Do you dream of starting your own business but wonder where you’ll get your startup funding? You may have your very best source of startup capital in your retirement savings just waiting for you to launch your own company. But how do you access it without getting slammed with taxes and early withdrawal fees?
This is where my recommended company Guidant Financial can help. They will set up a financial arrangement called a rollover for business startup or ROBS. This legal setup will allow you to access $50,000 or more from your IRA 401 (k), all types of retirement savings accounts, including Traditional IRA, 403(b), 457, Keogh, TSP, SEP, to invest in starting or buying a business or franchise.
I used my retirement funds to start my first business that I ultimately sold for over a million dollars! Yes, that’s true 🙂 Continue reading to learn about my experience and how you can use your retirement savings account to start your own business
How I used my 401 (k) to Start My Business
While working in corporate America, I amassed a significant amount of money in my retirement savings, some from my contributions and some from my employer matching program. Every day at work, I would daydream about launching my own company instead of continuing my corporate career. Startup funds was an obstacle I did not think I could overcome. My applications for business loans were denied, and I did not have adequate savings.
But when I learned that I could use my IRA account to start a business, I was thrilled and began the application process immediately. Once the account was professionally set up, I withdrew $50,000 to start my manufacturing company.
Over the next five years, I worked hard and was very successful, being named one of the fastest-growing businesses in my state by the regional business newspaper. An investor approached me with a too good to refuse cash buyout offer, which I accepted and sold my business for over million dollars. Without the ability to access my retirement funds this achievement would not have been possible. Read more about my entrepreneurial journey from startup to cash out.
What is a ROBS – Rollover for Business Startups?
A ROBS Rollover for Business Startups is a financial arrangement which allows business owners, new entrepreneurs, franchisees and business buyers access to their retirement savings accounts IRA 401 (k) to fund their startup launch, expand their business or purchase a company. The set up is legal and avoids tax payments and early withdrawal penalty fees.
A ROBS – Rollover for Business Startup is:
A good option to fund your:
- Business startups
- Buy an Existing Business
- Buy a Franchise
- Invest capital in Your Existing Business
A ROBS – Rollover for Business Startup is NOT
>>NOT A – Loan secured against your 401K retirement account – So no amount restrictions, no employer approval, and no loan repayment 🙂
>>NOT A – Withdrawal of your retirement account funds – No early withdrawal penalty feeds nor taxes for early withdrawal
>>NOT – Taxable as regular income on our personal tax return when funds are released
How does a ROBS work?
How a ROBS – Rollover for Business Startup works is simple.
1-2-3 your business is funded with your money.
- YOU, as a person, choose to invest your 401K retirement savings in company stock.
- The investment stock you select is that of YOUR company – A startup launch, existing business, new franchise or purchase of a firm.
- YOUR company receives money when YOU as an investor buys shares, stock of YOUR company
How to Setup a ROBS Account for Business Financing
To access the cash in your retirement savings accounts for your small business financing requires the expert guidance of professionals, who are well-versed in the current regulations for these types of financial arrangements. I highly recommend Guidant for your ROBS account setup.
They will use their team of CPA’s Certified Public Accounts and Attorneys to open your account in compliance with the latest government laws.
PLEASE do not trust this complicated, and very specialized financial instrument set up to a general attorney nor accountant. There are far too many crucial details that may be overlooked to your detriment.
Step by Step Process of ROBS – Rollover for Business Startup Financing
This is the process that dedicated ROBS professionals, such as my recommendation Guidant Financial will perform to set up your business financing from your retirement savings account.
Type C Corporation Formation – Your company MUST be structured as a C-Type Corporation. So if your firm is currently any other business structure such as LLC, S-Corporation, Partnership or DBA Sole Proprietorship, you will form a C corporation.
This is important because the IRS Internal Revenue Service only allows C corporation to legally sell stock shares of the business to a retirement account.
Retirement Plan Creation for C Corporation – Once your business is formed, or changed, to a C corporation structure you will set up a retirement plan for your company. There are several options, which Guidant will review with you, for your retirement plans such as 401(k) plans, profit sharing, defined benefits, defined contribution and a combination plan of these options.
The investment monies in these accounts must be managed by a custodian bank, such as Merrill Lynch or Schwab. Your ROBS provider will guide you in this selection. Typically this custodian will offer their expert advice on which retirement plans would be best for you.
