401(k) Catch-Up Contributions After ROBS

Rollovers as Business Startups (ROBS) allow aspiring entrepreneurs to tap their existing retirement savings to help launch a new business. Being debt-free and penalty-free, ROBS is a fantastic way to mobilize capital you already have. However, it does require you to invest at least a portion of the money you’ve put away for retirement.

Thankfully, for entrepreneurs over the age of 50, there’s good news! Catch-up contributions are a simple way for you to infuse your new 401(k) with extra cash while operating your business.

What are catch-up contributions?

The federal government regulates how much money you can contribute to a 401(k) account each year and this amount adjusts annually. For 2021, the standard contribution limit is $19,500. In 2022, this amount will increase to $20,500. If you’re under the age of 50, you can’t make any more tax-deferred contributions toward your retirement account.

People over the age of 50 have access to a special type of retirement contribution called a catch-up contribution. This allows older adults to contribute even more money to their qualifying retirement account annually. The 401(k) catch-up contribution limit is $6,500.

Catch-up contributions are essentially the same as standard contributions. The money you put into the 401(k) is tax-deferred and may continue to grow, depending on your investment portfolio. Once you turn 59½, you may begin taking distributions from the account. Similar rules apply to other retirement accounts, including IRAs, but the catch-up contribution limits are much lower.

Essentially, catch-up contributions give you nearly 10 years to invest even more money and get a good return to protect your financial future.

Using catch-up contributions after ROBS

As an entrepreneur, funding a startup using the ROBS structure sets you up with a new 401(k) managed by your small business. You can make contributions to this 401(k) just like any other retirement account, and you are beholden to the contribution limits set by the IRS.

While catch-up contributions are a smart move for anyone over the age of 50, they’re particularly beneficial to business owners who’ve used ROBS. Because you’ve taken a portion of your retirement savings and invested in your new business, you might be itching to replenish those funds as a back-up plan. Catch-up contributions give you the opportunity to funnel a lot more money back into your retirement savings.

This is the perfect way for ROBS users to “catch up” on their retirement accounts. Not only can you pay back the initial nest egg you used with ROBS but you can do it even faster through these contributions.

Another benefit of catch-up contributions is that they help you lower your taxable income even more. Because your 401(k) contributions are tax-deferred, you can reduce your annual tax liability by saving as much as possible. This may be beneficial to business owners who take a salary.

Lastly, there is an opportunity for the company to do a company match. The company can match the owner’s contributions up to 100% at the end of the year (if there is money in the company bank account), thus reducing the amount of money the company pays taxes on.

ROBS has many benefits, and it pays to know how taxes and other financial matters fit in with the funding structure. To learn more about ROBS and fast business funding, contact Tenet Financial Group! We have decades of combined experience assisting entrepreneurs in achieving their dreams in a financially feasible way.