{"id":118655,"date":"2025-03-07T21:59:32","date_gmt":"2025-03-07T21:59:32","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/unlocking-retirement-savings-to-fund-a-new-business\/"},"modified":"2025-03-07T21:59:32","modified_gmt":"2025-03-07T21:59:32","slug":"unlocking-retirement-savings-to-fund-a-new-business","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=118655","title":{"rendered":"Unlocking Retirement Savings to Fund a New Business"},"content":{"rendered":"


\n<\/p>\n

\n

Many people have dreams of starting a business but lack the capital or funding needed to launch their new business ideas.<\/span>\u00a0<\/span><\/p>\n

It\u2019s true: It costs money to start a business. The <\/span>US Small Business Administration (SBA) says<\/span><\/a> that how to fund a business is one of the first \u2014 and most important \u2014 decisions business owners must make. Self-funding is one way that entrepreneurs leverage their own financial resources to get a business off the ground and tapping into a 401(k) is one option that many entrepreneurs aren\u2019t aware of.<\/span>\u00a0<\/span><\/p>\n

Using Retirement Savings to Fund a Business<\/span><\/b>\u00a0<\/span><\/p>\n

When thinking about using retirement funds to start a business, it\u2019s important to note that the options are not limited to borrowing against a 401(k) or taking out a loan from it.\u00a0<\/span>\u00a0<\/span><\/p>\n

A provision known as Rollover as Business Start-up (ROBS) allows prospective business owners to use their retirement funds to pay for new business start-up costs. An individual would roll over his or her existing retirement funds to a ROBS plan in a tax-free transaction, which then uses the rollover assets to purchase the stock of a new C Corporation business.<\/span>\u00a0<\/span><\/p>\n

According to <\/span>Benetrends<\/span><\/a>, a financial services firm specializing in connecting entrepreneurs with franchise funding, the ROBS option typically follows these steps:<\/span>\u00a0<\/span><\/p>\n

    \n
  1. The entrepreneur establishes a new C Corporation.<\/span><\/li>\n
  2. The C Corporation <\/span>opens a new 401(k) plan<\/span><\/a> that includes an option for investing in \u201cqualifying employer securities.\u201d<\/span><\/li>\n
  3. Funds are rolled over or transferred from the entrepreneur\u2019s retirement plan to the new 401(k) plan.<\/span><\/li>\n
  4. The C Corporation\u2019s stock can then be purchased at fair market value, and the sale of the stock generates the business capital needed.<\/span>\u00a0<\/span><\/li>\n<\/ol>\n

    What You Should Know about ROBS<\/span><\/b>\u00a0<\/span><\/p>\n

    ROBS arrangements can be a highly beneficial source of capital; however, the Internal Revenue Service is strict when it comes to <\/span>ROBS compliance<\/span><\/a>.<\/span>\u00a0<\/span><\/p>\n

    Here are some important points to remember about ROBS:<\/span>\u00a0<\/span><\/p>\n

      \n
    • Only C Corporations can be used to set up a ROBS. You cannot use LLCs, sole proprietorships or any other types of entities.<\/span>\u00a0<\/span><\/li>\n
    • A ROBS arrangement does not borrow against your old 401(k). The new 401(k) established by the C Corporation is investing money in your business in the same way it would invest in any other companies\u2019 stocks.<\/span>\u00a0<\/span><\/li>\n
    • Funds from ROBs are <\/span>tax<\/span><\/a>\u2013 and penalty-free, and there\u2019s no limit to the amount of funds you can use from your old 401(k).<\/span>\u00a0<\/span><\/li>\n
    • ROBS arrangements may be funded from a variety of plan types, including 401(k)s, IRAs, 457(b)s, 403(b)s, PSPs and SEP IRAs. However, Roth IRAs are ineligible.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n

      If you\u2019re looking to explore your options for startup capital, you need an experienced tax adviser in your corner who is <\/span>knowledgeable about retirement plans<\/span><\/a> and financing. From proper entity selection at the inception of a business to developing an exit strategy, S.J. Gorowitz Accounting & Tax Services combines the broad experience of a large CPA firm with strong competencies in <\/span>business advisory<\/span><\/a> and <\/span>M&A advisory<\/span><\/a> services to meet the needs of emerging and expanding companies. To discuss your needs and situation, please contact us at 770.740.0797 or <\/span>info2@SJGorowitz.com<\/span><\/a>.<\/span>\u00a0<\/span><\/p>\n<\/div>\n