A rollover for business startups (ROBS) allows you to invest retirement funds from a 401(k) or individual retirement account (IRA) into your business without paying early withdrawal penalties or taxes. A ROBS isn’t a business loan or a 401(k) loan, so there’s no debt to repay or interest payments to make.
Most small business owners set up a ROBS with the help of a ROBS provider. We’ve taken the time to compare these companies and speak to small business owners who use them to rank their offerings and determine what the top ROBS providers do best. This year we ranked Guidant as the best overall because of the free consultation it offers and the stellar service it provides.
How a ROBS Works
A ROBS gives you access to your retirement funds to use in your business without having to borrow or cash out. It’s used to fund a new business or franchise, buy an existing business, or recapitalize your business. When you use a ROBS, your business retirement account owns shares of your new business.
A ROBS 401(k) involves incorporating a new business and opening a new 401(k) under it. After setup is complete, you can transfer assets from other retirement accounts and invest those funds in your new business. However, using a ROBS requires you to follow specific rules that govern how the account is set up, managed, and unwound.
A ROBS isn’t a withdrawal from your retirement account or a loan against it. Instead, it’s a rollover that invests in your business. Normally, if you take money out of a retirement account before age 59 1/2, you have to pay income tax plus a 10% penalty for the money you withdraw. Using your 401(k) to finance a business via ROBS offers advantages that aren’t available when borrowing against your 401(k) for other purposes.
How to Set Up a ROBS in 5 Steps
Setting up a ROBS requires you to create a C corporation (C-corp) and then establish a retirement plan, like a 401(k), for that new C-corp. Then, you roll over funds from your existing personal 401(k) or IRA into the new company’s retirement plan. Using the funds you’ve rolled over, the new 401(k) plan purchases stock in the C-corp, at which point the ROBS 401(k) rollover is completed, and your startup is capitalized.
1. Form a C-corp
The first step when using a ROBS to fund your startup is creating a C-corp. Your business must be a C-corp to qualify for a ROBS because the IRS prohibits certain transactions involving qualifying employer securities that only a C-corp can complete. This means that a C-corp is the only business structure that can sell shares of the business to a retirement account legally.
This also means that a ROBS won’t work for many common legal entities like a limited liability company (LLC), a sole proprietorship, limited liability partnership (LLP), or an S corporation (S-corp). If your business is already operating as a legal business entity other than a C-corp, you can convert your business entity to a C-corp to enable you to use a rollover for business startups.
2. Create a Retirement Plan for Your New C-corp
The second step in setting up a ROBS is establishing a retirement plan like a 401(k) for your new business. You have some retirement plan options, depending on how many employees you expect to qualify for the 401(k), how many highly compensated employees are expected, and other business-specific factors. These factors would be discussed during a free consultation with a ROBS provider.
Retirement plans small businesses used to set up a ROBS include:
- 401(k) plan
- Profit-sharing plan
- Defined benefits plan
- Defined contribution plan
- A combination of plans like a 401(k) with a profit-sharing component
You must find a custodian to manage the actual investments of the retirement plan like Wells Fargo, Merrill Lynch, or Charles Schwab. Most ROBS providers don’t offer those services but will help you find a custodian to work with, and that custodian can help you identify the right retirement plan for you.
3. Transfer Funds From Your Personal Retirement Account to the New Company Retirement Plan
The third step makes the ROBS transaction a rollover. Once the company retirement plan is set up within your new C-corp, your existing personal retirement funds are transferred to the new retirement plan. This transfer is seamless, but the time it takes depends on the process of the custodian holding your funds.
4. Retirement Plan Purchases Stock in the Corporation
The fourth step of a ROBS IRA or 401(k) transaction is to use the funds in your new retirement plan to purchase stock in your new C-corp. To do this, the business has to issue ownership shares of the corporation.
