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What is Rollover as a Business Startup (ROBS)?

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The investment information provided on this page is for educational purposes only. NerdWallet, Inc. does not provide advisory or brokerage services and does not recommend or advise investors to buy or sell particular stocks, securities, or other investments.

Rollovers as Business Startups (ROBS) transactions move money from a retirement account, such as a 401(k), into a business tax-free. As an alternative to other small business loans, ROBS can help you finance your business start-up costs, but they can be expensive and put your retirement savings at risk.
In general, NerdWallet does not recommend tapping into your retirement savings early unless absolutely necessary. Additionally, ROBS are complex transactions that may be subject to close scrutiny by the IRS. Before moving forward, consult a financial advisor and consider other ways to fund your business idea.

Here's what you need to know about ROBS.

We start with a quick survey to better understand your business's unique needs.

Once we have found your personalized match, our team will be happy to discuss the further process.

What are lobs?

In short, ROBS is a business financing method in which future small business owners use their retirement savings to fund a startup business or business acquisition. ROBS financing can help you avoid taking on business debt or transferring ownership of your business. However, starting a business involves risks and is considered a difficult type of financing.

How does ROBS work?

In a ROBS transaction, funds from qualified retirement accounts, including 401(k)s and traditional individual retirement accounts, are rolled over and invested in a new business or franchise.

Here's how ROBS transactions work:

  1. Establishment of shareholder benefit system “AC Corporation”.

  2. A new retirement plan is created for the new company.

  3. The employer becomes an employee of the C corporation and a beneficiary of the new retirement plan.

  4. Funds from the employer's existing retirement account are rolled into the new retirement plan.

  5. The rolled-over funds are used to purchase C Corporation stock.

  6. Business owners can use the proceeds from the sale of stocks to start a business.

You don't pay taxes on distributions because you roll the funds directly from your retirement account instead of withdrawing them. You also don't have to incur any penalties if you withdraw your funds before age 59 1/2. Instead, your retirement savings go directly to your business.

Is ROBS financing right for your business?

ROBS trading allows you to use your personal retirement savings to start a business without paying taxes. This may be an option if:

You have large retirement savings. ROBS is only possible if you have an existing 401(k), IRA, or other retirement account. Beyond that, you need to have enough savings for retirement that you can afford to lose some of it without jeopardizing your future financial security.

You cannot obtain other types of financing. To be approved for a small business loan, prospective borrowers typically require at least one year of business history, established revenue, and strong personal credit. But beyond traditional financing, options such as personal loans and business credit cards can provide startup funding with less risk than ROBS.

You don't want to be in debt. ROBS is not a loan, so you don't have to worry about repayments or possible defaults.

What are the risks of ROBS financing?

When using ROBS to finance your business, be sure to understand the potential drawbacks, including:

Your retirement is at risk. If your business fails, and many people do, it's time to say goodbye to your retirement nest egg. And even if your business is successful, you'll lose out on potential gains from stock market appreciation, tax-deferred savings in a 401(k) or IRA, and the power of compound interest as your investments grow over time. .

C Must operate as a corporation. AC corporations are a common business structure for large companies, but less common for smaller companies. With a C corp, you must pay taxes on profits and dividends received. They must also hold an annual general meeting and meet certain tax filing requirements. This means you will likely need the assistance of a lawyer or accountant.

We pay a fee to facilitate the transaction. ROBS can cost thousands of dollars to set up, and you may also have to pay monthly or annual management fees.

You have to be careful with bad actors. In 2009, the IRS embarked on a research project to understand how ROBS is being used and to identify non-compliant plans. The agency identified several recurring problems, including ROBS plan sponsors charging high fees, aggressively marketing ROBS, and failing to file or issue required tax returns. Did.

Alternatives to ROBS financing

There are many ways to leverage your personal financial security to launch a business without putting your retirement savings at risk. Consider the following options:

If you don't want to dip into your retirement savings, here's what you do. A personal business loan is a loan for individuals that can be used to fund a business. Eligibility depends on factors such as your personal credit history. However, if your business fails, you will still be in debt.
If you need flexible start-up financing: Business credit cards can be a good option for startups because they are typically issued based on your personal financial history rather than business capital. While you may not be able to continue borrowing enough money to fund your business for months on end, it can help you make ends meet while building a revenue stream.
If you want a little money: If you have time and don't need a lot of money to start your business, you may want to consider a start-up grant. Grants have the advantage of not having to be repaid, but the disadvantages are that the application period is short and highly competitive.



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