Rollovers as Business Startups (ROBS) give entrepreneurs the freedom to launch a business debt-free using retirement savings. ROBS has been approved by the IRS since 1974 as a fast, equity-based funding method. To use a ROBS to fund your business or franchise, you need to have a qualifying retirement account. There are numerous other tax-deferred retirement plans that meet the IRS requirements.
Eligible retirement plans for ROBS
If you have a tax-deferred retirement plan and have not paid taxes on those funds, you can use them to invest in your new business. On a basic level, most retirement plans are eligible for ROBS as long as they are tax-deferred and can be rolled into a new 401(k).
The following types of retirement plans can be used in the ROBS funding model.
- 401(k): 401(k)s are among the most common retirement accounts in the U.S. Many employers offer 401(k)s to their employees and may even match the contributions you make. Employees contribute pre-tax funds to the retirement plan, which are then invested. Vested 401(k) funds from a former employer are eligible for ROBS, as long as the account is not inherited.
- Traditional IRA: Traditional Individual Retirement Arrangements (IRAs) are similar to 401(k)s but they are self-directed accounts. You may have an IRA instead of or in addition to an employer-sponsored 401(k). IRA contributions are tax deductible, and the funds are tax-deferred, making them eligible for ROBS.
- 457(b): Employees of state and local government agencies are usually offered a 457(b) retirement plan instead of a 401(k). Like a 401(k), contributions to 457(b) plans are pre-tax and can be used for ROBS funding if the account is from a former employer.
- 403b: 403(b) retirement accounts are often held by employees of public schools, churches and some nonprofit organizations and charities. These accounts are also commonly known as tax-sheltered annuities.
- TSP: Thrift Savings Plans (TSPs) are retirement plans typically offered to employees of the federal government and uniformed personnel. Many veterans have TSP plans. TSPs are very similar to 401(k)s and are eligible to use for ROBS.
- Keogh: Keogh plans are tax-deferred pension plans. They are often used by self-employed individuals and unincorporated businesses. Contributions to Keogh plans are tax-deductible up to a certain amount and can be used in ROBS.
- Pensions and Annuities: Other types of retirement savings, such as defined-benefit pensions and annuities, may be used for ROBS. These plans typically provide fixed income amounts when a person retires.
ROBS retirement plan considerations
If you have one of the above-mentioned retirement plans and want to use those funds for ROBS, here are a few other things to consider.ROBS funding must be used for a for-profit business that you will be a full-time employee of. You cannot use ROBS to fund a nonprofit or charity, and you cannot be a hands-off or absentee owner.
In most cases, the retirement fund used for ROBS must be from a previous employer that you can roll over. You may use a retirement account from a current employer if your employer allows for an “in-service distribution.” However, most employers do not allow this, meaning you would have to leave your current job in order to use the funds.
Using retirement savings through ROBS is not a loan, nor is it a taxable distribution. You are not withdrawing funds early from your account. Instead, you’re investing your funds into your new business. This means you do not have to pay your investment amount back, and there are no penalties for using the funds.
Retirement funds are a creditor protected asset, so ROBS reduces your risk in business ownership. Let’s say you use $50,000 from your retirement savings through ROBS and take out a $100,000 SBA loan. If you default on your loan, the remainder of your retirement funds cannot be seized to satisfy the loan debt. In contrast, if you use your house as collateral for your loan, the house could be seized.
There are many benefits to using ROBS to fund a new small business. At Tenet Financial Group, we help aspiring entrepreneurs put their retirement savings to use in their new business ventures. Reach out today to learn more.