The number of shares assigned to the retirement plan equals the percentage of funding the plan is providing for the business. The percentage of startup financing the retirement plan is providing won’t always equal 100%. That’s because a ROBS can be used with another financing method like Small Business Administration (SBA) loans, personal savings, or additional partners and outside investors.
You might not want to issue 100% of your business’s shares during this round of funding. It may be advisable to issue only a fraction of the shares in case you want to raise money by issuing additional shares at a later date. This can get a little complicated, but a good ROBS provider will walk you through it.
5. Funds Become Available to the Corporation
The fifth step in setting up your ROBS is fun because you can now put the proceeds from your ROBS to use. The funds are now available to start, buy, or grow your business. You can use these funds for any normal business activity but not for personal expenses that you alone benefit from.
Keep in mind that there are ongoing administrative duties after your account is set up. This includes several reporting requirements outlined by the IRS and United States Department of Labor (DOL). A ROBS provider will handle these reporting responsibilities for you.
ROBS Requirements
A ROBS is not a loan, so you don’t have to meet traditional underwriting criteria like a credit check or cash flow analysis to qualify. This doesn’t mean that there aren’t requirements, however.
The four requirements for a ROBS are to hold an eligible current retirement account, have $50,000 or more in retirement funds, have a retirement account from a prior employer, and be a legitimate employee of the new business.
1. Hold an Eligible Retirement Account That Is Current
To use a ROBS, your funds must currently be held in a qualified, tax-deferred retirement account. Unfortunately, this means that funds held in popular Roth accounts, including Roth IRAs and Roth 401(k)s are not eligible for ROBS.
Some of the most popular tax-deferred accounts eligible for a ROBS transaction include:
- 401(k)
- 403(b)
- Simplified IRA (SEP-IRA)
- Thrift savings plan (TSP)
- Keogh plan
- Traditional IRA
2. Have $50,000 or More in Retirement Funds
Using retirement funds to start a business usually requires that you have at least $50,000 available in retirement savings. While this is not a strict rule, anything less than $50,000 usually means that the ROBS costs are likely to be prohibitive. Most ROBS providers won’t be willing to work with you if you’re trying to roll over less than $50,000 for this reason.
If you don’t have $50,000 or more in retirement funds, you can still complete a rollover to fund your new business. However, you will likely have to do it on your own, which makes it much riskier than using an experienced provider.
3. Have a Retirement Account From a Prior Employer
The retirement account you’re rolling funds over from can’t be administered by your current employer. Most employers will prohibit you from rolling over a retirement account while you still work for them.
However, you can use a retirement account from a previous employer, no matter who the current custodian is. You can also use funds in a self-directed IRA, a 401(k) you’ve opened up on your own, or any other eligible account you have that you opened up outside of your employer’s.
4. Be a Legitimate Employee of the New Business
To use a ROBS 401(k), you are required to be a legitimate employee of the business you’re investing in. There is no minimum time you must work in your new business each year. However, a thousand or more hours per year is a good rule of thumb. This means that a rollover for business startups may not be a good option for absentee owners or passive income businesses like real estate investing.
While you’re required to be a legitimate employee of the new business to use a ROBS 401(k), you may also be restricted in how much you can pay yourself in salary or benefits. While there are no published limits on how much you can pay yourself if you use a ROBS, taking too much money from your new business may qualify as a ROBS-prohibited transaction.
Those are the only four technical requirements, but other things could impact your success with a rollover for business startups. These things depend on what you’re using your funds for, what type of retirement account you have and what your business situation is.
Using a ROBS to Recapitalize a Business
One example of a situation where your ROBS may vary is if you’re using the money to recapitalize your business. If this is your situation, then you should keep some things in mind before you start the process. The business should be generating revenue, and, while it doesn’t have to be profitable, you should have a plan for how the business will become profitable.
These are not requirements in how a loan has minimum requirements. However, a ROBS provider might not be willing to work with you if you’re trying to put a bandage on a business that is losing a lot of money. One tip for using retirement funds to start a business is to invest your retirement funds into a business that can develop and grow because of your injection of capital.
