ROBS Explained: How to Leverage Your Retirement Savings for Entrepreneurial Success

Aspiring business owners find the task of securing finance for their startups challenging. Adopting the traditional modes of taking on loans, angel investors, and venture capitalists can also be daunting for a business that has yet to begin operations. You require easy access to liquidity at minimal cost and without any accompanying restrictions. This is where the ROBS (Rollover as Business Startups) transaction comes into play. ROBS helps you tap into your retirement fund to secure finance for your new business venture without incurring any early withdrawal penalties or other tax problems. Let’s understand how ROBS works.

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What is ROBS?

ROBS involves smart financial maneuvering that permits you to employ your retirement funds to commence business operations. Rather than looking outside for business funding, tapping into your own resources is more prudent. With ROBS, you gain access to your 401(k) or other eligible retirement accounts to fund your startup. In this manner, you are repurposing your retirement savings to build your own business.

?The process

The ROBS process involves a few steps.

1. ? ? ? Form a C Corporation

The first step in the ROBS process is forming a new C Corporation (C Corp.) with a corporate structure that allows shareholders. Your ROBS transaction depends on the sale of qualified employer securities (QES), so the business you start must be able to sell stock. A C Corp. is the only business entity permitted to sell QES.?

2. ? ? ? Set up a new retirement plan

After forming a C Corp your next step would be setting up a new retirement plan for your C Corp. This plan should be open to all employees, including you as the owner.

3. ? ? ? Roll over your retirement fund

Once the new retirement plan is set up in C Corp, all you need to do is roll over the funds from your existing retirement fund (401(k) or any other fund) to the new C Corp fund. The rollover amount is not subject to taxation because the amount is not being withdrawn from the fund but is directly being rolled over to another fund.?

4. ? ? ? Invest in your business

Once you have safely transferred your retirement funds to the new retirement plan in Corp, use it to buy company stock in your C Corp. Thus, you are legally investing your retirement fund in your own business rather than investing it in another company.

5. ? ? ? Launch your business

You can commence business operations such as purchasing equipment, leasing an office, hiring staff, etc., once you receive the proceeds from selling C Corp stock to your new retirement fund.

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Advantages and risks of ROBS

Advantages

· ? ? ? Employing a ROBS transaction to finance your new startup is prudent. You are not borrowing from banks and other lenders and are not burdened by debt. This causes the cost of capital to decrease.

· ? ? ? With ROBS you have complete ownership of your business since you do not have to sell your shares to outsiders.

· ? ? ? If the rollover process is completed strictly as per the rules, it stays tax-free. You don’t need to pay any tax when you transfer funds.

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Risks

· ? ? ? IF your business does not do well your retirement savings are in jeopardy.

· ? ? ? Rob involves complex legal manoeuvring and IRS scrutiny. Hence doing it on your own is not advisable. Engage the services of a professional tax consultant for assistance in setting up ROBS.

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ROBS is a powerful tool for resourceful entrepreneurs with reasonable risk appetite. If you’re confident about your business idea and willing to tackle the complexities involved, ROBS is a useful way to secure business finance.