How to use your 401(k) funds to start a business

November is National Entrepreneur Month. With research showing that 30% of new businesses are started by people over 50, you might be wondering how they do it.

One of the biggest challenges an entrepreneur faces after coming up with an idea is financing a new business. If you’ve been working for a while, there’s no doubt that you have the opportunity to set aside some money for this purpose. On the other hand, the savings may not be enough.

You might consider finding funds from the usual sources: family, friends, or a bank near you.

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

It’s in your 401(k) plan. This strategy is known as “Rollovers As Business Startups” or “ROBS”. Despite being an unfortunate acronym, there are situations in which this strategy makes sense.

What is ROBS?

You’re already familiar with the basics of it: rolling your 401(k) from your old employer. However, there is a turning point. Instead of investing in a public company, you use the money to invest in a 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,” said Herman (Tommy) Thompson, Jr., a financial planner with the Innovative Financial Group in Atlanta. “The idea is that instead of investing your super fund in public companies, you can use your super fund to buy shares in your own company.”

Can I start a business with ROBS?

If you are considering starting a new business, ROBS may be an attractive option.

“ROBS is a unique 401(k) transition period for employees who have left their employer and want to start a business,” said Ryan Shuchman, investment advisor representative and partner at Cornerstone Financial Services in Southfield, Michigan. “In effect, 401(k) funds can be used as start-up capital for a new business or to acquire an existing business.”

If you want to apply ROBS policy to your situation, you must follow specific rules. This is where you may enter uncharted territory.

“ROBS is an arrangement whereby a prospective business owner uses funds from their tax-eligible plan to pay for the start-up costs of a new business,” said Marcia S. Wagner, managing member of Boston’s Wagner Law Group. “The ROBS plan then uses the rollover assets to buy shares in the new C-Corporation. That is, the taxpayer transfers his or her funds to a shell company that has no equity issued. The plan documents allow the 100 % of the shares are used to acquire the company’s stock. These plans then typically file for a favorable IRS determination letter, although such a letter is only a determination of the language of the plan document. While there are many potential pitfalls to ROBS transactions, the benefit is that the acquisition of new There is no income tax or excise tax to be paid while doing business.”

Just because you may have transferred your retirement assets from your previous employer doesn’t mean you’ve missed the opportunity. ROBS funds can also come from your IRA.

“The technique here is that a small business sets up a 401(k) plan, the owner rolls a sum of money from another qualified source (such as an IRA or a previous employer plan), and once in the plan, the cash is used to purchase Highland Park, NJ “The scheme is now the ‘owner/custodian’ of the share certificates and the owners have now withdrawn the cash without taxing them. You can use them as an inexpensive form of financing for small businesses, especially for owners who can’t find or qualify for quality financing elsewhere. “

Is ROBS a good idea?

There are several advantages to financing a new business with the ROBS option. Remember, this is like buying any other stock in your retirement plan. It’s not like taking a loan from your 401(k) account. If you pass, you will be able to use your retirement fund tax-free without paying interest.

“ROBS can be a great way to fund your business without taking on debt or giving up equity in your company,” said Linda Chavez, founder and CEO of Seniors Life Insurance Finder in Los Angeles. “Essentially, ROBS allows You use your retirement savings to start or grow your business. There are a few requirements to use ROBS. First, you must have a 401(k) or other eligible retirement plan. Second, your business must be a C corporation. Finally, You must use the funds in your retirement account to buy stock in the company. Once these requirements are met, you can transfer your retirement savings into the company’s 401(k) plan. This will allow you to take advantage of the tax benefits of your retirement account while also taking advantage of these Funds to grow your business.”

What can ROBS be used for?

The fact that ROBS needs to create a C-Corporation means that your new business won’t reap the benefits of a walk-and-run. You need to be familiar with all reporting requirements for this.

“No other business entity can use ROBS because it requires buying private equity,” said Hamza Usmani, content director at Believe Money in Karachi, Pakistan’s Sindh province. “Work with a professional to make sure all the details are taken care of, as companies do require more paperwork to set up and manage than a sole proprietorship or LLC.”

Here’s another twist: what if your new company hires people?

“Under the ROBS framework, companies must also manage retirement plans and make them available to all eligible employees,” says Tiffany Payne, content director at PharmacyOnline in Burnley, UK. “This means that you may have to file a 5500 form each year detailing the actions of the program. Most ROBS providers can help you with these duties on a monthly basis, but it does take more time and work to maintain it properly.”

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

Source link