ROBS Solution, or the Rollover Business Start-up (aka Rollover as Business Startups), is an IRS and ERISA approved structure. It allows you to invest funds from your retirement account into a new business/franchise. You can remove funds from a Traditional 401(k) or IRA Plan to purchase a new or existing business or franchise tax-free and penalty-free.
The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsors. You then invest the rollover funds in the stock of the new C Corporation.
If you’re an entrepreneur, you’ll benefit in many ways by using the Rollover Business Startup Solution retirement option. With the Rollover Business Startup Solution, you:
Won’t take on debt: You can always invest more money into your business which is crucial for start-ups. Remember, a ROBS isn’t a loan, therefore there’s no debt to repay.
Won’t pay penalties or taxes: With the Rollover Business Startup Solution, you can withdraw funds from your retirement plan before 59 ½ without incurring taxes or penalties.
Receive Funding: Your credit score doesn’t matter, and typically other factors that may go against you aren’t considered. Your business receives funding when it needs funding. If you’re passionate about starting your business and you have a significant retirement “nest egg”, turn this into capital for your new business venture. The ROBS solution allows you to kick-start your new business by accessing the money in your retirement account.
Benefits of The Rollover Business Startup Solution
With the ROBS Solution at IRA Financial, you can do the following:
- Use your retirement funds to invest in a new business tax-free!
- Use your retirement funds to purchase a business or franchise tax-free!
- Use your retirement funds to finance a new or existing business tax-free!
- Earn a reasonable salary from your new or existing business.
- Help grow your business.
- Recapitalize and/or expand your business.
- Maintain a qualified retirement plan and help save for the future.
- Diversify your retirement investment portfolio by investing in your own business as well as stocks and mutual funds.
- Attract and retain quality employees by offering a benefit not commonly found in small business.
- Take advantage of high contribution limits under a 401(k) Plan.
- Enjoy tax benefits generated by using a 401(k) Plan.
- Private Business Funding without consent
- Work directly with our tax and ERISA professionals to establish an IRS and ERISA compliant structure that works best for you and your business.
Read More: Pros and Cons of Rollover Business Startups
How Does the Rollover Business Startup Solution Work?
The structure typically involves the following steps:
1. An entrepreneur or existing business owner establishes a new C Corporation.
2. The C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options. This includes employer stock, also known as “qualifying employer securities.”
3. Next, the entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan.
4. Then, the entrepreneur directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value. In other words, the amount that the entrepreneur wishes to invest in the new business.
5. Finally, the C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.
Read More: Top Businesses Using ROBS
What are the Requirements for Rollover Business Startups?
In order to establish a ROBS solution, there are three main requirements:
- There needs to be a U.S. based business.
- The U.S. business needs to be established as a C Corporation.
- The C Corporation must establish a 401(k) plan.
Only a U.S. business can establish a 401(k) plan. The reason a C Corporation and a 401(k) plan must be used and not an LLC or an IRA, is that pursuant to IRC 4975(d)(13), a 401(k) plan must purchase “qualifying employer securities” or C Corporation stock in order to satisfy the exception to the prohibited transaction rules under IRC 4975(d)(13).
The advantages of using a ROBS solution to finance an existing business is that you can use IRA rollover or 401(k) funds to finance an existing business without seeking outside capital or debt.
In addition, establishing a 401(k) plan for your business will allow you to make high tax-deductible contributions – $69,000 ($76,500 if you are at least age 50) for 2024 and even borrow up to $50,000 for any purpose. Moreover, below are some great reasons to establish a 401(k) plan for your business, in addition to using the ROBS solution:
Advantages of Establishing a 401(k) Plan:
- Up to a $5,000 Tax Credit!
- Current tax deduction for business owner
- Shelter earnings from tax
- Grow assets through the power of tax deferral
- Asset and creditor protection
- Retain key employees
- Help employees save for retirement
Read More: Top Businesses Using ROBS Solution
5 Advantages of the Rollover Business Startup Solution
Save Money
The primary advantage of establishing a ROBS solution is the ability to use your retirement funds to invest in a business you have a personal involvement with. You’re able to invest retirement funds into the business without having to take a taxable distribution and a 10% early distribution penalty if under 59 1/2. As a result, the ROBS solution can save you close to 45% of the distribution amount.
For example, if you’re under 59 1/2 and you want to use $100,000 of retirement funds to fund a business, you have the option to take a taxable distribution of that amount. But you will likely pay approximately 45% of the 100,000 in tax to the IRS when declaring the distribution on their tax return. That’s a whopping $45,000.
Of course, the tax rate can lower depending on whether you’re in a lower income tax bracket. It can also decrease if the retirement funds you need are insignificant.
Nevertheless, a ROBS solution saves you from paying tax and potentially a 10% penalty on that amount.