ROBS Costs
A ROBS is not a startup loan, so you don’t have debt or interest to pay back. Instead, you’ll only be charged by the professionals you hire to set up and manage your ROBS. While you could do this on your own with CPAs and attorneys, an experienced ROBS provider is a better solution.
Top providers charge you two fees: a setup fee and an ongoing monitoring fee.
1. ROBS Setup Fee
A ROBS provider charges about $5,000 upfront for a rollover business startup transaction, and the fee must be paid out of your own pocket. The funds being rolled over can’t be used to pay the setup fee.
The setup fee pays for setting up your account through a provider. This includes setting up the C-corp, conducting a valuation of the business, creating the company retirement plan, and filing paperwork with the IRS.
2. Ongoing Monitoring Fee
Your ROBS provider will help you administer your ROBS for a fee of $120 to $140 per month. Plus, they may charge you a per-employee fee if you have more than 10 retirement plan-eligible employees. Some providers may charge you an annual fee instead of a monthly fee, but the total yearly cost is the same either way, and they’ll allow you to make payments on that fee on a monthly basis.
The monitoring fee covers providing employees notifications when they become eligible for the plan, adding and subtracting employees from the plan, annually submitting required IRS filings like the Form 5500, and keeping track of any owner’s obligations for the plan. This ensures that your ROBS transaction is following all the 401(k) rollover rules.
Because of these fees, it rarely makes financial sense to do a ROBS if you’re rolling over less than $50,000. Anything below $50,000, and you’re looking at setup costs that run over 10% of your funding. Considering that most startup loans have origination fees of less than 4%, this level of expense is generally deemed too costly.
It’s possible to avoid some of these fees if you complete a ROBS transaction on your own without the help of a ROBS provider. However, we don’t recommend this because it’s easy to run into legal troubles and tax violations when administering your account unless you’re experienced and understand 401(k) rollover rules.
Also, you would need to hire individual attorneys and certified public accountants to work on your behalf, anyway. Few professionals have the experience necessary to protect you from the potential tax and legal liabilities a ROBS could bring if done incorrectly. It also isn’t likely to save you much money, if any at all, by using these professionals instead of partnering with an experienced ROBS provider.
ROBS Prohibited Transactions
Business owners who use a ROBS to start, purchase, or recapitalize a business need to be careful to avoid ROBS prohibited transactions. Some prohibited transactions in a ROBS 401(k) include excessive ownership compensation and the use of business property for personal benefit. Prohibited transactions can expose you to unanticipated taxes and penalties.
Personal Use of Business Property
If you use a ROBS 401(k) rollover, you aren’t allowed to use any property of the business personally. Internal Revenue Code section 4975 places a 15% tax on any transactions involving the sale, lease, or exchange of company property to a disqualified person, including the owner, his or her spouse, or immediate family.
Inappropriate Owner Compensation
If you use a ROBS for 401(k) business funding, you owe a fiduciary duty to your retirement account that owns stock in the company. This means that your compensation and benefits can’t be excessive, nor can you dilute your retirement account ownership by giving yourself stock options.
When you set up a rollover for business startups, you aren’t allowed to pay yourself from retirement funds that are transferred in to fund your business. Instead, you need to pay yourself from operating revenue. If you have employees in the business that you fund with a ROBS 401(k), and you qualify as a highly compensated employee under Internal Revenue Code Section 414, you may also violate 401(k) nondiscrimination testing.
Promoter Fees
When you raise money for a new company using a rollover for business startups, it’s not unusual to pay fees to advisors or brokers who help you raise money. However, according to Internal Revenue Code Section 4975, these promoters may qualify as fiduciaries, which could not collect “promoter fees.”
