Roth 401k & Robs
Hi Jeff: Can you tell me how you concluded that Roth 401(k) accounts can be used with the ROBS strategy as communicated on your webpage at https://fitsmallbusiness.com/rollover-business-startups-robs/
Here is the statement you make:
“Note: Roth IRAs and Roth 401(k) accounts are not eligible for ROBS.”
In my experience and understanding you can use Roth 401(k) monies for a ROBS transaction.
I’m not a Robs promoter, rather support several hundred clients who have engaged in the ROBS transaction, with their 401(k) Plan needs. We focus particularly on ROBS 401k Plans that have eligible employees beyond the owners and they need traditional investments added to their plan, enrollment kits, a participant call/email center and more.
Thanks in advance.
Kirsten Curry, CEO & Attorney
Leading Retirement Solutions
Thanks for reaching out to us in the forums for clarification. The statement we made is accurate. Roth accounts can’t be used to setup a ROBS if you still want to be compliant with IRS rules. The IRS published a set of guidelines and it has been interpreted that the very nature of a ROBS works because you’re using a tax deferred retirement account, like a traditional 401k or IRA. Roth accounts are not tax deferred, so they don’t work for a ROBS. In fact, none of the ROBS professionals we work with will process a ROBS through a Roth account because it would be in violation of the IRS guidelines, and really would miss the entire point of implementing a ROBS to begin with.
Please let us know if you need further clarification about a ROBS.
I want to revisit this and ask if you have any explicitly concluded determinations from the IRS regarding the Roth featured plan. I have not yet found this but would like to know this for sure. Have you experienced any plans being disqualified based on this? The interpretation of that a Roth featured plan does not qualify as a tax-deferred plan is too inclusive for me. All of the benefits of a Roth featured plan is in the tax-deferred growth inside of the plan. The tax-free benefit is conditional in the event that one makes qualified distributions. If you make non-qualified distribution you pay ordinary income plus the 10% penalty.
I recognize your interpretation makes sense based on the typical characterization of the tax-deferred plans but it would be helpful if the IRS were to explicitly give us an answer or if someone had the first-hand experience with a ROBS Roth case.
Thanks for your follow-up. Our understanding is still that Roth plans can’t be used in a ROBS. However, if you’d like to get more in-depth insight from professionals who focus exclusively on ROBS we would recommend that you reach out to Guidant. Guidant has tremendous expertise on ROBS and should be able to answer your question or let you know if there’s a workaround that may work for you.
Hope this helps,