For many entrepreneurs, the gap between when you leave your career and when your business is profitable enough to pay a salary is uncertain. You might dream of opening a small business but are not ready to leave your full-time job behind quite yet, for financial reasons or otherwise. Fortunately, you don’t always have to. There are ways to fund your business through a Rollover as Business Startup (ROBS) while remaining employed.
ROBS allows you to tap into your retirement funds without taking out a loan or incurring early withdrawal penalties. In order to do so, you’ll need to roll over funds from an existing retirement account, like a 401(k) or IRA. Here are the two main ways aspiring business owners can use ROBS while they remain employed.
Use an old retirement account
The most common way to execute ROBS is to use a retirement account from a former employer. If you’ve switched companies but haven’t rolled the retirement account over from your previous job, those funds can easily be used to launch your business. That retirement account was already sitting—you might as well roll it over and put it to good use!
First, you’ll create a C-corporation and a new retirement plan for your new business. Then, you can roll some or all of your existing retirement funds into the new account. From there, you’re able to invest those funds like you normally would—except you’re investing in your own business!
This process doesn’t involve your current employer or their retirement savings plan whatsoever. You can remain employed at your current job during the rollover process.
Conduct an in-service rollover
What if you don’t have a 401(k) from a previous employer or you’ve already rolled it over into your current employer’s retirement plan? There may be another way for you to use those funds. This process is called an in-service rollover.
An in-service rollover allows you to roll funds from your current employer’s retirement account into a new one—like your ROBS account. In-service rollovers can be conducted while you are still employed at the company sponsoring your retirement plan.
However, plan providers have different rules regarding in-service rollovers. Some providers limit who can do rollovers based on their age. Others prohibit in-service rollovers entirely. You’ll need to speak with your company to determine whether this is an option under your retirement plan. If an in-service rollover is prohibited by the plan, you will have to leave your current employer before doing a rollover.
Launch your business with a safety net
Whether you’re using a former employer’s retirement account, or an in-service rollover for ROBS, or leaving your current employer to start a new business, there’s one significant thing to remember: ROBS users must be an active employee of the small business they’re funding. This means you can’t be a hands-off (AKA absentee) owner. Although you can keep your day job while you handle the rollover process, you’ll need to commit to your business when it’s up and running to meet IRS requirements. Your third-party administrator can guide you on how many hours you should work at your business to be considered a bona fide employee.
Are you interested in learning more about ROBS? Begin your business planning with Tenet Financial Group, a leading Third-Party Administrator of rollover funding plans. With decades of experience installing and administering ROBS accounts, we’ve helped small business owners launch their companies to success. Contact us today to get started.