Rollovers as Business Start-Ups (ROBS) are arrangements in which prospective business owners use their 401K retirement funds to pay for new business start-up costs without paying income taxes or early withdrawal penalties.
How It Works
Step 1
ESTABLISH A CORPORATION
Create a C-Corporation, a legal entity separate from you and your retirement plan.
Q: What type of business can I start with the 401K ROBS Plan?
A: Almost any type. The ROBS 401K Plan is a very flexible small business financing strategy. The type of business you can start with the 401k ROBS Plan is virtually unlimited. As long as the business is active and not exclusively engaged in the investment or lending of capital, your business should qualify for the 401k ROBS Plan. They can even purchase either a new or existing business or business startups as long as they are eligible employees of, for instance, a new business venture, aside from being the business owner.
Q: Why am I required to use a C-Corporation?
A: We have designed the 401K ROBS Plan to ensure it satisfies applicable legal requirements. The 401KROBS Plan requires the use of a C-Corporation in order to comply with Federal pension law. The use of an S-Corporation, LLC or another entity type other than a C-Corp would not meet the legal requirements.
Q: Can I receive a salary from my new business?
A: Yes. You are required to be an employee of your new business that is financed with the 401K ROBS Plan. While you are not legally required to take a salary you may take a reasonable salary once the business generates revenue.
Q: Will you hold the rollover funds?
A: No. To ensure that your business is financed as fast as possible we will fully assist you with the rollover of your retirement funds through the 401k ROBS Plan. However, we will never hold your money. You will select a bank to set-up the ROBS accounts and hold the funds.
Q: Is the 401K ROBS Plan just a loan from my 401K?
A: No. By financing your business with the 401K ROBS Plan you will not be borrowing any money from your 401K. Instead, you will be investing your existing retirement funds in a new business. More importantly you will be investing in YOU!
Q: What specific problems do you see with ROBS?
A: Preliminary results from the ROBS Project indicate that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. When a business fails, you could lose your entire retirement account which will be hard, if not impossible to recover.
Some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public.
These findings are questionable since there are many ROBS arrangements in which the businesses are quite successful and represent very prudent alternatives to more traditional investments.
Business success is based on large part to the proper operational management of the business venture and by following sound management and risk principles. Moreover, unlike taking out a business loan, being able to leverage retirement funds this way means you don't have to worry about business loan payments and interests. Moreover, if you transfer funds directly from your retirement account instead of rolling them over, the IRS will tax the money. Withdrawing from retirement accounts before the age of 59 1/2 years old could result in 10% tax penalties aside from the income tax needed to be paid on the withdrawal.
Some other areas the ROBS plan could run into trouble:
After the ROBS plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock. Since the 2008 announcement from the IRS such amendments are rare.
If the sponsor amends the plan to prevent other employees from participating after the DL is issued, this may violate the Code qualification requirements. These types of amendments tend to result in problems with coverage, discrimination and potentially result in violations of benefits, rights and features requirements.
Promoter fees.
Valuation of assets.
Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over into the ROBS plan.
Let's Talk
A ROBS transaction is challenging and complicated to execute, that is why it is crucial to have a competent and experienced ROBS provider to work with you. There are many ROBS providers that offer similar fees and support. However, what sets us apart is our experience with many business startups ROBS successfuly funded. You may have other questions such as the nature of the business property you could finance with a ROBS plan and other restrictions. ROBS (Rollover for Business Startups) is an opportunity for small businesses to have a business funding vehicle using the investor's existing retirement account. You may look at this opportunity to learn about this opportunity.
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