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules. These do not apply to a Self-Directed IRA structure.

How Does the Rollover Business Start-up or ROBS 401(k) work?

The Rollover Business Start-up (ROBS) arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsors, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

The following is how a typical Rollover Business Start-up structure works:

Business Start-up Structure

1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as the stock of a corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.

2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.

3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.

4. Jim then directs the investment of his or her 401(k)-plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).

5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).

6. The C Corporation utilizes the proceeds from the stock sale (the amount of rollover funds and personal funds used) to purchase the assets for the new business.

7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

Related: Rollover as Business Startups Compliance Rules

ROBS 401(k) vs Self-Directed IRA LLC

The ROBS structure at IRA Financial Group is IRS-compliant. The ROBS is the only legal structure that individuals can use to invest retirement funds into a business they will operate and be employed by. As you may know, with a self-directed IRA LLC, an individual can invest retirement funds in a private business, but not a business that he or she is involved in. According to the Internal Revenue Code 4975, that is a prohibited transaction.

With a Solo 401(k), an individual can only borrow up to $50,000 or 50% of his or her account value (whichever is less). He/she can then use that loan for any purpose, including starting or financing a business. Notably, if an individual requires more than $50,000 for a business, then the ROBS is the only solution that will allow one to use their retirement funds to start or finance a business. You can start your business today tax and penalty-free!

Read More: Can I Use My IRA to Invest in a Startup?

Get in Touch

Do you have questions about using ROBS to buy a business that we did not cover in this article? Contact IRA Financial Group directly at 800-472-0646 and ask us your questions. 

Did you know

Only the ROBS solution will allow you to use your IRA or 401(k) funds to buy a business or franchise. And it is the only legal way to use retirement funds to purchase a business or franchise from which you can draw a salary, without tax or penalty, which can help you to live your dreams. While R


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