ROBS Compliance
Besides ROBS prohibited transactions, there are additional 401(k) rollover rules and compliance issues that business owners should be aware of. These include which employees you offer retirement plans to and what investments are offered in the plan. While it’s rare, the IRS and DOL may audit your business to ensure compliance with all ROBS 401(k) rules.
ROBS Requirements If You Have Employees
A ROBS benefits the employees of the C-corp in which the funds are invested. This means that while business owners who invest their retirement account in their new company may benefit from operations, they are required to run the company for the benefit of the retirement plan that owns the business.
If you have employees, there are two strict ROBS requirements that you must follow.
1. Eligible Employees Must Be Offered the Opportunity to Invest in the Company Retirement Plan
When using a rollover for business startups (ROBS), you’re required to educate eligible employees about your retirement plan, provide them with plan documents, and make sure they have sufficient time to enroll. Employee eligibility requirements vary by state and plan design, but employees must be at least 21 years old, have worked for your business for one year, and have worked at least 1,000 hours during that time.
Once the employee invests in the retirement plan, you must process contributions and take care of any employer tax obligations related to the plan. Keep in mind that employees can become eligible to take part in retirement plans at different times throughout the year.
Working with a ROBS company eliminates many of these headaches because it handles most of these things for you. A ROBS provider keeps track of who is eligible and provides onboarding documents to give to employees to ensure you are following 401(k) rollover rules—the only thing it won’t do is to deliver the information to your employees.
2. Employees are Entitled to Invest the Same Way You Are
All employees eligible for the company’s retirement plan must have the ability to invest in the same offerings as everyone else. This means that you can’t offer some investments to owners but not to employees. If you make shares of the company part of the retirement plan offerings, then eligible employees get to buy in.
Keep in mind, however, that investment options within a retirement plan can change. While your plan may offer the option of investing in your new C-corp for a period, it may change later on. If your retirement plan changes its investment options before employees become eligible, then the newly eligible employees are not entitled to invest in past offerings. This can stop your employees from owning part of the company if you desire.
You must meet the “effective availability” requirements when educating your employees about the retirement plan. This means you must make investment vehicles available for a significant amount of time for the employee to make an informed decision on whether or not to invest.
Abiding by the rules for eligible employees can be difficult without the right guidance. This is another reason we recommend partnering with a top ROBS provider experienced at both setting up a ROBS and getting its clients through audits.
Government Audits of ROBS
Rollovers for business startups (ROBS) are held to certain compliance standards by both the IRS and DOL. While either of these government agencies can start an audit of the business to determine if the business’ retirement plan has violated any rules, the chance of an audit is low.
If you face an audit, some things checked for compliance include:
- The retirement plan was set up correctly: The provider wants to make sure that all the requirements we discussed above have been met
- All required annual filings have been completed: The provider will double-check that forms, such as the annual IRS Form 5500, have been filed properly for each year the ROBS has been in place
- You meet all employee requirements: The business is required to educate employees about the plan, provide all necessary forms and take care of all employer taxes related to the retirement plan; we cover this in greater detail below
If you use a ROBS 401(k) rollover and encounter an audit from the IRS or DOL, your ROBS provider will help you through the audit process. This is one of the many benefits of working directly with a ROBS provider to set up your plan.
Pros & Cons of Using a ROBS
A top concern that many entrepreneurs have when using retirement funds to start a business is that if their startup isn’t successful, they could lose their investment. What many people don’t realize is that the financial risk involved with a startup and the possibility of business failure aren’t unique to a ROBS.
Advantages of Using a ROBS
- No interest or debt payments: It can be difficult and expensive to get capital to start or purchase a business. This is true for startups. A rollover for business startups is not a loan, so you do not incur debt and do not have to pay interest.
- Better business success rates: A study showing that companies funded by ROBS have a much better survival rate than other startups. This is because they are not starving the business for funds to make debt payments.