Invest in Yourself
The ROBS solution allows you to invest your retirement funds in yourself rather than Wall Street. Of course, not all businesses are successful. According to Bloomberg, close to 80% of new businesses fail in the first 18 months. Therefore, investing your retirement funds in a new business is certainly risky. However, it is a risk that you are legally permissible to take as per the Internal Revenue Code.
Using retirement funds to invest in your business is not for everyone. However, for those entrepreneurs who prefer to invest in themselves rather than Wall Street, the ROBS solution is an option.
Diversification
There is a growing sentiment among financial advisors that in order to protect your retirement funds from a market downturn, you must diversify your retirement funds. This belief grew after the 2008 financial crisis.
You cannot eliminate investment risk completely, but you can manage your level of risk. If you invest your retirement funds in different types of investments, such as stocks, real estate, and even private businesses, you can better protect your retirement funds.
Also, diversification may enable a retirement portfolio to grow both when markets boom and returns crumble in one sector. Work with a financial planner and tax professional when looking at investment options. This is especially important when using your retirement funds to buy a business.
Earn a Salary
In order to participate in a 401(k) plan, you must be an employee of a business that adopted the plan. This is why, if you own Apple or IBM stock yet do not work for these companies, you can’t participate in their 401(k) plan.
In order to be eligible to participate in the corporation 401(k) Plan, you must become a W-2 employee of the C corporation. It’s important for many entrepreneurs to earn a salary and be involved in a business. For these individuals, the ROBS solution is the better option in comparison to the Self-Directed IRA.
Benefit from having a 401(k) Retirement Plan
One of the best ways for you to save toward your own retirement and ensure your future security is through an employer-sponsored 401(k) plan. Below are some advantages of offering and participating in a 401(k) Plan.
- Matching Contributions: Many employers will match a portion of your savings. It’s like passing up free money if you don’t participate. A safe harbor 401(k) Plan is a popular type of 401(k) plan for small businesses. It offers employees who participate in the plan a 3% matching contribution by the employer. Thus, if the employee earns $40,000 in salary during the year and contributes 3% of the salary of $1,200 to the 401(k) plan, the employer contributes an additional $1,200 (3% of the salary) to the individual 401(k) plan account.
- Retaining employees: For most businesses offering retirement benefits, it is worthwhile for small businesses to compete for talented workers by implementing 401(k) benefits. Offering 401(k) plan benefits is a great way to retain key employees. In general, when potential hires are considering multiple job offers, they’ll compare those offers on corporate culture, growth opportunities, and benefits packages.
- Easy Administration: 401(k) Plan administration is now easier and more cost-effective than ever with Internet options available to small employers. In addition, IRA Financial Group offers record-keeping and third-party administration services for your plan. This allows you to spend more time focusing on your business and less on your plan.
- You Can Participate: You are eligible to participate in the company 401(k) plan if you are an owner or an employee of the company that sponsors the 401(k) plan. Current regulations allow plan participants to contribute up to $23,000 of their income on a pretax basis each year, or $30,500 if at least age 50 in 2024. Therefore, in addition to your tax savings for offering the plan and providing matching contributions, you’ll receive tax savings for participating in the plan.
How to Remain IRS Compliant with Rollover Business Startup (ROBS)
When you make the choice to employ the structure for a business/franchise, there are criteria you must adhere to and things you should never do with the structure. Below is a list of what you should do to stay IRS compliant and benefit most from the Rollover for Business Startup.
1. Maintain an Active Business
Ensure that you run an active operating business/company. It cannot be a passive business, such as certain real estate ventures, nor can it shift into one. Additionally, your business must be legal on a federal level in order to employ the ROBS solution. For example, marijuana is not legal on a federal level, therefore you may not be able to fund your business with the Rollover for Business Startup Solution. ROBS providers are not likely to move forward with such a business, because the IRS has not yet approved it.
2. Be an Active Employee
In order to stay IRS compliant, your business must provide a legitimate service, and you must be an employee of that business. You can earn a salary, but not before the business derives compensation. At that point, you can earn a “reasonable” salary for your position. You can work with a ROBS provider, such as IRA Financial, to determine what a “reasonable” salary is, or you can perform a basic market salary comparison. It does not matter what role you choose in the company, but it must be active. For example, you cannot be a passive investor in your brother’s company. The amount of hours you work annually is not set, but 1,000 hours is a good baseline.
3. Offer 401(k) Plan to Employees
It’s important to give your employees the option of participating in an employer-sponsored 401(k) plan, and you should never make it difficult for them. Plus, all employees must have the same investment options. If it is available to owners, it must be available to all employees.
When you offer a 401(k) plan, you increase your chance of hiring individuals best equipped for the job, and you better retain key employees. Additionally, you receive tax benefits by offering a 401(k) plan, and participating in one.
