Plenty of young people dream of starting their own business—but get discouraged when they see the hurdles they have to first clear. Financial hurdles are chief among young entrepreneurs’ complaints when ideating a startup. However, if you’re an aspiring business owner who’s been saving for retirement, there might be a financial path you haven’t considered yet: a rollover as business startup (ROBS).
ROBS allows you to invest savings from a qualified retirement account into a new business—without early withdrawal penalties or incurring debt, in addition to being tax-deferred. As long as they have enough saved, young entrepreneurs are a natural fit for ROBS, whether on its own or in tandem with another funding option such as an SBA Loan. Here’s why you should consider using ROBS to become a small business owner while you’re still young.
Leverage a less-risky investment
Just like any other funding method, there is a level of risk associated with using ROBS. Rather than put up collateral for a loan, you’re investing your retirement savings into your new business. This is where younger entrepreneurs have a bit of an advantage. Because you’re further away from retirement, there’s less perceived risk in dipping into your nest egg.
Being newer to the workforce, you may not feel like you have enough saved up to pay for a new business or franchise. The great thing about ROBS is that it works alone as well as with other funding mechanisms! You can pair your 401(k) funds with an SBA loan to make up the total cost of the startup, for example. It’s recommended that you have at least $50,000 to roll over because of the fees involved with ROBS set-up using a Third-Party Administrator (TPA).
Take advantage of time to save for retirement
ROBS also lets you have the best of both worlds. As part of the ROBS structure, you’ll set up a 401(k) plan for the new company, and you and your employees can contribute to it. Once your business is up and running, you can put a portion of your paycheck toward your retirement savings—just like you would at another job.
By starting the business while you’re young, you’ll have ample time to save for retirement and build your wealth through your new business venture.
Spend your whole life doing what you love
Most importantly, ROBS gives you the freedom to pursue your dreams early on in life. Some people aspire to open their own businesses but find that it gets harder the longer they wait. As you make big life changes, build a family, and acquire debt, entrepreneurship is not impossible, but it can be more challenging.
Take advantage of the opportunity now to launch your dream business and spend the rest of your life helping it grow, adapt and build wealth for your future.
Be mindful of ROBS restrictions and tips
If ROBS sounds like a good option for your startup venture, be mindful of its restrictions and ways you can make it work well for you. One common problem young entrepreneurs run into is attempting to use inherited retirement funds for ROBS. If you inherited an IRA or another retirement account from a loved one, it is not eligible to be applied to ROBS because it has already been taxed. Only pre-tax contributions are eligible for a rollover.
A ROBS must use pre-tax retirement funds from a prior employer. Most plans will not allow an employee to use funds unless they separate from (quit) their employment first. Some allow for an in-service distribution, but this is rare.
Additionally, you’ll want to partner with a TPA that’s knowledgeable about the process and has experience setting up ROBS for other businesses. Your TPA will also provide the ongoing administration of your business’ new 401(k) Plan to ensure you stay in compliance with the IRS. Ready to learn more about ROBS and begin your entrepreneurial journey? Contact Tenet Financial Group to get started! We’re experts in ROBS funding for small businesses and franchises, and our consultative approach will ensure you understand all the ins and outs of this funding method so that you can make an informed decision regarding your needs.