
Sign up & start saving!
Get our weekly newsletter for the latest in money news, credit card offers + more ways to save
Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
Starting a small business takes money — and so does buying a new one. If you’re having trouble getting the funds and have more than $50,000 in retirement savings, you might want to look into a Rollover for Business Startups (ROBS) arrangement.
This option allows you to invest your retirement funds in your business without paying any taxes, fees or interest. A ROBS isn’t available for all businesses, however, and it puts your retirement on the line.
A ROBS arrangement allows business owners to take funds from their retirement account and invest it — or “roll it over” — in their business. Since it’s not a loan, you don’t have to repay it. And since you aren’t technically withdrawing from your account, you won’t have to pay any income taxes or fees.
ROBS are popular with franchise owners, perhaps because of the common belief that this business model is less likely to fail than an independent startup — though that’s not necessarily true.
ROBS might be inexpensive up front, but they come with significant risks — one of the biggest is you could lose a large portion of your retirement savings.
Not every business or owner qualifies for a ROBS. You must meet these four requirements at the very least, though your provider might have other requirements.
To be eligible for a ROBS, you must have a tax-deferred account — meaning that you don’t pay taxes until you withdraw from it. Some common tax-deferred accounts include:
Roth IRAs and Roth 401(k)s aren’t eligible for a ROBS. Also, you generally can’t use an account set up through your current employer — most won’t let you roll over your funds.
While this isn’t a legal requirement, using an account with less than $50,000 may not be worth the cost. Also, most providers won’t work with accounts that have less than $50,000, meaning that you might have to do it yourself.
A C corporation is a type of tax status for corporations. Your business must have this tax status to be eligible for a ROBS.
They pay taxes on their annual revenue before their shareholders get their cut of the business. The shareholders then pay income tax on the already-taxed money they receive. New corporations are C corporations by default. To save on taxes, some file to become S corporations, which only pay taxes after shareholders get their funds.
C corporations might pay more taxes than S corporations, but they have less restrictions. For example, the IRS has no limits on how large a C corporation can grow, how many different classes of stock it can issue or the nationality of its shareholders. C corporations are also the only type of business entity that’s eligible for a ROBS.
Corporations, LLCs and other business structures explained
In other words, you have to actually work for your business, rather than just be a shareholder. And you can’t just put in a few hours a week. You need to be eligible for your business’s new retirement plan, which might require you to earn a certain income or work a minimum number of hours.
You can always roll over your funds yourself. But most business owners find that impractical and risky — the IRS has some complicated requirements and using a ROBS makes you more likely to get audited. Here are several providers that can help your business set up a ROBS.
Guidant Financial | Startups that want legal and technical support and want to apply for other types of business financing in the future. |
|
| |
MySolo401k | Startups looking for the most affordable ROBS option. |
|
| |
FranFund | Anyone looking for a ROBS or combination of ROBS and SBA loans to fund a new franchise. |
|
| |
Benetrends | Startups looking for a highly experienced provider. |
|
| |
Catchingfire Funding | Entrepreneurs who want to fund a new business with a 401(k). |
|
|
Generally, business owners follow these steps when setting up a ROBS:
When you set up a ROBS, you’re technically taking advantage of a tax loophole. To avoid paying unnecessary fines, consider going with an expert. You can get started with the table above by considering the following factors:
Your business must be a C corporation to set up a ROBS. You can do this by registering your business’s name with your state, filing a certificate of incorporation or articles of incorporation and paying a fee. The state agency you need to register with varies by state.
Once you’re registered, you need to draft corporate bylaws and hold at least one board of directors meeting. You also need to apply for an employer identification number (EIN). Your ROBS provider might be able to help you set up your C corp.
The next step is to create a retirement plan that you and other eligible employees can sign up for. You can do this by creating a Retirement or Profit-Sharing Plan Adoption Agreement, in addition to a Plan Administration Agreement. Your ROBS provider is often able to help you with this step.
Some ROBS providers can help you find a company to manage your retirement account, though not all do.
Now that you have your retirement account set up, you can start to roll over your funds from your old account into your new retirement account. You must roll over at least $50,000 for it to count as a ROBS. There’s no maximum amount you can roll over, however.
The next step is to sell your company’s stock to your new retirement plan. You don’t need to sell all of it to your retirement plan — just enough to cover the costs you want to use your ROBS for. For example, if you wanted to cover half of your startup costs with a ROBS, you’d need to sell 50% of your company’s stock.
Once you’ve sold the stock, your company can use those funds however it needs.
There’s a chance you don’t have enough money in your retirement account to cover all of the costs associated with starting a new business. It’s common for entrepreneurs to use a ROBS along with another type of business financing, including:
ROBS aren’t for every business. While you won’t have to meet credit or revenue requirements to qualify and can theoretically get access to a large amount of funds for free, it comes with several risks. Since it’s a complicated process that requires expertise, most businesses opt to hire a company — which isn’t cheap.
Curious about more business loan alternatives? You might want to check out our guide to business loans.
Features, fees and complaints to consider before you apply for a T. Rowe Price account.
Edward Jones is a full-service brokerage firm that grants every investment account access to a financial advisor.
This type of savings account can save you from a lot of financial stress and anxiety.
The NEA Smart Money account combines aspects of banking and investing, but only educators qualify.
What you need to know about using FTX US, including fees, available cryptocurrencies and what payment methods are available.
4 Northwestern Mutual wealth management alternatives to consider.
Teach your kid to save, spend and give wisely with this prepaid debit card and mobile app.
4 Personal Capital robo-advisor and wealth management alternatives to consider.
Some lenders will approve a home loan even though you’re not receiving a permanent income. However, you’ll need to undergo some assessments.
We break down the financials for each of these soon-to-be public listings to help you decide whether they’re worthy of your watchlist.