- No income taxes or early withdrawal penalties: If you were to make a withdrawal for using retirement funds to start a business, you would have to pay income taxes and, if you’re age 59 1/2 or younger, early withdrawal penalties. The penalty is typically 10% of the amount withdrawn. By structuring your funding as a rollover, you avoid these costs.
- No impact on personal credit or personal assets: When you do a ROBS, there’s no credit check, and you don’t have to sign a personal guarantee. Most loans require both, which means the personal credit of the business owner can be damaged and personal assets taken if the business can’t afford to pay back the loan.
- Retirement funds can grow in a tax-advantaged account: A loan is one-sided with money flowing from your business to the lender to pay back the loan. When doing a ROBS, a 401(k) plan is created for the company. You can contribute to that account as your business produces revenue and use the funds for retirement.
Disadvantages of Using a ROBS
- The possibility of losing retirement money: Most new businesses fail and, if yours does, then you could lose all the money you invested. Also, consider the opportunity costs: If your retirement money was not invested in your company, it could be invested in stocks, bonds, exchange-traded funds (ETFs), or mutual funds.
- You could be audited: A rollover for business startups increases the likelihood that the IRS or DOL will audit your business. If they find that you violated certain rules, you may have to pay penalties and taxes. The increased risk is small.
- You need to administer a retirement plan: When you commit to a ROBS transaction, you become the administrator of a company-provided retirement plan. Although some providers offer guidance with this, you need to market the plan toward employees and help them enroll. This can take time away from your business.
- Your business must operate as a C-corp: It’s only possible to do a ROBS if your company is structured as a C-corp. Many small businesses prefer the simplicity and tax advantages of an LLC or partnership instead of a corporation. You’re giving that up if you do a ROBS, but you can get help to make sure everything is set up correctly.
Unwinding a ROBS
Most entrepreneurs have the goal of starting a business, growing it, and someday selling or exiting the business. Starting a business with a ROBS adds several steps for unwinding a ROBS in addition to the business. How you unwind your ROBS 401(k) will depend on how you’re exiting your business—selling stock or assets or going bankrupt.
There are several real scenarios to consider when unwinding a ROBS.
Business Stock Sale
If you sell the stock of your business, then unwinding a ROBS is easy. Everyone who owns a percentage of stock in the business typically receives that portion of the sales proceeds, minus any funds required to wind down your investment or other potential business obligations. The funds given to the retirement plan for its owned stock in the business are rolled into an IRA for your benefit.
Business Asset Sale
Many businesses sell their assets instead of their stock to prevent the new owners from taking responsibility for any potential future liabilities that the current company may have. In these circumstances, unwinding a ROBS becomes more difficult.
Once the business assets are sold, the funds are used first to pay off liabilities and administrative obligations. The net proceeds remaining after those payments are then distributed to the owners of the business, including your retirement plan.
If Your Business Fails
If your business fails, then unwinding a ROBS still requires closing out your retirement plan. You must educate your employees on what options they have for the funds they’ve already invested in the plan. When your business fails, you do not have any obligation to pay back your original funding to anyone, but you will lose the money.
Every Scenario Requires a Form 5500
Every 401(k) plan is required to file an IRS Form 5500 annually to report plan assets, expenses, inflows, and outflows. If you use a ROBS 401(k), it’s important to file Form 5500 every year that your plan is active. Even when you complete unwinding a ROBS transaction, you need to file a final Form 5500 for the year your plan was terminated to stay in compliance with 401(k) rollover rules.
ROBS Frequently Asked Questions (FAQs)
Does the company have to be a C-corp, or can it be an LLC, partnership, or S-corp?
The only business structure you can use for a ROBS is a C-corp. As long as you have money invested in a company via a ROBS, you must remain a C-corp. However, if you divest the money and unwind your ROBS, you can use any business entity you’d like based on federal and state laws.
Can I change the business to an LLC later, or does it have to stay a C-corp?
As long as you have funds invested in the business, the entity must be a C-corp. This is due to your company retirement plan owning shares of your business. Only a C-corp allows something other than a person or legal business entity to own shares.
