Has anyone considered using their retirement savings (part or all of it) to participate in ROBS (Rollover for Business Startup)? If you don't know what this is, let me know and I'll explain it. I have considered it, and have not totally abandoned the idea
Thanks for starting a discussion c5ac5b9! I think it would be great if you could explain what this is for those who are unfamiliar.
ROBS = Rollover for Business Startup
This IRS recognized program started in 2009 and allows you to take any portion of our 401(k) and remove it with zero penalty and paying no taxes on it to start your own business, purchase a business or refinance a business.Many have used this to purchase a franchise or start their own business. In order to stay on the "good side of the IRS", it is advised to have a ROBS knowledgeable company help you with the massive amount of paper work and they usually charge about $5000 to start your C Corporation and another $120/month for the monthly filings with the IRS. Once your 401(k) funds are rolled over and the C Corp is started, you then take the money out of the C Corp to 'invest' into the company. Typically these funds buy your business, so that you have zero debt for the company and then all gross income are taxed at the Corporate rate and this provides you and your employees income as well as paying the IRS taxes on the 'new money' (see the IRS still gets its share). You must hire people (you are included as a hire) and allow employees to invest into the retirement program of your company. As with all programs that sound too good to be true, the same thing exists here. If your business fails, you lose your retirement money. If you file incorrect paperwork with the IRS, you pay penalty and taxes on the amount used (reason you use an experienced company). There are many success and failure stories out on the Internet about this. For me, I have a great business plan already, but the thought of losing all the retirement money, if the business fails is keeping me at present from 'going for it."
It is my understanding that the IRS considers these ROBS of questionable legality as they benefit the individual and not the so much the retirement account. Read the IRS statement regarding this:
Here is what wiki has to say about them:
"Promoters, such as a Roth IRA broker of a self-directed IRA LLC, or small business financing, aggressively market IRS ROBS arrangements to prospective entrepreneurs and business owners for funding for a business as small business financing. In the case of most ROBS facilitators, there is a very close relationship between the promoter/facilitator and the franchise industry, seeking to sell and promote business "opportunities" and seeking funding sources for these sales and promotions. Most ROBS "promoters" and facilitators pay substantial referral fees to the franchise brokers who refer business to the promoters. Rarely are these fees disclosed to the entrepreneur. Fees charged by most "promoters," consequently, are in excess of the fees that would be charged by attorneys and accountants for the same services who are prohibited from paying referral fees. It should be noted that some companies offering ROBS plans do not pay referral fees to brokers, and charge lower fees as a result. There remains a substantial question whether such referral fees are illegal under ERISA and the U.S. Criminal Code: Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 U.S.C. Section 1954)"
ROBS have a very high rate of failure. In my opinion the only safe way to use an 401K to finance a business is to establish a solo401K if you have self-employment income. It doesn't have to be much, just anything you get a 1099 for. I established one and then rolled my IRAs into it. You can then loan half of it to yourself, up to 50K. If 50K isn't enough for your start-up it might we wise to find other funding sources outside your retirement. This avoids all the fees associated with ROBS and is much less likely to get you in trouble with the IRS. I'm using my solo401K to buy investment real estate which I can do inside my retirement account. But I found one house I liked so much I wanted to buy it for myself to live in. It was only 30K and banks won't issue mortgages that are that low. So what I did was I loaned myself the money from my solo401K. Normally taking 401K loans are not a good idea because if you lose your job you either have to repay the loan immediately or it gets taxed as a distribution. A solo401K does not have this problem.
I just came across this term while searching for ways to minimize tax liability when cashing out a portion of the retirement plan to fund a new business. A professional accountant told me that only 5k is allowable for equipment and startup and 5k for organizational expenses. She also mentioned that the company has to be operational before cashing out the retirement plan and that section 179 of the IRS provides many more benefits to deduct based on existing earnings. This topic is a bit complicated for those like me with little accounting background.
If I were you I would research more on the section 179 from the IRS.
As an attorney specializing in Rollover as Business Startups, I wanted to chime in with a few comments:
First: in terms of the view of the IRS with respect to rollover as business startup (ROBS) transactions, it is clear from their published statements that they acknowledge that these are legitimate transactions - most recently I was on an IRS webinar where the speaker from the IRS acknowledged ROBS transactions. The IRS has two types of concerns with respect to ROBS transactions: (I) investment risk; and (ii) ongoing compliance. In terms of the investment risk, the IRS is concerned that a person may invest his or her retirement savings in a business that fails resulting in the person losing not only the business but also all or part of his or her retirement savings. From a compliance perspective, the IRS has found that those persons who have used a ROBS 401k to finance a business do not follow the ongoing requirements such as an annual reporting requirements, keeping the 401k plan amendments up to date, etc. The latter concern highlights the importance of working with a professional specializing in ROBS.
Second: it is true that some companies do not pay referral fees to brokers and charge lower fees (including my company).
Third: while the solo 401k loan option described by smaneck may work for certain business financing, certain caveats should be noted: (1) the loan is limited to 50% of the balance or 50K, whichever is lower; (2) the loan has to be paid back to the retirement account (ROBS business financing does not have to be paid back since it is an equity investment instead of a loan); and (3) since the solo 401k is for businesses with no employees (other than the owner and his/her spouse), it may not be compatible with a business that hires employees.
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