Rollover (Transfer) Funds from Your Current Retirement Account to Your New Company Retirement Plan – This step is a financial transaction which rollovers (moves) your money from one retirement account (your current 401K) into your newly formed retirement plan (at your company).
Your Company Retirement Plan Buys Stock in Your Corporation (Your Company) – This step is to use the money in the new retirement plan (you created in step #2 above) to buy stock in your newly formed (or existing) C corporation.
Your company issues ownership shares of corporation stock. In addition to using these stock shares for your ROBS business financing, you can also use them for raising capital now or at a later date with outside investors or partners.
Business Funding Available to Your Business Corporation – The fifth and final step in setting up your ROBS is getting the cash to finance your business startup, buy a business or franchise or invest in your existing business. Your ROBS provider will set up the banking transactions to give you access to this money.
Fees for ROBS Accounts – Setup and Ongoing
Because a ROBS Rollover for Business Startup is not a loan, you don’t have to pay it back and do not incur interest fees. Instead, you will pay for ROBS professionals for both expert guidance and financial setup of your ROBS accounts which enable you to legally use your 401k funds to invest in your business, buy a company or franchise or launch a new business.
Account Set up Fees
ROBS providers will typically charge $5,000 to set up your entire Rollover for Business Startup structure. Because of this cost, it is generally not worth it to do a ROBS setup for under $50,000. This fee includes professional consultation which is vital for such a complicated process.
You are required to make this payment upfront, and you cannot use the proceeds of the ROBS to pay this fee. BUT, because you are doing this as an individual, and not a business, when you initiate your personal 401k transfer you can take out a personal loan and repay it with the monies from the ROBS once it is set up. That is what I would do if I had significate money in my retirement account but not a lot of ready cash.
This fee includes setting up your C-type corporation, a valuation of your business (or the franchise, or existing business you want to purchase), the creation of the company retirement plan and all required paperwork documentation filed correctly with the IRS.
Ongoing Maintenance Fees
Just like other complex financial structures, you will need professional monitoring your account. ROBS providers, like my recommendation Guidant, will maintain your account to be sure it complies with the latest IRS rules and regulations for around $130 monthly. Additionally, you could be charged a fee per employee enrolled in the retirement plan, if you have more than ten employees eligible, due to the additional documentation required.
Advantages of a ROBS for Startup Financing
No Repayment nor Interest Fee – Not a Loan
Because a ROBS is NOT A LOAN against your 401k, you do not have to repay it and will not incur interest costs. This is a considerable advantage because startup business loans can be tough to get and carry a high APR capital interest rates. Thus your business is in an advantageous cash position to take advantage of profitable sales opportunities and avoid negative cash flow created by sizeable monthly loan payments.
No Penalties or Early Withdrawal Fees or Income Tax Due
Unlike other types of withdrawal before the age of 59 1/2, you are not penalized with fees of any sort. Most early withdrawal fees are 10% of the total and income taxes could be taxed at the highest personal income rate.
No Personal Credit Check or Personal Guarantee
Another great benefit of ROBS rollover for a business startup is that your personal credit is not an issue. Plus you do not have to sign a personal guarantee. This is a significant win because most business loans, including government-backed SBA loans, often require your personal guarantee and personal assets, such as your home, as collateral. By taking these type of business loans, you protect you and your families personal assets from business debt.
Retirement Savings Continue to Grow
A ROBS account rolls over, transfer your current 401k into new retirement savings, so those funds continue to grow tax-free. Also, you can contribute additional monies to your new retirement plan for more tax-deferred income.
Greater Success Rates Small Business
Recent studies show that companies who used ROBS to fund their startup, expansion or purchase have a higher survival rate than that of other small business after four years. 81% of Guidant clients are successful in business after four years as compared with SBA business survival rates of 51% after five years. Percentage of business failure rates first year, five years and ten years
Because these firms have correctly planned their working capital needs and secured funds without robbing cash from their daily business operations – crippling their financial health.
Disadvantages of a ROBS for Funding Your Business Startup
Losing Your Retirement Savings
One of the most significant concerns that most people have about using retirement savings to fund the business is the risk of losing their money. Indeed, this is a concern, however, wherever you obtain your startup funding -whether through your 401(k) or other means. The risk level is the same.
If you got a business loan, you would be indebted for any amounts unpaid if your business failed. Using your 401(k) for business funding is a safer option depending on your age. If your business does fail, the remaining monies in your time and account will continue to grow, and you will not have a massive debt your unable to pay, which is often the case for those who take business loans to finance a startup company.
