How Does a ROBS 401(k) Work?
Direct Answer: A ROBS 401(k) — rollover business startup — lets an entrepreneur use retirement funds to buy stock in their own C corporation without triggering a taxable distribution. Funds move from an IRA or former employer plan into the ROBS 401(k), which then purchases private stock in the corporation. The owner must work as a W-2 employee at least 1,000 hours a year, and the ROBS 401(k) must file Form 5500 annually regardless of value.
How Does a ROBS 401(k) Work?
A ROBS 401(k) is short for “rollover as business startup.” It is a specialized retirement plan structure, not a loan, that allows an entrepreneur to invest eligible retirement funds directly into their own business as an equity purchase.
“It’s short for rollover as business startup… a specialized retirement plan structure that allows entrepreneurs to use eligible retirement funds to purchase a business or even fund an existing business.”
Live Q&A webinar on how the ROBS 401(k) works, hosted by Mark Nolan, Founder/ Compliance Officer, My Solo 401k Financial.
Key Takeaways
- A ROBS 401(k) requires forming a C corporation — not an S corporation or LLC — because only C corporations issue the stock the 401(k) must purchase to become a shareholder.
- Taking a $100,000 distribution instead of using a ROBS 401(k) could leave an entrepreneur with as little as $60,000 after federal taxes, a 10% early-withdrawal penalty, and possible state taxes.
- A ROBS 401(k) must file Form 5500 every year regardless of account value, unlike a Solo 401(k), which only files once assets exceed $250,000.
- The ROBS 401(k) owner must work as a bona fide W-2 employee of the C corporation for at least 1,000 hours per year; a 1099 contractor arrangement does not qualify.
- My Solo 401k Financial charges $3,000 for the first 12 months of ROBS 401(k) setup, then $899 annually starting in month 13 for ongoing compliance reporting.
- A ROBS 401(k) cannot fund a business operated only by a family member, such as a son or spouse — the person contributing the retirement funds must also work as a W-2 employee of that business.
- Once a W-2 employee works 1,000 hours in a year for the ROBS 401(k)-funded corporation, that employee must be offered a chance to participate in the 401(k) plan.
What Are the Steps to Set Up a ROBS 401(k)?
A ROBS 401(k) follows a specific sequence, and skipping or reordering a step can turn the transaction into a taxable distribution. First, a C corporation must be formed — the ROBS 401(k) cannot invest in an S corporation, because S corporation rules don’t allow a 401(k) or IRA to be a shareholder, and it cannot invest in an LLC, because LLCs issue membership units rather than stock.
“It has to be a C corporation. It cannot be an S corporation… It cannot be an LLC because an LLC issues units.”
After the C corporation is formed, it adopts a qualified 401(k) plan — the ROBS 401(k) — which is signed via an adoption agreement. An existing IRA or former employer plan is then transferred directly into the ROBS 401(k) brokerage account, never into the corporation’s bank account. Finally, the ROBS 401(k) uses those funds to buy private stock in the C corporation, wiring funds directly from the ROBS 401(k) brokerage account to the corporation’s bank account.
Why Use a ROBS 401(k) Instead of Taking a Distribution?
A ROBS 401(k) avoids the tax bill that comes with cashing out a retirement account to fund a business. A pre-tax distribution triggers federal income tax and, if the account holder is under age 59½, a 10% early-withdrawal penalty, plus state taxes depending on residency.
“If you took a $100,000 distribution from your IRA or former employer plan, you may end up only… receiving $60,000 because of all the taxes and penalties.”
A ROBS 401(k) Is Not a Participant Loan
A ROBS 401(k) is an equity investment, not a loan, and nothing needs to be repaid to the plan.
“A ROBS is not a participant loan… The corporation is not allowed to borrow funds from your ROBS 401(k). That’s not the way the ROBS 401(k) works.”
ROBS 401(k) vs. Solo 401(k): Key Differences
In short: a ROBS 401(k) always files Form 5500, while a Solo 401(k) only files once it crosses the $250,000 threshold — and only the ROBS 401(k) can legally purchase stock in the owner’s own business.
“Owners sometimes assume the under $250,000 filing exemption available to one-participant solo plans… applies to the ROBS. The IRS has explained that the one-participant exception does not apply.”
Can a ROBS 401(k) Fund a Family Member’s Business?
No. A ROBS 401(k) can only finance a business in which the person contributing the retirement funds also works as a W-2 employee. A parent cannot use their own ROBS 401(k) to fund a business their adult child will run alone.
“Unfortunately, the 401(k) regulations do not allow you to use your ROBS 401(k) to finance your son’s business or your wife’s business, for that matter.”
What Are the Ongoing ROBS 401(k) Compliance Requirements?
A ROBS 401(k) is an ongoing qualified plan, not a one-time funding event, and carries compliance obligations at both the corporate and plan level. The C corporation must file its own corporate tax return (Form 1120), and its stock must be valued annually once the business has been operating — a new business being funded for the first time has no valuation requirement.
Hiring W-2 Employees Triggers Plan Eligibility
Once a W-2 employee works 1,000 hours or more in a 12-month period for the ROBS 401(k)-funded corporation, that employee must be offered the chance to participate in the 401(k), including the ability to buy stock in the corporation. An employee can decline in writing with a revocable waiver, but the offer must be made.
What Counts as a Prohibited Transaction in a ROBS 401(k)?