As the business owner, do I have to offer the company retirement plan to all employees?
You must offer the retirement plan to all eligible employees. The DOL does set minimum requirements on who is entitled to a company retirement plan. Generally speaking, an employee must be at least 21 years old, have worked for one year, and have worked at least 1,000 hours during that time.
Do employees have to be provided the opportunity to purchase stock in the company?
Not unless you or other owners have that opportunity. The requirement is that company stock has to be made “effectively available” to employees the same way it’s available to owners. While this will be in your initial part of your retirement plan, it can be removed before you have employees become eligible, if you desire.
However, company stock can only be purchased by the employees through the retirement plan. Because stock in new companies is usually illiquid―can’t be sold easily―most employees tend to avoid investing even when it is offered.
What happens if the business fails?
When a business fails, the assets are liquidated and used to buy back as many shares of stock owned by the 401(k) plan as possible. Any funds remaining in the 401(k) plan are placed into an IRA for the business owner’s benefit, and both the plan and the corporation are dissolved.
Who is holding the retirement accounts?
The actual cash accounts are held by a custodian that’s typically a brokerage firm like Fidelity or TD Ameritrade. In general, the cost of having a custodian hold the retirement accounts is negligible or free. The brokerage firms make their money through their normal charges for buying or selling stocks, mutual funds, and exchange-traded funds (ETFs).
Can a ROBS be used to purchase real estate?
A ROBS can’t be used to purchase real estate directly but can be used to provide working capital for a C-corp that invests in real estate. A ROBS can be used to fund businesses that buy raw land, income-producing property, or developable land. Some profits can be distributed to ROBS in the form of dividends.
How many people can invest in a business using a ROBS?
There is no maximum number of people that can invest in a business via ROBS. It’s common for multiple business partners to invest using a ROBS. However, anyone using a ROBS to invest must be a legitimate employee of the business. You can also take funding from investors as direct investments outside of this transaction.
Can the business owner’s retirement account sell shares?
As for selling shares, if the company is sold, the retirement account or accounts holding shares will get payment in exchange for the shares it held. Also, the corporation can offer to buy back or “redeem” the shares from the plan, which provides another way to increase the cash in a retirement account.
Can the business owner’s retirement account collect dividends?
Although it is not commonly done, should the corporation issue a dividend to shareholders, the 401(k) plan gets its proportionate share since it is a shareholder of company stock. A more common practice is for the business owners to pay themselves bonuses and higher salaries as the company starts generating excess cash flow.
Can I use additional financing with a ROBS?
Many forms of financing can be used with a ROBS to give the business more capital to work with. The most popular options include SBA loans and equipment financing. A ROBS can also be used as a down payment for other financing, and providers can offer help with qualifying.
How is a ROBS different from an ESOP?
A ROBS is used by incorporating a new company and forming a 401(k) under that new company. An employee stock ownership plan (ESOP), on the other hand, is structured to facilitate the purchase over time of a company’s stock by its employees.
Bottom Line
A ROBS can be an excellent option for funding a small business, whether you’re starting out, want to buy a business, or recapitalize your current business. You should weigh all the pros and cons of a ROBS and get all your questions answered by a professional before deciding if it’s right for you.
Tamara Bell-Karlsson
Hi. We bought a company with my (now ex) husbands 401k. We did everything right and thru Guidant. We sold the business in Jan 2018. Here’s my question: Upon exiting we put the money back into a new 401k to close out the business 401k. The we each did a rollover into separate Rollover IRA’s. We’re now getting a call from Guidant saying this was illegal to do and everything should have gone back into a Rollover IRA for ONLY my husband because it was his original 401k that was used to buy the business.. After reading your info it doesn’t seem like this was wrong or illegal. Was it?
