Rollovers as Business Startups: ROBS


Rollovers as Business Startups (ROBS) allow a person to start or acquire a business using their 401(k) without paying early withdrawal penalties or upfront taxes. I utilized my 401(k) when I purchased a business from Viking M&A years ago. You might be surprised at how many folks have no idea that this is an option!

What is a ROBS?

A ROBS is:

A ROBS is a financial arrangement wherein a business owner rolls over funds from eligible retirement accounts such as a 401(k) or IRA to acquire a business, refinance a business, or pay for the startup costs of a new business. Eligibility for ROBS requires that the value of the retirement accounts be at least $50,000. An experienced professional can help you determine if your situation qualifies before you start the funding process.

A ROBS is not:

A ROBS is not a business loan or a loan from your 401(k). It is complex and can be very confusing, which is why it is recommended to use an experienced ROBS provider with a good track record and years of experience with ROBS funding. It is worth noting however, that although a ROBS is extremely complex, completing the steps and receiving funds can actually go quite quickly.

The ROBS process in 5 steps:

  1. Form a C Corporation (a corporate structure that allows shareholders).
  2. Create a 401(k) plan for the business.
  3. Roll over your existing retirement account funds into the new 401(k).
  4. Use those rollover funds to purchase stock in the new C Corporation.
  5. Depending on your investment decisions, your account is credited with the stock purchased by the 401(k) funds, and you now have the capital to acquire, refinance, or start your business. 

What are the pros of a ROBS?

No Underwriting 

A ROBS does not involve an underwriting process, which makes it a great option for owners who may not be approved for a traditional business loan, whether due to personal credit, positive cash flow, or other factors that lenders require.

No Debt

Since a ROBS is not a loan, but rather the use of retirement funds you have already saved, you can avoid dealing with the monthly payments and interest associated with business loans. Profits can be quickly invested back into the business, accelerating the time required to reach break-even. 

No Penalties

Back when I began considering a ROBS for myself, I was still several years away from being able to access my 401(k) funds. However, when used for a ROBS, funds from your 401(k) or IRA are not subject to the 10% early withdrawal penalty or distribution tax even if you have not yet turned 59½.

Invest in Yourself

My 401(k) funds were earning average stock market growth, which was fine. But I made a decision to bet on myself by buying a business from Viking and utilizing my 401(k) savings to help fund the acquisition. This means that as the company grew and gained value, my 401(k) (which I now controlled) grew along with the value of the business.

What are the cons of a ROBS?

High Risk

While investing your retirement savings in yourself and your business can offer a promising potential payout, it is that retirement you risk losing if the business fails. You also risk losing any gains you would have potentially seen from a rising stock market had you left your funds in the retirement account, along with the compounding power of an investment growing over a longer period of time.

C Corporation Status

Operating as a C Corporation is not a con in and of itself. However, you are required to operate as a C Corp for a ROBS, so if this is not the best business structure for your particular business (as opposed to an LLC or sole proprietorship which have different tax implications), you will want to take this into consideration.

Fees and Requirements

As we mentioned above, due to its complexity, it really is necessary to use the services of a professional to orchestrate this financial arrangement. There are fees involved with those services, as well as monthly 401{k) administration fees and forms, and an annual appraisal of the business. 

Possible Audit

You may face increased scrutiny from the IRS after completing a ROBS, meaning your risk of facing an audit may be higher. This is one more reason to use the services of a professional. (If there are any errors made in the transaction process, the ROBS can be disqualified.)

There are certainly a few pros and cons to it, but a ROBS is a viable option for those who are short on cash and long on 401(k) saving to fund a business. If you are not interested in taking on debt and you are willing to take a risk on yourself, it is worth discussing a ROBS. 
At Viking, we have decades of experience working with business owners just like you, and we work with trusted partners who specialize in ROBS. Contact us today, and we can discuss whether a ROBS might be the right option for you.