Rollover as Business Start-ups

The Internal Revenue Code and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.

Read more: Are Rollover Business Startups Legal?

So long as the retirement funds can be rolled into a traditional 401(k) plan, you can use just about any type of funds you want. This includes 401(k) plans, IRAs (traditional, SEP, SIMPLE) and 457(b) plans. However, you cannot roll Roth IRA funds into a 401(k).

ROBS can used to fund just about any business out there, so long as it is legal (on the federal level) and is active and looking to generate a profit. You cannot use ROBS for a business that only generates passive income, such as rental income.

Yes, your business entity must be a C corporation because it is funded through a stock purchase called, Qualified Employer Securities, which is only available with a C corp.

Yes, you can utilize the ROBS structure, and have co-owners or investors. If they use also use ROBS, they have to be an employee and earn a reasonable salary.

The pros of using Rollover Business Startups (aka ROBS or 401(k) Business Funding) include:

Tax Savings – If you plan on using retirement funds to invest in a business, you could simply withdraw the funds. However, you will be hit with a huge tax bill and may owe penalties. All contributions to traditional plans are tax-deferred. This means you will owe taxes on all distributions. If you were to take a large sum of money to invest in a business, the tax hit will be enormous. Further, if you are under age 59 1/2 when withdrawing from the plan, you will be hit with a 10% early withdrawal penalty. Using the ROBS solution allows you to take distributions tax- and penalty-free!

No Debt – When using a ROBS for your business, you won’t incur debt. ROBS is not a loan, so there’s no money to pay back to a bank. No high interest fees and no chance of defaulting. Therefore, all profits can now be reinvested into the business to make it grow faster.

No Credit Check – Speaking of a bank loan, there’s no need for a credit check when using ROBS. Securing a traditional loan is hard for many people. While you may have plenty of savings in your retirement account, you might not have the credit-worthiness to obtain a loan.

Invest in Yourself – Why bet on the stock market or other investment vehicles when you can invest in yourself? Take control of your retirement by going into business for yourself. This way, it’s up to you if you fail or succeed.

Earn a Paycheck – In order to participate in the 401(k) plan, you must be an employee of the C Corporation. This gives you the advantage of earning a salary AND being involved in all aspects of the business, including decision making.

The cons of using ROBS include: 

Failure – According to the Small Business Administration, about half of all new businesses fail within five years. Therefore, the biggest risk with ROBS is losing most, if not all, of your retirement savings due to a failed business venture. It’s imperative to make sure your business succeeds!

Audit – After performing a ROBS, the IRS might look at you a little more closely. The chances of an audit are still slim, however they do increase. So long as you have a good facilitator, you should be okay even if the IRS starts looking into you.

Losing out on Potential Gains –Once you move your money out of your current retirement plan, it’s no longer earning money for you. Great years in the Stock Market can yield 10-15% earnings. Additionally, you lose the power of compounding. On the other hand, during a down year, you won’t lose money either.

Yes. Just like any company, your new company will be able to borrow funds from any financial institution or third-party to help finance your business. The borrowing of funds will not trigger a prohibited transaction under Internal Revenue Code Section 4975.

Yes! In fact, as part of ROBS, you must be an employee of the business. Your salary must be reasonable for your business type.

So long as it’s an active real estate business, such as a management company, you can use ROBS. At least half of the assets must be real estate that you manage. Note: you cannot use the real estate for personal use.

Just like any workplace retirement plan, you must offer the new 401(k) plan to all qualified employees. Contributions can be made up to the annual limits.

Each year, the 401(k) plan will be required to file the Form 5500 with the IRS. The purpose of the form is to provide the IRS with an annual valuation of the 401(k) plan’s assets.

Yes. In order to file the IRS Form 5500 each year, it is crucial that the qualifying employer securities purchased by the 401(k) plan be valued.