ROBS: Using Your Retirement Nest Egg to Fund a New Business Venture

ROBS: Using Your Retirement Nest Egg to Fund a New Business Venture

How often have you heard of the 40 or 50 something professional who wakes up to find him/herself suddenly laid off from a promising career? It’s not that unusual, especially in this day and age. As big companies, that were once stable places that could nurture “cradle to grave” job security and a long career, continue to thin the ranks of long tenured employees, we have met several people who have successfully started a new journey with a start up business venture.

Embarking on the path of entrepreneurship requires capital. For those lucky to have equity in their homes or (gasp!) paid off mortgages on their home, a home equity loan is one option. What few people realize is that your retirement nest egg of a 401(k) or IRA is also a potentially cheap funding source.

How it Works

For those who cannot access a home equity or small business loan, they should seriously consider the alternative method known as “Rollovers as Business Start-ups,” or “ROBS.” Through ROBS, individuals can invest 100% of an IRA, 401(k) or other type of eligible retirement account to fund a new business (or franchise).  In addition, ROBS can be combined with other financings, such as a bank loan, private debt or SBA loan.

ROBS Process (Simplified):

  • Entrepreneur forms a C corporation (note: LLCs, LLPs, LPs or S corps cannot be used under a ROBS).
  • New corporation creates an eligible retirement plan that is allowed to invest in a private company’s stock. This is typically a 401(k) account.
  • Funds from the entrepreneur’s existing retirement account are rolled over into the new retirement plan, tax free.
  • New retirement plan purchases C corporation stock, which are then invested to buy equipment, and pay for start up costs of the new business venture.

We would note that there are many layers of fees, like 401(k) set up and maintenance, incorporation costs, and of course, the double taxation resulting from C corporation tax filing status. LLCs, LLPs and S corporations are only subject to a single level taxation. While ROBS have been used successfully by many start up businesses, and enable entrepreneurs to pursue new ventures without risking their personal homes or credit history, we urge you to carefully consider these risks, costs and taxes by consulting a qualified CPA or tax attorney and an experienced ROBS service provider.

Good luck.

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