Rollovers as Business Startups (ROBS) allow entrepreneurs to use their retirement savings to fund a business or franchise. The ROBS structure utilizes a new retirement plan to mobilize the funding. However, this structure probably looks different from other retirement plans you’re familiar with.
If you’re considering using ROBS to fund a business venture, it’s important to understand how it works. ROBS differs from other types of retirement plans that allow you to invest in businesses.
How does ROBS work?
ROBS is a highly regulated funding structure absent early withdrawal fees, tax penalties or loan repayments. The money you choose to fund a business goes directly from your account into the business.
In order to do this, entrepreneurs must follow a few important steps. First, your new business must be registered as a C-corporation. C-corps are the only business structure that allows owners to sell unlimited stock in the company, a must!
Then, existing qualifying retirement account funds “roll” into a new 401(k) established under the business through a third-party administrator. From there, you can invest those retirement funds into shares of stock from the new business, providing it with capital.
When you fund a business with a ROBS, you can continue to contribute to your new 401(k) and invest those funds for retirement.
ROBS vs. self-directed IRAs
One retirement plan/investment vehicle that’s somewhat similar to ROBS is a self-directed IRA. This type of plan also allows you to invest retirement funds directly into a particular business. Under this structure, you’re able to roll retirement funds into an IRA that’s managed by a trustee, then invest those funds into an LLC.
Unfortunately, self-directed IRAs do not allow you to invest in a business that you are actively involved in. This means that if you plan to be a hands-on owner of your business and want to take a salary, it is not legal to invest in your business through a self-directed IRA. This structure creates severe limitations that do not properly serve active small business owners and their funding needs.
ROBS vs. traditional 401(k)s
ROBS is also different from the “normal” retirement plans you might be used to, like a traditional 401(k) that invests into varied portfolios. You may have options when it comes to the investments you can put money toward, but those will not include your own business.
This doesn’t mean your traditional 401(k) funds are off the table. You are legally allowed to take a loan out against your 401(k) and can use that money to fund a business. However, you are only able to borrow a maximum amount of $50,000 or 50 percent of the amount you have in your retirement. For example, you can borrow $35,000 if your retirement account has $70,000 in it.
When comparing this option to ROBS, it’s clear that ROBS has more benefits. ROBS is not a loan and does not require repayments, nor does it involve extra taxes or fees. You can make your retirement funds work for your startup without the hassle and added financial stress.
ROBS is a totally unique business financing structure that allows you to use your retirement savings to both invest in and be an active participant in a new business. At Tenet Financial Group, we help entrepreneurs establish and manage ROBS financing to make their business dreams a reality. Contact us today to learn more.