Using Your 401K to Start Your Business

By Linda Passaro
Published on: February 12, 2017

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Who should read this:  Anyone wanting start a new business

Why you should read this:  Using your 401K as a startup investment

Those of us who dutifully contributed to 401K Plans and maxed our contributions over the years are sitting on tax-free financing options to help us start new businesses or purchase existing businesses. This is not a loan with interest nor do you pay taxes for moving the money.  Few financial advisors are even aware of this unique business startup option.

The program is called “Rollover as Business Startups” (or ROBS), which allow business owners to use their retirement funds to invest in a business without incurring tax penalties.

If you ask your financial advisor, they may caution you about the risks involved if you utilize 401K money, however, this program is all about helping entrepreneurs to create new jobs and participate in the economy versus sitting out on unemployment.  ROBS utilizes the money from an eligible retirement account to finance the purchase of a business or franchise or to create startup businesses.

How Does It Work?

In simplistic terms, you form a corporation (C Corp), and that corporation then sponsors your business 401K plan. Funds are rolled from an existing retirement account into the new 401K without triggering a taxable distribution. This new 401K plan purchases shares of the corporation, which can then purchase a business or franchise.

All eligible employees (21 years or older and working over 1,000 hours) must be given opportunity to partake in your business’s 401K plan and you can continue to contribute to your 401K (up to a maximum $24,000 if you are 50 years old or older) pre-tax dollars.

With ROBS you are in control of your finances, invest in yourself  and can continue to contribute to your retirement which is important given how unsure we are that we will ever see the Social Security Benefits we have paid into for many years.

Some Frequently Asked Questions about Rollover Business Startups:

  • Is this considered tax avoidance and raises an issue with the IRS? NO

The Employee Retirement Income Security Act of 1974 was set up explicitly to encourage investment in small businesses that then creates jobs and business taxes. A win-win scenario and a way to help stimulate jobs which is key given the state of our economy.

  1. Is ROBS a Loan with Interest? NO

It is an investment in your new business or franchise, not taking on debt. This means you won’t have to make monthly loan payments or incur interest, and you have the opportunity to increase the value of your investment through annual contributions back into the plan for your retirement.

  1. Do I have to risk my entire 401K plan? NO

Many people only use a portion of their retirement assets, leaving the remainder in their existing 401K or IRA to be invested as they traditionally have been. Diversifying your 401K by funding and investing in your own business while keeping some funds in the traditional investments appeals to most people as the best option.

  1. Can I also apply for a small business loan (SBA)? YES

The ROBS arrangement can be used in conjunction with a small business loan, allowing you to diversify your investments even further. SBA loan portion will involve interest rates. ROBS does not involve interest as it is not a loan.

  1. Do I need to work in my business or can I be an ROBS absentee owner with ROBS funding? YES

You must be a bona fide employee of your new business. ROBS financial advisor experts recommend that you work at least 1,000 hours per year to be considered an employee.

  1. Can ROBS fund an LLC? NO

Compliance requirements of Rollovers for Business Startups requires that the business must be a C Corporation. Limited Liability Companies (LLC), Partnership or S Corporations don’t meet the necessary requirements.

  1. Does ROBS funding take a lot of time to execute? NO

Depending on the state in which you’re filing, and how fast you’re able to file the necessary paperwork, funding can take as little as a few weeks with most transactions completed in less than 30 days.

  1. Is ROBS the same as Self-directed IRAs? NO

You can finance a business with both self-directed IRAs and ROBS, but there are some differences. If you use an SDIRA, the owner may not work for the business they invest in or take a salary. The investment amount is also potentially liable for the unrelated business income tax. With ROBS, the 401K owner must work for the new business. Plus you have the added benefit of being able to draw a reasonable salary that would be at a reasonable level if you were to hire an outside employee.

We recommend you do research and speak to a number of financial advisors and legal counsel who specialize in ROBS programs.

Guidant is the company I decided to use after speaking with three providers. They project that they will help entrepreneurs secure $410 million in financing solutions – so you will NOT be alone in seeking this innovative business purchase financing option.

Websites to Review:

Guidant Financial


Linda Passaro

Linda Passaro

Linda Passaro is a proven business leader and recognized expert in growing global luxury consumer brands and experiences across watches/jewelry, fashion/accessories and consumer technology categories. Her expertise lies in launching challenging brands, re-positioning established global brands and building new businesses.

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