Over the past two years, many workers have been reevaluating their futures and careers, thinking about how they really want to spend their working lives. Many are considering starting or buying a business, seeking independence, more autonomy, and a way to build a future for their family.
If you’ve considered starting or buying a business but don’t want to take on loan debt, there may be another solution: using your own 401(k) or IRA as a source of funding. The ROBS (Rollover as Business Start-Ups), a program that now has a proven track record lasting almost thirty years. The program has helped thousands of entrepreneurs receive funding in a way that is safe, effective and legal. It’s also quick – many receive their funding in as little as 10 business days.
The program was designed in cooperation with the IRS to allow workers to leverage the funds they’ve invested over the years and use them to build, buy, or grow their own business. Here’s how it works.
The process begins with establishing a new corporation using the proper legal structure to support the establishment and operation of the company's qualified retirement plan.
To avoid early withdrawal penalties and preserve tax-deferred status, financial planners work with you to create a new retirement plan, taking into account your plans for your business. You move your existing funds (or the portion you plan to use for your business) into this new retirement plan.
After the corporate retirement plan is in place, you'll need to identify an appropriate plan administrator. This administrator creates the new account according to the plan's design and specifications. The rollover funds can now be invested in the newly formed C Corporation by purchasing stock in the corporation. The stock purchased by the plan is credited to your account based on your investment decisions. You’ll have the capital to start, purchase or infuse funding into your new small business or franchise.
With this program, you become your own banker; you don’t start out with debt from a traditional bank. “If someone has worked and saved for retirement, they have valuable assets that still may not qualify them for traditional business loans,” says Jelena Kuchar, senior consultant with Benetrends, the company that pioneered the Rainmaker program in 1983. “The ROBS program gives the control of funding the business to the owner, so they can make decisions about how they use the money.” Kuchar says that when people withdraw funds directly from a 401(k) or IRA before turning 59½, they get hit with a 10 percent early withdrawal penalty and face a distribution tax. You avoid those with a ROBS.
The ROBS funding allows you to take a salary from the company once your business is formed and eliminates loan payments to a bank, giving you an early advantage in your business cash flow. The lack of debt service means you can significantly shorten your time to profitability and maximize your potential success.
Here are some things you should consider.
You’ll need to operate your business as a C Corporation; no other business structure qualifies for ROBS. So it’s important to consult with your tax advisor to make sure that’s the right fit for your business. You’ll need to make sure you’re meticulous about the filing and corporate legal requirements to avoid extra scrutiny or penalties by the IRS. You’ll also be required to take an active role in the business as an employee. Taking a salary is the only way to draw money from the fund.
You’ll pay some fees to the company that manages your fund, and Roth IRAs don’t qualify for ROBS. Your funds won’t grow as they would in a traditional investment fund; you’ll be using them to grow your business instead. Unlike the stock market, though, this is an investment you can control through your own hard work.
And of course, the funding comes from the money you’ve set aside for retirement. You’ll need to get good advice on your business plan and make sure the numbers make sense for you and your family. If you’re ready to take a risk on yourself, this could be the right plan to start the company you’ve always dreamed of.
