In this episode of Coffee with Carl, attorney Carl Zoellner covers the basics behind rollovers as business startups (ROBS) transactions.

 

Updated August 27, 2020

Rollovers as business startups, or ROBS, transactions can be complicated. There are many intricacies to this, so it may not be the best tool for everyone. That being said, this is an option that can be useful for some investors. So, let’s talk about the very basics of ROBS transactions: what they are and how they work.

The first step of initiating a ROBS transaction is to create a new C corporation. This C corporation will then create a 401(k) account with the ability to purchase private stock. Then, you’ll get the funds from your existing retirement accounts and roll them over into the new 401(k) established by the new C corporation. This does not create a taxable event.

Next, the 401(k) plan purchases stock in the new C corporation. This infuses the new business with funds that can be used for whatever business is being conducted. These steps may sound simple, but be wary: there are major pitfalls that must be avoided with ROBS transactions.

Know the Risks

Yes, you can use an existing IRA to fund a new business, but it’s essential that you’re aware of the significant risks and compliance issues that accompany ROBS transactions. Rollovers as business startup transactions are not illegal; however, they’re frowned upon by the IRS. Thus, the IRS looks at them with a higher level of scrutiny. As a result, using this tool can increase your audit risk.

Furthermore, when you purchase stock in the new C corp, there are compliance issues you must be aware of to ensure you don’t step afoul of the ROBS rules or create a prohibited transaction.

ROBS: Don’t Go It Alone

Overall, the takeaway here is that you should always work with a qualified professional on ROBS transactions. If you want to use this tool, I highly encourage you to schedule a complimentary consultation with us so we can first make sure that it’s a good fit for your personal situation. There are lots of other ways you can access your retirement account funds for investing, so it’s important that we first make sure using a ROBS transaction makes sense for your goals. For many investors, it may be more headache than it’s worth.

 

Watch as Carl covers the basics of ROBS transactions and how some investors use them to fund new businesses.

 

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Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.

 

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