Amanda Norman
Hi Tamara,
Thanks for visiting the site! Unfortunately, we are can’t offer you legal or tax advice. Guidant is an experienced ROBS provider and would be better equipped to advise you. If you feel that you need second opinion you may wish to contact another experienced ROBS provider to assist you with your situation. You can find a link to providers we suggest below.
https://fitsmallbusiness.com/best-rollover-business-startup-robs-providers/#comments
Hope this help. Wish you the best.
Mandy, Moderator
j. edward goodwin
As someone who is in the final stages of setup on a ROBS startup, I have to say this is one of the most informative, concise, and clearly written articles I’ve ever read on the subject. Thank you for certain points that I found reassuring, as I head into my new business. By the way, I’m a client of Guidant and would highly recommend them for the setup of one’s ROBS financing. They have been Professional, detail oriented, have stayed on top of the process and communicated in a most effective and appreciative manner. Like this article itself, I highly recommend Guidant.
Amanda Norman
Hi J. Edward,
So glad to hear you liked the article, and thanks for sharing your experience. We love getting feedback from our readers that have real experience with the vendors we recommend.
Thanks for reading and the kind comment!
Mandy, Moderator
Matt Sorensen
Really enjoyed your article, thanks! Are ROBS relatively new or have they been around for awhile?
Amanda Norman
Hi Matt,
So glad you liked the post. It looks like in 2008 the IRS released a memorandum that coined the term ROBS to describe this business loan practice.
Thanks for reading and commenting!
Mandy, Moderator
Jennie Morataya
If someone has used a ROBS to start their business, are they able to do an early withdrawal or borrow against their retirement account in the ROBS (with appropriate tax/penalties, of course) just like they could with an employer backed 401k or IRA? Or, would they have to unwind out of the ROBS first? Thanks!
Robert Newcomer-Dyer
Thanks for asking the question!
When you set up a ROBS, in most scenarios you’re creating a 401k for the benefit of you (as an employee of your company) and all other eligible employees. (Note: Some providers set up a profit sharing plan or other variation instead).
When you create the 401k plan documents, you can set up a loan provision along with other features of the plan. It’s important to know that this is not always set up by default, and if you have an existing ROBS, you may need to amend the plan to allow for loans. This can be tricky, but is possible. Ask your ROBS provider.
Similarly, you may take withdrawals from your 401k as allowed in your plan documentation. In most plans withdrawals are restricted to either a (provable) hardship, or termination of your employee relationship. If you allow for withdrawals under other circumstances, you will need to allow them for all eligible employees.
One last caveat: When you take a loan from a 401k, you are borrowing from yourself. In other words, the loan comes out of the plan balance. This means that whatever percentage of funds you take out in the form of a loan are now invested in that loan to you. So, the funds must be available.
If your funds are currently tied up in ROBS shares, it may be difficult to borrow from your 401k, as the C-Corp would need to buy the shares back, which may trigger a valuation. However, if you have only invested a portion of your retirement funds in the C-Corp shares, you may borrow from any remaining funds up to $50,000 or 50% of your plan balance, whichever is less, up to the amount that is available in your plan balance.
Best of luck!
Robert Newcomer-Dyer
Jessica L Shahinian
We have a new client (restaurant) that did this program and successfully formed a C-Corp for the ROBS process. He used that money and that new C-Corp to purchase 98% of the stock of another C-Corp (intention of that ROBS process). Currently sitting with two C-Corps (one with no activity, ROBS, and one with all the activity, restaurant C-Corp), I wonder if he could file a consolidated tax return for the two without hindering his compliance with his ROBS setup. Can you enlighten me to ensure he will still be compliant with a consolidated return and if there are any transactions, filings or potential risks involved that we should note?
Thank you in advance for your clarification of this process. Last thing we want is to put our client in a sticky situation! – Jessica
Crystalynn Shelton
Hi Jessica,
This is a great question but one that requires a CPA that specializes in taxes or even a tax attorney to take a look at for you.
Best of luck,
Crystalynn Shelton