How to Use Your 401(k) Funds to Start a Business

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November is National Entrepreneur Month. Studies show that 30% of new businesses are started by people over the age of 50, you might be wondering how they do it.

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One of the biggest challenges entrepreneurs face, after coming up with their idea, involves financing that new business. If you have been working for some time, you undoubtedly have the opportunity to set aside some money to be used for this purpose. On the other hand, that savings may not be enough.

You might consider looking for money from common sources: family, friends, or banks in your neighborhood.

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But did you know there may be a source closer to home?

It’s sitting right there in your 401(k) plan. This strategy is known as “rollover as a business startup” or “ROBS”. Despite the unfortunate abbreviation, there are situations where this strategy makes sense.

What is a ROBS?

You’re already familiar with the basic aspect of this: rolling over your 401(k) from your old employer. There is a twist though. Instead of investing in publicly traded companies, you use the money to invest in the private company you are about to start.

“ROBS is a marketing tool designed to allow individuals to leave corporate America and access their retirement plans to fund a new business or franchise,” says Herman (Tommy) Thompson, Jr., financial planner at Innovative Financial Group in Atlanta. designed for.” “The idea is that instead of investing your retirement funds in publicly traded companies, you can use your retirement funds to buy shares of your company.”

Can I use ROBS to start a business?

If you are looking to start a new business, ROBS can be an attractive option.

“ROBS are unique 401(k) rollovers for an employee who has left their employer and wants to start a business,” says Ryan Schuchman, investment advisory representative and partner at Cornerstone Financial Services in Southfield, Michigan. “Effectively, 401(k) funds can be used as startup capital for a new business or to acquire an existing business.”

If you are going to apply ROBS strategy to your situation then you should follow some specific rules. This is where you will be entering unknown territory.

“A ROBS is an arrangement in which potential business owners use funds from their taxable plans to pay for new business start-ups,” says Marcia S. Wagner, managing member of Wagner Law Group in Boston. “The ROBS plan then uses the rollover assets to purchase the stock of a new C-corporation. That is, the taxpayer is rolling his or her funds into a shell corporation with no equity interest issued. Plan document rollover Allows 100 percent of the shares held in the account to be used to acquire the corporation’s stock. These plans then typically file for a favorable IRS assessment letter, although such a letter is only used as the language of the plan document. There is a determination. Although there are many potential disadvantages associated with ROBS transactions, the benefit is to acquire a new business without being subject to any income or excise duty.”

Just because you’ve already robbed your retirement assets from your former employer, doesn’t mean you missed out on this opportunity. ROBS funding can also come from your IRA.

“The technique here is that a small business sets up a 401(k) plan and the owner rolls over the amount of money from another qualified source such as an IRA or a previous employer plan and the cash in the plan is used to purchase Stock in the same business,” says Jason Grantz, managing director of Integrated Pension Services in Highland Park, New Jersey. “The plan is now the ‘owner/custodian’ of the stock certificates and the owner has now received cash without taxes. You will use them as cheap financing for a small business, and especially for owners who want quality Can’t find or qualify for funding elsewhere.”

Are ROBS a good idea?

There are many advantages to using ROBS options for financing a new business. Remember, it’s like buying any other stock in your retirement plan. It’s not the same as taking out a loan from your 401(k) account. If you go through the hoops, you’ll have access to your retirement funds tax-free and without the need to pay interest.

“A ROBS can be a great way to fund your business without taking on debt or giving up equity in your company,” says Linda Chavez, founder and CEO of Seniors Life Insurance Finder in Los Angeles. “Essentially, a ROBS allows you to use your retirement savings to start or grow your business. There are certain requirements for using a ROBS. First, you must have a 401(k) or other qualified There must be a retirement plan. Second, your business must be a C-Corporation. Lastly, you must use the funds from your retirement account to purchase stock in your company. Once you meet these requirements, you You can add your retirement savings to your company’s 401(k) plan. This will allow you to take advantage of the tax benefits of a retirement account, while also using the money to grow your business.”

What can ROBS be used for?

The fact that a ROBS requires the creation of a C-corporation means that your new business will not have the benefits of running before you can. You will need to be familiar with all the reporting requirements it requires.

“No other business entity can use ROBS because it needs to buy private stock,” says Hamza Usmani, head of content at Believe Money in Karachi, Sindh, Pakistan. “Work with a professional to make sure all details are handled because corporations require more paperwork to set up and manage than sole proprietorships or LLCs.”

Here’s another twist: What if your new company hires employees?

“According to the ROBS framework, the company must also manage a retirement plan and make it accessible to all eligible employees,” says Tiffany Payne, head of content at PharmacyOnline in Burnley, England. “This means you may have to submit a Form 5500 every year detailing the functions of the plan. Most ROBS providers can assist you with these duties for a monthly cost but more time to maintain it correctly. And it works.”

The bottom line is that ROBS can be a viable financing option, but it will require a unit of work that you may not be prepared for.

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