4. Be Aware of ROBS Audit Risk
Though the ROBS structure it completely legal, they are quite complicated to set up on your own. If you don’t set it up properly, or fail to maintain the allowed structure, you can face an IRS audit. If the IRS deems that the rules were broken, then the entire amount of the transaction may be taxed. Note that there is less than a one percent chance that your ROBS will be audited. IRA Financial ensures that you’re ROBS structure will be completed. and maintained properly.
5. File Your Rollover for Business Startup Documents Annually
One thing you must remember to do is file all the necessary documents and tax returns for your business every year. Generally, you must file your corporate taxes on your own. Other forms, such as the 5500, will be completed and returned by your plan administration service. Failure to file these documents annually will lead to unnecessary tax consequences.
To be clear, all the responsibilities you have as a business owner will be there. In addition, when using the Rollover for Business Startup to invest in a business, you must make sure all rules are followed. The tax bill may be hefty if you don’t. IRA Financial will always make sure this doesn’t happen to you!
Watch this – ROBS – Additional Benefits
6. What Happens When You Close or Sell the Business?
In the unfortunate event that you have to close the business, or if you decide to sell it, you must take appropriate measures to close out your Rollover for Business Startup. As mentioned above, all taxes (including State if they are owed) must be submitted for the final year of operating the business. Further, you must now close the 401(k) plan set up for the business.
There are basically two ways to close the 401(k): 1) insolvency and 2) stock buy back. When your stocks become valued at $0, they are insolvent. You must distribute the plan assets to those who participated and thus dissolves the plan. If you buy back the stock that the 401(k) has in the business, you then must deposit the funds from the sale back into the plan. You can then distribute those funds to the plan participants.
There are a few other maintenance issues to resolve, but the final thing you must do is file the last Form 5500 for the business. Again, this is generally prepared and submitted by your administration team. 1099 forms may also be needed to report all distributions from the plan. IRA Financial will prepare and/or help you submit all the required paperwork so that you are not hit with any penalties.
Why Use IRA Financial for the Rollover Start Up Solution
IRA Financial was founded by a group of top law firm tax and ERISA professionals who have worked at some of the largest law firms in the country, including White & Case LLP and Dewey & LeBoeuf LLP. The legality of using retirement funds to purchase employer corporate stock as your Business Funding Solution is firmly established in the Internal Revenue Code and under ERISA law. Although codified under law, the IRS has been concerned that a number of promoters marketing this type of structure have not had the expertise to develop a structure that is fully compliant with IRS and ERISA rules and regulations. With this in mind, the IRA Financial’s in-house retirement tax professionals spent the last two years carefully studying IRS materials and guidance in order to design an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free!
The Rollover for Business Startups (ROBS) Solution was developed to specifically address and solve each of the non-compliant areas addressed by the IRS creating a business acquisition and funding solution that is in full compliance with IRS and ERISA rules and procedures. Unlike our competitors who have been offering this type of structure for many years, which according to the IRS, a significant portion have been found to be non-compliant, the IRA Financial Group has patiently waited for clear IRS guidance before offering a business acquisition structure that would be fully compliant with IRS and ERISA rules and procedures. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals to ensure the structure satisfies IRS and ERISA rules and procedures.
We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will typically be ready for investment into your new or existing business within 14-21 days.
Rollover Business Startup Solution Funding Services
The services we offer to get you started with the ROBS solution include the following:
- Establishment of “C” Corporation
- Articles of Incorporation
- By-Laws
- Organizational Meeting Minutes
- Stock Certificates
- Employment Agreement
- Federal Tax Identification Number
- Provide corporate record book and stock certificates. Draft Stock subscription agreement and stock purchase agreement.
- Establishment of 401(k) Plan
- The Adoption Agreement Plan
- Basic Plan Document Agreement
- The Summary Plan Description
- IRS Opinion Letter
- Notice to Employees
- Resolution Adopting Plan
- Retain third-party administrator (when needed)
- Process ERISA Fidelity Bond (when needed)
- Retain independent Appraisal for corporate stock valuation
- Completion of IRS Form 5500
- Direct access to our on-site tax and ERISA professionals
Rollover for Business Startup Conclusion
Getting started with ROBS is only the beginning. Whether you used your retirement funds to start a new business or invest in an existing one, you must make sure to follow all IRS rules. Failure to do so will lead to unnecessary taxes and penalties. Here at IRA Financial, we will guarantee that this does not happen to you. If a question arises, our experts will work diligently to get you the correct answer and keep you IRS-compliant.
Do not hesitate to get in touch with us via our contact page or by calling 800.4720646. We are here every weekday from 9am-7pm. We are always available for all of our clients’ needs, big or small.
Did You Know?
A C Corporation is a legal entity where the owners, shareholders, or stakeholders are taxed separately from the entity. C corporations offer shareholders limited liability protection (LLP).
