We speak every day to entrepreneurs about using their retirement funds tax-free and penalty-free to start or buy a business or franchise.
For a small business owner considering utilizing our ROBS 401K plan for business financing, it is important to consider scenarios and strategies to exit a Rollover as Business Startup (ROBS 401K) Business Financing plan.
What is a ROBS 401K?
- 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 401K 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)
- C-corporation
- 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:
Top Exit Scenarios
- The business is sold
- The business is closed
- Convert to an S-corporation
How to Exit ROBS 401K:
Sale of the Business
- Asset sale (most common)
- Sale proceeds flow to the C-corporation
- Wind-down C-corporation
- After paying back any creditors, remaining proceeds flow to the stockholders per ownership percentages (e.g. 401k and individual)
- Stock sale: proceeds flow directly to stockholders
- Work with tax and legal advisors
- Wind-down 401k
- Rollover/distribute all 401k assets
- 1099-R
- Final Form 5500
How to Exit ROBS 401K:
Business is Closed
- Liquidate C-corporation
- Liquidation proceeds flow to the C-corporation
- Wind-down C-corporation
- After paying back any creditors, remaining proceeds (if any) flow to the stockholders per ownership percentages (e.g. 401k and individual)
- Work with tax and legal advisors
- Wind-down 401k
- Rollover/distribute all remaining 401k assets
- 1099-R
- Final Form 5500
How to Exit ROBS 401K:
Stock Buyback
- C-corporation buys back shares from 401k
- Full or partial buyback
- Fair Market Value
- Funds flow from C-corporation to the 401k account
- Decrease 401k ownership percentage
- Update Stock Ledger
- If Full Buyback, may convert to an S-corporation
- 401k Plan
- Invest in other investments (e.g. via brokerage account)
- Continue to maintain (e.g. offer to eligible employees, Form 5500)
How to Exit ROBS 401K:
In-kind Stock Distribution
- Transfer Stock from 401k to Individual
- No cash withdrawn from C-corporation
- Update Stock Ledger
- Taxes and Penalties (if under 59.5 years of age) based on Fair Market Value
- 20% withholding
- Report as Taxable Distribution on 1099-R
- If all stock distributed from the 401k, may convert to an S-corporation
- Continue to maintain 401k
Continue the discussion in our My Community where our Owners host a daily LIVE webinar where you can ask questions and you can post questions in our forums: ROBS 401K Business Financing forum
