How to Use a ROBS 401(K) – Rollovers as Business Startups

Businessmen discussing ROBS 401(K) rollover

How to Use a ROBS 401(K) – Rollovers as Business Startups

Have you ever had a great business idea and taken steps to realize it, just to encounter problems financing it? Or maybe you’re debt averse and don’t want to take on a small business loan? Or perhaps you don’t qualify for a loan for whatever reason? A solution may exist in the form of a ROBS (Rollovers as Business Start-ups ) rollover strategy.

What is a ROBS Rollover strategy?

A ROBS Rollover is a method to obtain funding for your start-up idea by rolling funds from your 401(K) or IRA into your newly-minted business. The kicker is that the funds aren’t classified as distributions, so you don’t have to pay taxes on them, and the IRS won’t hit you with a 10% early withdrawal penalty.
The IRS doesn’t classify the funds you roll over as distributions because those funds are rolled into your C-corporations 401(K) retirement plan. They are then used to purchase shares of your corporation, giving you the liquidity necessary to execute your business plan.
Now, I know what you’re thinking: What C Corporation and what shares? Well, yes, the process is a bit convoluted.

Here’s the ROBS 401(K) rollover process broken down step by step.

Once you have taken those steps, you will need to follow strict compliance rules, hold annual shareholder meetings, and pay administrative fees to your 401(K) provider. Record keeping and keeping up with changing regulations and tax laws will also be necessary. Setting up the rollover may cost thousands of dollars, so you want to keep that in mind when making your decision.

Is a ROBS 401(K) rollover a good idea?

It makes perfect sense if your business will earn more than your 401(K) in the long run. But we all know that most companies fail, so unless you’re sure you have a million-dollar idea, a foolproof business plan, and have exhausted all other financing means, you may want to let your 401(K) continue to do its thing of generating compound interest at a tax-advantaged basis.
However, you may want to consider a ROBS rollover if you already have a sizeable nest egg and are willing to potentially part ways with a chunk of it forever. Also, having a business set up in Florida as a C Corporation comes with its own benefits, such as a low corporate income tax of 5.5% in 2023 and reduced liability.
  • Dan DiLascia

    Dan has over 22 years of experience in financial services. His career started as an intern in 1998 learning the financial planning business from the ground up before graduating with a Finance Degree from Siena College in Loudonville, NY in 1999. Working as a fiduciary financial advisor, putting the client’s needs first, is the foundation on which he’s built his practice. Dan’s office is located in Lakewood Ranch.

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  • Sean Koscho

    Sean Koscho is a financial advisor with a passion for helping others – whether that’s in the office managing their wealth, as a passionate 10-year high school football coach or in the line of duty, for the last 9 years, as a Firefighter/EMT with the Sarasota County Fire Department.

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  • Kyle Howell

    My education, experience and professional affiliations have fostered my practical approach to offering financial services and advice to my clients. Rather than just recommending a hodgepodge of unrelated products, first I’ll consider your specific financial goals and investment objectives. Working together, we’ll formulate a strategy to help you achieve your goals. Then I’ll recommend the appropriate products and services to help you execute your strategy.

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2022 Tax Document Information

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If not, or if you experience any issues, please reach out to Tim O’Brien (tim.obrien@intervestintl.com).

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