So, you are thinking about buying a business by rolling over your 401(k) or IRA by using a ROBS Plan…now what?
Essentially, you can rollover funds from your existing 401(k) or IRA tax and penalty free, if the funds are used to buy stock in a business. There are companies that offer the service of walking you through the process of getting your funds released and having your business set up properly. Using one of these companies is highly recommended because it is a complicated process. They will supply you with all the documentation you need to establish and maintain the retirement plan as well as set-up the new business entity.
How does it work?
- Create a C-Corporation.
- Design and Implement a new qualified retirement plan.
- Rollover the funds to the new plan.
- Plan invests in the newly formed C-Corporation by purchasing stock in the corporation.
Working with plenty of these types of business startups, I wanted to put together a list of questions that I get and issues that have arisen over the years.
- You do not own the business. Technically the 401(k) owns the company and you are an officer of the company. This becomes important because the funds to buy the initial stocks to establish the company does not count as a purchase from you. The 401(k) is set up as its own legal entity, and you are simply running the business on its behalf.
- The business is a C-Corp. There are pros and cons to this entity type, and most small businesses prefer to be an LLC to keep things simple when it comes to tax filing, but if you choose this route to set up your business there is no other entity option you must be a C-Corp.
- You cannot be “reimbursed” for the money that came from the 401k. Since the 401(k) was set up as its own legal entity, you both can’t get credit for the contribution.
- You can be reimbursed for out of pocket expenses. Business expenses paid from personal funds can be reimbursed to you. This is done by submitting an Employee Expense Report.
- You are an employee of the Company. This requirement is in place for many reasons, and it is probably the most important thing for you to remember as you run your business. There are many different entity types and they all have different requirements when it comes to paying the owners and officers and this is because of how the business and its owners/officers are taxed at the end of the year. As we covered above, the 401(k) is the owner, and you are the officer, so essentially you are its number one employee, and you should be paid accordingly. You cannot take draws or any undocumented loans from the company, because a normal employee of another business would not be able to do this.
- There are “Disqualified Transactions” that could get your Rollover disallowed. You must keep the business separate from your personal life. Disqualified transactions include, but limited to, taking money from the business in the form of a loan or advance, paying a personal credit card, loaning or advancing money to family or friends, making lease or loan payments for your personal vehicle. Disqualified transactions can result in the IRS disallowing your Rollover which would result in you paying the income tax, early withdraw penalty, interest and additional penalties.
This business funding solution is just one way to fund a new business venture. Contact us today, to discuss the best funding situation for your new business.