I was talking to an attorney and a topic was raised over the last few days about a financing concept I had never heard of.
It is called Rollover for Business Startups (ROBS). It is a way to fund a new business with your IRA or 401-k account without paying early withdrawal fees or income taxes.
As a general rule, you have to pay income taxes and possibly a 10% early withdrawal penalty if you take money out of your IRA. But if you do the withdrawal as a ROBS transaction, it is not considered a withdrawal and there are no taxes and no penalties.
In addition to using the funds to start up a new business, you can also use the money to purchase an existing business or recapitalize your current business.
Here is my disclaimer: I am not a tax preparer and am not giving you tax advice. If you like this, call me and we can get with an expert that will guide us through the process.
There are five steps to setting up a ROBS:
You need to form a C Corporation. A ROBS will not work with any other entity type: no LLC, Sub S corp, Partnership or Sole Proprietorship.
Create a Retirement Plan for your new C Corp. You will be transferring your current IRA account balance into this new retirement plan. You have flexibility in the type of plan you want to set up: 401(k), Profit Sharing, Defined Benefit, etc.
Transfer funds from your current personal retirement plan to the new company retirement plan. This is a tax free transaction and has no associated challenges.
The retirement plan purchases stock in the corporation.
Funds become available to the corporation.
Conventional wisdom says that you should be transferring at least $50,000 into the new retirement plan. There are expenses associated with setting this structure up and there is some ongoing maintenance. You don’t want all your cash going to expenses.
If you want to follow this path, you will need to find a company to help set this up and can also be a custodian of the retirement plan. While doing my research for this post, the name that came up most often was Guidant. The estimate for creating the ROBS was $5,000 and ongoing maintenance of approximately $150/month.
The big downside to this program is you are putting your retirement money at risk. If the business fails, you risk losing all of your invested retirement funds. The other downside is you now have two government agencies giving you rules to follow – and possible audits to go through: the IRS and the Department of Labor.