A ROBS 401(k) remains subject to the same prohibited transaction rules as any qualified retirement plan. Using ROBS 401(k) or ROBS-funded corporation assets for personal benefit — beyond a reasonable W-2 salary — is prohibited, as is lending funds from the corporation or the plan to a disqualified person, or selling property between the corporation and a disqualified person.
What Happens When a ROBS 401(k)-Funded Business Is Sold?
Proceeds from selling a ROBS 401(k)-funded business return to the corporation’s bank account first, then flow back to the ROBS 401(k) brokerage account, since the ROBS 401(k) is the shareholder being bought out. Those funds can then be transferred to an IRA, and a final Form 5500 is filed to close the plan.
How Long Does a ROBS 401(k) Take and How Much Does It Cost?
A ROBS 401(k) can be completed in as little as 10 to 15 business days, though delays with a former employer plan’s transfer processing can extend the timeline to roughly 30 business days. My Solo 401k Financial charges $3,000 for the first 12 months of ROBS 401(k) setup, covering corporation and 401(k) formation, followed by an $899 annual fee starting in month 13 that covers ongoing compliance reporting.
Live Webinar Questions About ROBS 401(k) Plans
Is There a Similar Webinar for Solo 401(k) Backdoor Roth Conversions?
An attendee asked whether a comparable session covers the Solo 401(k) and Mega Backdoor Roth strategy.
“Is there a similar webinar for solo 401k that sets up after tax 401k with backdoor Roth conversion?”
Mark Nolan confirmed that the Mega Backdoor Roth Solo 401(k) strategy is a separate topic covered in other webinars, and that My Solo 401k Financial has offered it since 2013.
Will There Be Initial and Ongoing Costs?
A second attendee asked about ROBS 401(k) pricing.
“Will you be discussing initial costs and any ongoing costs, if any?”
Mark Nolan pointed to the firm’s pricing page and confirmed the $3,000 first-year setup fee and $899 annual fee described above.
Glossary
- ROBS 401(k)
- “Rollover as business startup” — a retirement plan structure that lets an entrepreneur use IRA or former employer plan funds to buy stock in their own C corporation without a taxable distribution.
- C Corporation
- The only entity type a ROBS 401(k) can invest in, because C corporations issue stock; S corporations and LLCs are not eligible.
- Equity Investment (vs. Loan)
- The ROBS 401(k) purchases private stock in the corporation and becomes a shareholder; nothing is borrowed and nothing must be repaid, unlike a 401(k) participant loan.
- Form 5500
- The annual informational return a ROBS 401(k) must file every year regardless of plan value, because the plan owns the business through its stock rather than the individual owning it personally.
- 1,000-Hour W-2 Rule
- The requirement that the ROBS 401(k) owner work as a bona fide W-2 employee of the funded C corporation for at least 1,000 hours per year to satisfy IRS rules.
Frequently Asked Questions
How does a ROBS 401(k) work?
A ROBS 401(k) rolls IRA or former employer plan funds directly into a new 401(k), which then purchases private stock in a newly formed C corporation. The owner must work as a W-2 employee of that corporation for at least 1,000 hours a year, and the transaction is treated as an equity investment rather than a taxable distribution.
Can a ROBS 401(k) be used with an S corporation or LLC?
No. A ROBS 401(k) can only invest in a C corporation, because C corporations issue stock. S corporations cannot have a 401(k) or IRA as a shareholder, and LLCs issue membership units rather than stock, so neither qualifies for the ROBS 401(k) structure.
Is a ROBS 401(k) considered a loan?
No. A ROBS 401(k) is an equity investment, not a participant loan. The plan buys shares of stock in the C corporation and becomes a shareholder; there is no repayment schedule, unlike a 401(k) participant loan, which must be paid back.
Can I use my ROBS 401(k) to fund my son’s or spouse’s business?
No, not by itself. A ROBS 401(k) can only fund a business in which the person contributing the retirement funds also works as a W-2 employee for at least 1,000 hours per year. A family member can also work at the business, but cannot be the only one working there.
Does a ROBS 401(k) have to file Form 5500 every year?
Yes, every year, regardless of the plan’s dollar value. This differs from a Solo 401(k), which only files Form 5500-EZ once assets exceed $250,000, because the IRS treats the ROBS 401(k) as owning the business through its stock rather than the individual owning it personally.
Is there a similar webinar for Solo 401(k) backdoor Roth conversions?
Yes. My Solo 401k Financial covers the Mega Backdoor Roth Solo 401(k) strategy in separate sessions and states it has offered this strategy since 2013, processing thousands of conversions for owner-only and husband-and-wife businesses.
How much does a ROBS 401(k) cost?
My Solo 401k Financial charges $3,000 for the first 12 months, covering C corporation and 401(k) formation, followed by an $899 annual fee starting in month 13 that covers ongoing ROBS 401(k) compliance reporting, including the annual Form 5500 filing.
What counts as a prohibited transaction in a ROBS 401(k)?
Examples include using ROBS 401(k) or corporation assets for personal benefit beyond a reasonable W-2 salary, lending plan or corporate funds to a disqualified person, selling property between the corporation and a disqualified person, and letting a disqualified person use corporation-owned assets, such as a warehouse, for personal purposes.
This article is based on the [VERIFY: webinar date] live webinar hosted by My Solo 401k Financial. Analysis by Mark Nolan, Founder/ Compliance Officer, My Solo 401k Financial.
Learn more about setting up a plan with My Solo 401k Financial →
