How to Use ROBS to Invest in Real Estate and Cut Taxes

How can you use ROBS to invest in real estate and cut taxes?

If you’re a retirement investor who wants more control over your money and a smarter way to avoid costly taxes, there’s a little-known but powerful tool worth exploring: the ROBS structure. Short for Rollover as Business Startup, ROBS gives you a legal, IRS-approved way to tap into your retirement savings to invest in a business—including real estate—without triggering early withdrawal penalties or taxes.

Even better? When paired with a smart tax strategy like advisory fee stripping, you can reduce the taxes your business pays and keep more money growing inside your retirement account. Let’s break this down in plain English—what ROBS is, how it works, and why it beats a Self-Directed IRA in some key ways.

What Is ROBS?

ROBS stands for Rollover as Business Startup. It’s a strategy that allows you to take money from an existing 401(k) plan or IRA and use it to start, buy or fund a business, without paying taxes or early withdrawal penalties.

How It Works (in 5 Steps):

1. Form a C Corporation – You create a new business that’s taxed as a C corp.
2. Set Up a 401(k) Plan – The new company adopts a retirement plan.
3. Roll Over Your Retirement Funds – You move money from your IRA or old 401(k) into the new 401(k).
4. Buy Company Stock – The 401(k) uses the funds to buy shares of your C corporation (called founders stock).
5. Use the Funds for Your Business – The company now has capital to invest in something active, like a real estate fund.

Unlike a Self-Directed IRA, this structure lets you actually work for your business and be involved in day-to-day operations.

Why Real Estate Investors Love ROBS

One of the big headaches of using retirement funds to invest in real estate is something called UBIT, Unrelated Business Income Tax. This tax can kick in if you invest in leveraged real estate with an IRA, slashing your profits with rates as high as 37%.

The ROBS structure avoids this issue entirely. Here’s why:

• Your 401(k) owns stock in a C corporation, not the property directly.
• The corporation makes the investment, not your retirement plan.
• You can legally draw a salary and actively manage the business.

But there’s a catch: C corporations pay 21% federal corporate tax on their income. That’s where advisory fee stripping comes in.

Lowering Taxes with Advisory Fee Stripping

Since your C corp is an operating business, it can pay you a salary for providing legitimate services—like advising or managing investments. This salary is tax-deductible to the corporation, which reduces its taxable income.

Let’s look at an example:

Example:

• Jane rolls over $200,000 from her 401(k) using a ROBS setup.
• She forms a C corp, Market Capital Inc., and invests in real estate.
• The C corp earns $100,000 in net income.
• Jane pays herself a $40,000 salary for managing the business.
  • That $40,000 reduces the company’s taxable income to $60,000—saving $8,400 in taxes (21% of $40K).
• Jane keeps more of the income in her hands, legally and without early withdrawal penalties.

And if Jane doesn’t want to shift too much income to herself personally, she could take a smaller salary and let the C corp pay tax-free dividends back to her 401(k) instead.

Why This Strategy Doesn’t Work with a Self-Directed IRA

Trying the same thing with a Self-Directed IRA is risky—and often not allowed.

Here’s why:

1. Prohibited Transactions – If your IRA pays or receives fees from a business where you’re involved, it likely violates IRS rules. This could disqualify the entire IRA.
2. UBIT Still Applies – If you or your IRA-owned business provide services to another company, the IRS may see it as active income and apply UBIT.

Worse still, even unpaid personal involvement can lead to disqualification.

The Bottom Line: Flexibility and Tax Efficiency

With a ROBS structure, you can:

• Work for your own business.
• Take a salary and manage operations legally.
• Avoid UBIT entirely.
• Deduct real business expenses like advisory fees.
• Keep retirement savings growing tax-deferred or tax-free.

Final Thoughts About Why You Should Use ROBS to Invest in Real Estate

If you’re serious about using retirement funds to invest in real estate—especially leveraged deals—a ROBS setup offers flexibility and tax advantages that a Self-Directed IRA simply can’t match. When paired with advisory fee stripping, you can minimize corporate taxes and keep more of your hard-earned returns.

Just make sure to work with a knowledgeable provider, like IRA Financial, that knows how to structure a ROBS plan properly and ensure full IRS compliance. If you have any questions, feel free to schedule a call with one of our ROBS experts!

Frequently Asked Questions