ROBS financing is a way for entrepreneurs to use their retirement funds to pay for new business start-up costs without paying taxes or penalties on the withdrawal.
ROBS stands for Rollovers as Business Start-Ups, and it involves setting up a C corporation, creating a 401(k) plan for it, rolling over existing retirement funds into the new plan, and then using the plan to buy shares of the corporation. This way, the entrepreneur becomes the owner of the business and the 401(k) plan becomes the shareholder.
ROBS financing can be a good fit for potential entrepreneurs who need financing for their venture in a rising rate lending environment. This is because ROBS financing does not involve taking out a loan or paying interest, which can be costly and risky when interest rates are high. ROBS financing also allows entrepreneurs to avoid diluting their ownership or giving up control to outside investors, which can be another challenge in a competitive market. ROBS financing can also provide tax benefits, as the business income can be deferred or sheltered within the 401(k) plan.
However, ROBS financing also has some drawbacks and risks that entrepreneurs should be aware of.
For one thing, ROBS financing requires compliance with complex IRS rules and regulations, which can be time-consuming and expensive to maintain. Failure to comply can result in audits, penalties, or disqualification of the plan.
For another thing, ROBS financing exposes the entrepreneur’s retirement savings to the risk of business failure, which can jeopardize their financial security in the future.
ROBS financing also limits the entrepreneur’s ability to raise additional capital from other sources, as most lenders and investors will not accept 401(k) shares as collateral or equity.
Therefore, ROBS financing is not a one-size-fits-all solution for entrepreneurs who need funding for their business. It is a complex and risky strategy that requires careful planning, execution, and monitoring.
Entrepreneurs who are interested in ROBS financing should consult with qualified professionals such as tax advisors, attorneys, and financial planners before proceeding.