A Rollover Business Startup (ROBS) arrangement allows you to use retirement funds, tax and penalty free, to finance a new or existing business. If you’ve ever wondered “How Does ROBS Work?”, the structure generally involves rolling over funds from an IRA or former employer 401(k) into a newly created 401(k) plan that is sponsored by a C Corporation. The funds are deposited in the C Corporation bank account and are available for use for business purposes.

How Does the ROBS 401(k) Solution Work?

The following is how a typical ROBS structure works:

Here is a straightforward look at how a typical ROBS structure is set up:

1. Form a C Corporation
   An entrepreneur, Jim, forms a new C Corporation in the state where the business will operate.
2. Why a C Corporation?
   The IRS exemption that makes ROBS possible applies only to corporate stock. LLCs and S Corporations do not meet this requirement, and S Corporations cannot have a 401(k) plan as a shareholder.
3. The C Corporation Adopts a 401(k) Plan
   The new Corporation adopts a 401(k) plan that allows participants, including Jim, to invest their accounts into various options, including employer stock.
4. Roll Over Prior Retirement Funds
   Jim elects to participate in the plan and rolls over his previous 401(k) or IRA funds into the new 401(k).
5. The Plan Purchases Corporate Stock
   Jim directs the 401(k) plan to purchase newly issued stock in the Corporation at fair market value. The amount purchased reflects the amount he wants to invest in the business.
6. Personal Capital Requirement
   Jim contributes at least 1 percent of the purchase price personally. This step ensures the structure is not treated as an ESOP.
7. Funds Become Available to the Business
   The Corporation deposits the proceeds, which include rollover funds and Jim’s personal contribution, into a business bank account. The business can then use the funds for legitimate business expenses.
8. Operating the Business
   Jim can work in the business, earn a salary based on business revenue, and personally guarantee loans. These activities are not allowed when using a Self-Directed IRA

Learn More: ROBS 401(k) Frequently Asked Questions

Legal Foundation for the ROBS 401k Solution

The ability to use retirement funds for business financing relies on exemptions under IRC Section 4975(d) and ERISA Section 408(e). These exemptions allow 401(k) plans to invest in employer securities without triggering prohibited transaction rules when the structure is set up correctly.

ERISA 408(e) protects routine corporate activities involving employer securities. Without this exemption, many ordinary business transactions by a plan sponsor could be treated as technical violations. Congress designed the rule to allow flexibility for employer securities in retirement plans.

Congress has also encouraged employer stock investments in 401(k) plans, within limits. Many major corporate plans, including Apple and Pepsi, include employer stock as part of their investment lineup.

Learn More About ROBS 401k

Adam Bergman, founder of IRA Financial, explains how the ROBS structure works and how it can be used to generate tax free dividends. In this episode of AdBits, Adam discusses how entrepreneurs can use retirement funds to invest in their own business, avoid double taxation, and build a more efficient financial strategy. Watch the full video below.

How About a Self-Directed IRA to Buy a Business?

Although ROBS is technically a form of self-directed retirement strategy, it is very different from using a Self-Directed IRA LLC to acquire or run a business.

With IRA Financial’s ROBS strategy, the new business can:

• Borrow from third parties
• Pay salaries to employees, including owners who participate in the plan
• Engage in routine business transactions with disqualified persons
• Allow owners to personally guarantee business loans

By comparison, a Self-Directed IRA LLC has clear restrictions. You cannot:

• Work in the business
• Earn a salary
• Personally guarantee loans
• Engage in transactions with disqualified persons

For these reasons, a Self-Directed IRA cannot be used to run an active business without triggering prohibited transaction rules.

Get in Touch

At IRA Financial, we help entrepreneurs use their retirement funds to launch or expand a business using the ROBS solution while staying fully compliant with IRS and ERISA rules. If you are ready to move forward or want to learn more about how the structure works, call us at 800.472.1043 or schedule a consultation with one of our specialists.