What Are Rollovers as Business Startups (ROBS)?
In a ROBS transaction, you use your retirement savings to fund your business startup costs. But you’ll need to set up a C corporation and may have to pay fees for professional assistance.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Nerdy takeaways:
A Rollover as Business Startup (ROBS) lets you use your existing retirement funds to start or buy a business.
It involves setting up a C corporation, creating a new retirement plan, rolling over retirement funds to that new plan and then using those funds to buy company stock in your new corporation.
A ROBS might be a fit if you can’t qualify for a small-business loan and can stomach risking your retirement savings.
What is a ROBS?
A Rollover as Business Startup (ROBS) lets you use money from your retirement account to launch a business without paying taxes or early withdrawal penalties.
A ROBS can help you avoid having to take out a small-business loan, but it comes with a potentially steep price — you'll be banking at least some of your retirement savings on the success of your business. This means you may not have that savings to fall back on if your business doesn't pan out.
ROBS transactions are also complex and may face IRS scrutiny. Consider talking to a financial or tax advisor, and look at other ways to fund your business idea, before you make a decision.
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
How does a ROBS work?
In a ROBS transaction, funds from eligible retirement accounts — including a 401(k) or a traditional individual retirement account — are rolled over and invested in a new business or franchise.
Here’s how the process works:
A C corporation — a corporate structure that allows shareholders — is formed.
A new retirement plan is created for the new corporation, typically a 401(k) plan.
You become an employee of the C corporation and the beneficiary of the new retirement plan.
Your existing retirement funds are rolled into that new retirement plan.
The rolled-over funds are used to buy company stock in the C corporation.
You use the proceeds from the sale of stock to start or buy the business.
Because the retirement funds are rolled over instead of withdrawn you won’t owe taxes or pay early withdrawal penalties. Instead, your retirement savings go directly into your business.
Is ROBS financing right for you?
A ROBS transaction allows you to tap your personal retirement savings to start your business without paying taxes, but it isn’t right for everyone.
You may want to consider it if:
You have significant retirement savings. A ROBS is possible only if you have an existing 401(k), IRA or another retirement account. Beyond that, you should have enough saved so that losing some of it won’t jeopardize your future.
You can’t qualify for other types of financing. Many small-business lenders require at least a year in business, steady revenue and strong credit. If you’re just starting out, options like personal loans and business credit cards can be a less risky way to get startup funding.
You don’t want to take on debt. A ROBS isn’t a loan, so you don’t have to make payments or worry about defaulting.
What are the risks of Rollovers as Business Startups?
Make sure you understand the potential drawbacks of financing your business with a ROBS, including:
Your retirement is at risk. If your business fails — and many new businesses do — say goodbye to some or all of your retirement nest egg. And even if your business succeeds, you’ll lose the potential gains from a rising stock market, the tax-deferred savings of a 401(k) or IRA and the power of compounding as your investments grow over time.
“I think there's a misconception among business owners that eventually they're going to sell their businesses and that's going to be something that they can count on for their retirement planning … The reality is that usually doesn't happen. Depending on the statistic you look at, roughly 70% of small businesses don't successfully sell or transition to the next generation.”
Jordan Rodriguez
|
CFP and founder of Chagrin Valley Business Strategies.
You must operate as a C corporation. A C corporation is a common business structure for larger companies, but less so for small businesses. With a C corp, you’ll have to pay taxes on your profits as well as any dividends you take. You’ll also have to hold annual shareholders meetings and meet certain tax filing requirements — which means you’ll likely need support from a lawyer and an accountant.
You may have to pay high fees. If you hire outside help from a ROBS provider to set up the ROBS, prepare to shell out several thousand dollars plus monthly or annual fees.
You’ll have to watch out for bad actors. A past IRS review found some ROBS plan sponsors charge high fees, aggressively market ROBS and fail to file or issue the required tax forms.
Alternatives to ROBS financing
If you want to launch a business without risking your retirement, consider these other funding options:
If you don’t want to touch your retirement savings: A personal business loan is a personal loan that you use to fund your business. The terms you qualify for depend on your personal credit, among other factors. If your business fails, you’ll still have to pay it back.
If you want flexible startup financing: Business credit cards are generally issued based on your personal financial history, not business finances, so they can be a good option for startups. You may not be able to borrow enough to fund your business for months on end, but they can help make ends meet while you build your business.
If you don’t want to take on debt: Consider equity financing methods, like turning to friends and family or raising money from angel investors.
If you need a small amount of money: If you have the time and you don’t need a large amount of money for your startup, you may also look into startup business grants. Grants have the advantage that they don't need to be paid back, but the drawback is that they can be very competitive with short application windows.
