We hosted a live webinar on our My Community to discuss the pros and cons of using a rollover as business startup (ROBS 401K) to fund the startup or purchase of a business with retirement funds.
How does a ROBS 401K work?
A rollover as business startup (ROBS) transaction allows you to use your retirement money to start or buy a business without paying taxes or penalties.
Key ROBS requirements
- Use retirement funds in a former employer plan and/or non-Roth IRA
- Use the funds to start or buy an active business (i.e. operating company providing goods and/or services)
- Bona fide employee (e.g. 1000 hours per year)
ROBS 401k Process
- Step 1: Incorporate C-corporation
- Step 2: C-corporation sponsors 401k plan
- Step 3: Rollover funds to 401k
- Step 4: Invest 401k funds in the stock of the C-corporation
- Step 5: C-corporation may use the funds for legitimate business purposes including to buy or start a business
ROBS 401K PROS
#1 Invest Retirement Funds without incurring taxes or penalties
- Invest all eligible retirement funds (e.g. former employer plan and/or non-Roth IRA):
- No taxes
- No Penalties
#2 Start or buy a business “debt-free”
- ROBS 401K investment structured as a stock purchase:
- No loan payments required
- Keep funds in the business to grow business
#3 No credit score, guarantee or underwriting requirements
- A ROBS 401k is not a loan.
- No credit score requirement
- No underwriting
- No personal guarantee
#4 Access funds quickly
- With no underwriting or approval process, funds can be accessed relatively quickly:
- Typically access funds in about 3 weeks
#5 Use funds as down payment on a loan
- The proceeds of a ROBS 401K investment may be used as a downpayment to qualify for an SBA or other business loan.
- Leverage funds to buy a bigger business
#6 Invest your retirement funds in yourself
- With a ROBS 401k, your retirement funds are invested in your own business:
- Instead of Wall Street stock investments, invest in business that you have complete control over
- Invest in what you know
ROBS 401K CONS
#1 You may lose your business and your retirement savings
- If the business that is funded with your retirement funds fails, you may also ultimately lose all or a significant part of the retirement funds invested in the business.
#2 Must operate the business as a C-corp
- As long as you own part of the business via the ROBS 401K, the business must be operated as a C-corporation.
#3 Must maintain a 401K plan
- The ROBS C-corp must maintain a 401k plan:
- Offer to eligible employees
- Annual 5500 filing
- Annual valuation, etc.