The use of the business financing 401k plan (ROBS 401k) is a popular method of financing one’s own business debt and penalty free, and while this method of financing your own business has been around for over 20 years, the pertinent IRS regulations have not changed. Here are some of the top compliance items to understand prior to using your retirement funds for financing your own business.
- Neither nondeductible (after-tax) IRAs nor Roth IRA funds can be transferred to the Business Financing 401k (ROBS 401k).
- If Roth 401k, Roth 457 and Roth 403b are transferred to the “Roth Designated Account” bucket of the Business Financing 401k (ROBS 401k), this bucket must be held in a separate sub-account of your ROBS 401k.
- As a rule of thumb, in order to transfer an employer plan such as a PSP, 401k, 403b and 457b plan to the Business Financing 401k (ROBS 401k), you either have to be no longer employed (separated from service) with the employer that sponsors the retirement plan or be age 59 ½ or older (retirement age). However, some exceptions apply. Or only if you transferred funds from a previous employer plan or IRA you generally will be able to transfer these funds from the plan to the ROBS 401k plan prior to separating from service.
- The Business Financing 401k (ROBS 401k) setup fee cannot be paid with retirement funds or the C-corporation funded business. Also, once the business has been funded, business funds cannot be used to pay off your personal credit card that was used to pay the ROBS 401k setup fee.
- The purpose of the Business Financing 401k (ROBS 401k) is to fund your own business; therefore, you have to (don’t have a choice other than being) be a W-2 employee of the retirement funded business.
- The use of the Business Financing 401k (ROBS 401k) strategy requires a C-corporation entity (no exception).
- All the revenue generated by the ROBS 401k funded C-corporation business will simply flow in and out of the corporation’s business account. If at the end of the year after the company has paid expenses & taxes, the company has earned an after-tax profit company could decide to distribute that profit. In that case, the C-corporation would pay out dividends (profits) to the stockholders in which case it must pay all stockholders dividends in accordance with the ownership percentages (i.e., the 401k for you benefit and you personally). For example, if the only two stock investors in the C-corporation are you and your ROBS 401k, profits/distributions attributable to the shares in the 401k would flow to the 401(k) account on a tax-deferred basis and the remaining profits would be distributed to you personally; you would have to pay capital gains on your personal amount on your personal taxes.
- You should wait to receive w-2 compensation (e.g., salary, bonuses, etc.) until the C-corporation is generating income to justify your salary and then your salary should not be unreasonably high (i.e., no more than what the company would have to pay someone else to do all of the things that you do). Any compensation that you receive should be paid to you as W-2 wages (i.e. not as 1099 income). As such, it will be prudent to coordinate with your business tax adviser.
- Your ROBS 401k cannot guarantee a business loan to your ROBS 401k funded C-corporation.
- Your ROBS 401k funded business cannot do business with any other business that you or disqualified persons own. Disqualified persons include you, your spouse, child, grandchild, for example.
More Items to Know
- Inherited IRAs or inherited qualified plans such as a former employer 401k plan cannot be transferred to the ROBS 401k plan if the funds were inherited from a non-spouse.
- You cannot loan personal funds to the ROBS 401k funded business. This same rule also applies to disqualified parties such as your parents, children, spouse, etc.
- The ROBS 401k funded business can be operated via/through a subsidiary LLC that is wholly-owned by the C-corporation.
- The ROBS 401k funded business must be a C-corporation and Can NOT be an S-corporation.