Increased Audit Risk
It is true that setting up a ROBS account increases the odds that either the Department of Labor or Internal Revenue Service will audit your business. And if there are rules violations, you will have to pay the required taxes and penalties.
Luckily, this increased likelihood of audit is minimal, less than 1% (0.32% according to industry expert Guidant) of all people using their 401(k) for business funding are audited annually.
C Corporation Business Structure Mandatory
Only businesses structured as a C type Corporation will be able to benefit from 401(k) financing. Many American small businesses like the easy setup and advantageous taxation of partnerships or LLC, limited liability companies. However, your company must be a Corporation to benefit from Rollover for Business Startups funding.
Management of Retirement Savings Plan
As part of the ROBS 401(k) business funding set up, you become the administrator of your new company retirement plan. Guidant will provide assistance and guidance on how to inform and enroll your employees. While this will require some time commitment on your part, it is very little as compared to the advantages of accessing your capital at reasonable rates.
ROBS Legal Requirements & Government Audits
Both the IRS and the US Department of Labor has specific regulations that must be adhered to, listed below. If you use a high quality ROBS provider, like Guidant, it is doubtful that you will be audited – less than 1%. 2017 audit rates of Guidant clients was 0.35%.
If you are audited by either government agency, Guidant will give you all the needed support to get through the audit. While you may have heard of some ROBS being disqualified, thus dismantled, during an audit, Guidant has never had this happen to one of their clients. Another reason to go with the professionals.
ROBS audits check for these conditions:
- Proper Retirement Plan Setup
- Annual filings completed
- Employee Requirements met (see below)
Compliance of ROBS with Employees
ROBS are created to help the employees of the C corporation to save for retirement in a tax-deferred plan. Employees of the business include the business owner if they are what the government considers a legitimate employee.
You must be active in the management of the company, so absentee owners and passive income businesses like real estate investments are not recommended for ROBS Rollover for Business Startup.
- Eligible Employees Offered Retirement Plan – You must inform your employees, give them documents and ample time to enroll if they elect to.
- Employees Can Invest the Same as Company Owner – All retirement plan participants must be able to invest in all options.
FAQ about ROBS – Rollover for Business Startups
Can I use my IRA to start a business?
Yes, you can access your IRA or 401 (k) retirement saving funds to finance your startup business. It is done by financial professionals, such as Guidant, which create a C corporation that holds your retirement funds and uses them to purchase stock in your new startup company. Thus you are financing your own business with your IRA stock purchases.
Can I take money out of my 401K to buy a business?
Yes, you can “withdraw” monies, with the help of finance professionals to either start a business or buy an existing business. You will not pay taxes on the withdrawn funds nor will you be charged an early withdrawal penalty fee. These accounts are tax-exempt, so you do not have to pay taxes.
Can you use retirement funds to launch a company?
Yes, you can use your retirement savings to launch your new business. The first step to use your retirement funds is to set up and incorporate a separate business which will have its own 401(k) plan within it. Then you will transfer, rollover, your existing 401(k), IRA into the new corporation’s plan. Both retirement accounts are tax exempt, so you will not pay additional taxes. Once this has been done, you can then purchase stock shares in your new startup company – thus withdrawing the funds for your business startup funding.
Can I use my 401K account to invest in real estate?
While many financial brokerage firms who manage IRA accounts do not allow for real estate investment with IRAs money the Internal Revenue Service does not explicitly prohibit real estate investments. To use your 401(k) and pay little to no tax you need careful planning and professional financial advisors. They will set up, transfers or loans against your IRA 401 (k) to access your funds for real estate investments.
What is an IRA LLC?
Some investors have used the legal entity LLC, limited liability company and set up an IRA LLC. This strategy is often used to purchase real estate and is called a checkbook control account. This means that the account holder of the IRA has complete signing authority over there retirement funds.
Is this new? I never heard of ROBS Rollover for Business Startups before?
No, it is not new. However many CPA, stockbrokers, bankers and financial advisors have not promoted this option for small business financing because there is not a lot of sales commissions payments due them.
Is it legal in all 50 states in America?
Yes, in 1974 the Employee Retirement Income Security Act transferred from the employer to the employee the responsibility of retirement saving. This empowered people to have control over their accounts and future.
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