Rollovers as Business Startups: How to Use Retirement Accounts to Fund Your Business

By April Maguire

2 min read

Entrepreneurs can struggle when securing new business funding. Rollovers as Business Startups (ROBS) is a method of financing where business owners can fund their companies using money from their own retirement accounts.

Usually, a business owner works with a legal, financial, and/or tax professional to ensure the ROBS method is implemented properly. As an overview: using the ROBS method, you incorporate your new startup as a C Corp and then establish a qualified retirement plan. You can then roll over an existing 401(k) or IRA into the new retirement plan without having to pay taxes on the funds, which is owned by the new C Corp. Following the rollover, the C Corp implements what is called “a qualified employer securities transaction,” which enables the retirement account to buy shares in the company, thus putting money into the new business.

The IRS permits new companies to access funds from retirement accounts, but owners must adhere to all applicable tax rules and requirements to avoid steep penalties.

ROBS secures funding, and it also allows entrepreneurs a funding source that–unlike a loan–doesn’t require repayment.

Pros

Tax Protection
With ROBS, assets shift directly from your tax-exempt retirement fund to your startup. As a result, this distribution is not immediately taxable. In addition, the IRS does not set a limit on ROBS business financing.

Cons
Some of the potential drawbacks of using retirement funds to start a company are outlined below.

Increased IRS Attention
While ROBS offers a number of tax benefits for entrepreneurs, the method can also draw enhanced IRS scrutiny. Entrepreneurs thinking of using retirement cash to fund a new business usually work with a financial or tax professional to ensure all procedures are followed properly.

Utilizing ROBS incorrectly can expose you to costly fees should the IRS rule your funds taxable. Additionally, owners must be sure that their ROBS remain qualified retirement accounts and refrain from using retirement funds to pay their own salaries.

New Business Failures
Rolling over your retirement fund into your business can also put your savings at risk. If your business venture fails, your retirement savings cannot be recovered.

Service Fees
As mentioned above, most business owners will need the help of a financial, legal, and/or tax professional to provide guidance on the ROBS method. This assistance can be costly, and some business owners may find it to be too expensive.

Before committing to the ROBS method of funding, entrepreneurs should research to come to an informed decision about whether the ROBS method is an appropriate funding mechanism for their business.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

100 Best Business Blogs You Need to be Reading (and Taking Lessons From)

There are many business blogs on the Internet. Some of the most…

Read more

Your Financing Options

Current financing options are broken into three categories: Small Business or High-Growth…

Read more

Close the Gap with Education

Programs have been created exclusively for women to address cultural barriers, educational…

Read more