A Rollover as Business Startup, more commonly known as ROBS, is a funding strategy that allows you to take existing qualified retirement funds and turn it into ready cash for your business.
While the process isn’t complicated, there are complexities with the initial set up and ongoing administration that, if not handled correctly, could land you in hot water and owing taxes, penalties, and fines.
Fortunately, there are funding providers with expertise in ROBS that can keep you and your plan in compliance with the IRS/DOL regulations. This article will share some of the most commonly asked questions about ROBS funding, along with the best answers to help you decide if using your 401(k) for business funding is the best solution for you.
Most Common ROBS Funding Questions
1. Am I eligible for ROBS funding?
There are three primary requirements that you must meet to qualify for ROBS funding:
-
-
- You must have funds in a qualified retirement plan that you can roll into a ROBS plan.
- You must have an active business providing goods or services to customers.
- You must work in the business as a paycheck-receiving employee.
-
There are a few more stipulations within each of these points, so consult your ROBS funding team to find out more.
2. How much should I invest from my existing retirement plan?
Well, the basic answer here is: How much do you have and how much do you need? There is no minimum required amount to roll to your ROBS plan. However, there are costs associated with this process, and ongoing administration to maintain compliance. If you only need a small amount (say, less than $50,000), and if your business doesn’t have any full-time employees, you might want to consider another option.
3. How does the ROBS funding process work?
There are 4 key steps required to convert your 401(k) funding to a ROBS account:
STEP 1: SET UP A C CORPORATION
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.
STEP 2: DESIGN A NEW QUALIFIED RETIREMENT PLAN
To avoid early withdrawal penalties and preserve tax-deferred status, a new retirement plan is created for which you’ll move your existing funds. We will customize your plan, taking into consideration the needs of your business and employees.
STEP 3: TRANSFER YOUR RETIREMENT FUNDS INTO THE NEW PLAN
After the corporate retirement plan is in place, you’ll need to identify an appropriate plan custodian. This custodian creates the new account according to the plan’s design and specifications. If you’re rolling over funds from a 401(k), your plan custodian will work with you to fill out temporary IRA documents, although you will have to initiate the rollover. If funds are being rolled from an existing IRA, your plan custodian will initiate the movement of those funds.
STEP 4: USE THE RETIREMENT PLAN’S FUNDS FOR YOUR BUSINESS
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 have the capital to start, purchase or recapitalize your new small business or franchise.
4. How can a ROBS funding provider help?
Benetrends is proud to have a long track record of helping small business owners leverage their 401(k) funding under the ROBS process. But not every ROBS provider is the same. Make certain you ask these important questions:
- How experienced is your firm? Not only in years, but in the number of clients that have been funded. Check online reviews to see what others think about the company’s services.
What is your process if I’m audited? ROBS transactions don’t necessarily flag your business for an audit, but you should look for a provider that will stand beside you if that happens. - What about ongoing administration? You want a provider that will be with you for the life of your business, from inception to filing, and maintenance.
- What are your costs? Every ROBS provider charges a fee; make sure yours is fully transparent with no hidden costs or fine print.
For the best ROBS funding expertise, look no further than Benetrends Financial. We’ve been doing this work for decades and have a long track record – nearly 40 years – of helping business owners get the cash they need while keeping the plan in compliance. Schedule a consultation or see if you pre-qualify today to explore your options.
