COMMON QUESTIONS ABOUT ROBS 401(K)/IRA FUNDING
1. How does a ROBS 401(k) work?
A ROBS 401(k) allows you to roll over funds from a qualified retirement account (like a traditional 401(k) or IRA) into a newly created C-corporation. This corporation sponsors a retirement plan, and the plan buys stock in your business, providing you with capital to fund your startup or buy an existing business—without triggering early withdrawal penalties or taxes.
2. Is using a ROBS plan legal?
Yes, ROBS plans are legal when set up correctly and comply with IRS and Department of Labor (DOL) regulations. However, the structure must be followed precisely to avoid tax or legal consequences.
3. What are the advantages of using a ROBS plan?
No debt or interest payments (unlike loans)
No early withdrawal penalties or tax consequences
Can be used in combination with other funding methods
Provides immediate business capital
4. What are the risks of using a ROBS 401(k)?
If your business fails, you could lose your retirement savings
Requires strict IRS and DOL compliance
You must operate as a C-corporation
Can trigger audits if mismanaged
5. Who qualifies for a ROBS 401(k)?
Anyone with a qualifying retirement account and a desire to start or buy a business can use a ROBS plan. However, you must actively work in the business (you can’t just be a passive investor).
6. Do I need a specific type of retirement account to use ROBS?
Yes, only funds from tax-deferred retirement accounts, like a 401(k), 403(b), or a traditional IRA, qualify. Roth IRAs and Roth 401(k)s generally do not work.
7. Does my business need to be a C-corporation?
Yes. The IRS requires the business to be a C-corporation because only C-corps can sell stock to a retirement plan.
8. Can I use ROBS for any type of business?
Most for-profit businesses qualify. However, certain businesses, such as passive investments (like real estate rental properties), may not be eligible.
9. How much does it cost to set up a ROBS plan?
Setup costs typically range from $4,500 to $5,500, depending on the provider.
10. Are there ongoing fees for maintaining a ROBS structure?
Yes. Most ROBS providers charge $100–$200 per month for compliance and administrative services.
11. How much of my retirement funds can I roll over?
You can roll over as much as you want, but many advisors recommend not using all your retirement savings to reduce risk.
12. Can I combine my ROBS funds with other financing options?
Yes. You can use ROBS alongside SBA loans, personal savings, or investor capital to fund your business.
13. Can I use ROBS funds to pay myself a salary?
Yes, but your salary must be reasonable and justified based on industry standards. Overpaying yourself can trigger IRS scrutiny.
14. Can I use ROBS funds to buy an existing business?
Yes. Many entrepreneurs use ROBS to purchase a franchise or an established business rather than starting from scratch.
15. What happens if my business fails after using a ROBS plan?
If the business fails, the ROBS-funded stock becomes worthless, meaning you could lose the retirement funds you invested.
16. What IRS rules do I need to follow to keep my ROBS compliant?
The C-corp must remain an active business
The retirement plan must own company stock
Employees must be offered the chance to participate in the retirement plan
The business must follow fair salary and compensation practices
17. What are common mistakes that could trigger an IRS audit?
Using ROBS funds for personal expenses
Not offering the retirement plan to eligible employees
Paying yourself an excessive salary
Failing to properly document stock purchases
18. Do I need a third-party administrator for my ROBS plan?
Yes. A third-party administrator helps manage compliance, handle IRS filings, and ensure your plan remains legal.
19. How do I exit a ROBS plan if my business is successful?
You have a few options:
Buy back the stock from the retirement plan
Dissolve the retirement plan if no employees remain
Convert the business structure (though this can trigger taxes)
20. What happens if I want to sell my business later?
If you sell the business, the retirement plan gets its share of the proceeds, which may need to be distributed among eligible employees if they participated in the plan.