Friday, November 18, 2022

What Is A Robs 401k

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How Do You Qualify For A Robs

ROBS 401K Quick Start Guide: What you need to know?

To qualify for ROBS financing, you must meet 4 main requirements:

  • You must currently own an eligible retirement or pension plan from a prior employer
  • Your plan account must contain at least $50,000
  • Your business must be structured as a C corporation
  • You must be an employee of your business receiving a salary

Eligible plans include:

  • Thrift savings plan plans
  • Simplified employee pension plans

If you meet these criteria, you should qualify for ROBS financing.

Using Robs To Cash In Your 401k Is Risky Business

Three years ago, Suzie Ford and her husband, Todd, withdrew all their retirement funds to start a brewery. They had no backup plan.

“It was pretty scary. My husband and I are a little older than most people starting a brewery, and we invested every single cent,” Suzie Ford, 46, says. “The day before we opened, we kind of had a panic attack. We both just looked at each other and said, Failure’s not an option. We’re going to make it work no matter what.”

The bank where Suzie worked had just been bought out, and Todd, a commercial pilot, wanted a schedule that wouldn’t keep him away from home so much of the time. With their son in college, they saw an opportunity for a career change that would let them spend more time together. Their friends had always told Todd that his home-brewed beer was good enough to sell.

Yet that is far from the case for everyone who takes advantage of ROBS. If half of all new businesses fail to make it past the first five years, is it wise to take that chance with your only retirement nest egg?

The Internal Revenue Service warned in a 2010 survey of ROBS businesses that “although there were a few success stories, most ROBS businesses either failed or were on the road to failure, with high rates of bankruptcy.”

But Charles Mowrey, 40, isn’t concerned. He emptied his retirement fund this May to buy a seven-cabin resort in Arkansas’s Ozark Mountains with his wife, Robin.

How Does The Robs Solution Work

The following is how a typical ROBS structure works:

  • Jim, an entrepreneur or current business owner establishes a new C Corporation in the state the business will be operating. The ROBS structure involves a C Corporation, not an LLC or S Corporation. This is because of the exemption to the IRS prohibited transaction rules which involves the purchase of qualifying employer securities. This is the stock of a Corporation. Using an LLC does not satisfy this definition. Only individuals can be shareholders of an S Corporation and a 401 Plan is a trust.
  • The new C Corporation then adopts a prototype 401 plan. It specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investment options. This includes employer stock or qualifying employer securities.
  • Jim elects to participate in the new 401 Plan. He directs a rollover of a prior employers 401 Plan funds into the newly adopted 401 Plan.
  • He then directs the investment of his 401 plan account to purchase the C Corporations newly issued stock at fair market value. In others words, the amount that Jim wants to invest within the new business.
  • Additionally, Jim invests personal funds equal to or more than 1% of the purchase price. As a result, the structure is not considered an Employee Stock Option Plan .
  • Now Jim can earn a salary from the revenues of the business and personally guarantee any business loan.
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    Robs Provider Consideration #: Fair Pricing

    As fellow business owners the Leaders of My Solo 401k Financial understand the importance of minimizing business expenses and staying lean in order to achieve success. In fact, one of the primary advantages of employing a ROBS 401k/PSP to fund your business is the ability to minimize or avoid the need to incur debt which is an expense that can be detrimental to a business particularly a new business. For this reason, we are committed to help our clients by keeping costs low and work hard to maintain our very competitive pricing. In fact, our ROBS 401k fee is typically about $2500 less than the other major ROBS providers over the first year. There are several important reasons for the difference:

    • It is common industry practice to pay referral fees to brokers, etc. that often amount to upwards of $1500. My Solo 401k Financial has NEVER paid and has a policy against paying such fees. By passing this savings onto our clients we stay committed to keeping costs low.
    • The first year of ongoing compliance support is included within our initial fee.Given that the significant ongoing compliance requirements for a ROBS 401k/PSP plan dont typically begin until the 2nd year, we made a business decision to forgo charging the first annual fee as we felt that we couldnt justify charging a fee for work that doesnt typically start until after the first 12 months.

    If you select My Solo 401k Financial:

    The Truth About Robs Plans: The Good The Bad & The Ugly

    ROBS 401K

    Webinar Transcript:

    Our topic today is the truth about ROBS plans, the good, the bad, and the ugly, and were going to dive into that in just a moment.

    Next up, all rollover participants must be employees. So for example, I had a situation last week where a couple said we are husband and wife and we would both like to use our retirement funds to contribute to the business but my husband doesnt want to work in the business. I will operate it solely. If youre going to do this through ROBS plan, both the participants who are rolling those dollars into that plan must be active in the business. They will both need to be on payroll and receive a reasonable salary.

    If youre familiar with how a 401k works for the taxation, as the money is put into the 401k, it is invested. And those investment earnings grow tax-free. They grow tax-free until you decide to take a distribution until you decide to take the money out. So in this case, selling the business is no different than owning stock in a major company. If you own some Apple stock with your 401k or Microsoft or Duke Energy, the proceeds of the sale of that will roll back in and become a part of the new balance of that 401k. When you decided to take a distribution out of that 401k, that is considered ordinary income and not capital gains. You will not have the advantage of using capital gains rates in the sale of your business if youre utilizing a ROBS plan.

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    What Is A Robs & How Does It Work

    A rollover for business startups is a way for prospective business owners to use retirement funds to pay for the startup and initial operating costs of a new business without taking out a business loan. A ROBS can also be used to purchase or invest in an existing business or franchise. A C corporation , which allows for shareholders, is established and a new 401 plan is set up.

    The prospective business owners retirement funds are used to purchase stock in the new company, with the proceeds from the sale of stock used to fund the new or purchased business. This option is preferred to borrowing against an existing 401 or IRA because of the interest and penalties that would be assessed and the short-term nature of many 401 and IRA loans.

    Create A Corporate Retirement Plan

    Once you have your C corporation set up, the next step is to create a corporate retirement plan. A 401 is normally used, but several other types of plans may qualify. Examples of qualifying plans include:

    • 401 plans
    • Profit-sharing plans
    • Combinations of plans, such as a 401 plan with profit-sharing features

    Your plans investments must be handled by a qualified custodian, as with any other retirement plan. ROBS providers normally do not handle this, but can help you find a qualified party.

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    Eligible Employees Must Have Opportunity To Invest In Companys Retirement Plan

    If your business will have additional employees, you may be required to offer those employees the ability to participate in your companys retirement plan. Eligibility requirements for retirement plans vary by state and plan design but often are based on the employees age, length of employment, and employment status .

    What Do Robs Cost

    ROBS 401K Webinar – “How to” Exit a ROBS 401K Business Financing Plan

    Based on our review of a dozen providers, the cost of a ROBS transaction can range from $4,000 to $5,000. That’s for the setup. There are also monthly fees to cover ongoing support and maintenance, including IRS reporting, eligibility tracking, and plan reconciliation. Those fees can range from $75 to $140 per month. Some providers charge a base monthly fee for a maximum number of employees and then add a charge for additional employees.

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    How Robs Helps Business Owners

    ROBS funding can help business owners start their business off on a firm financial footing and provide operational flexibility.

    As mentioned, business loans can be difficult to obtain and lenders often require high levels of collateral to grant them. But those arent all the challenges that loans can pose to small business owners. Another key issue can be debt. Debt has crippled many small businesses. And loans, of course, result in businesses carrying debt.

    Lets imagine that you receive a loan from the SBA for $250,000. Payments on that loan would cost you approximately $2,775 per month and those are with the relatively good terms the government provides. If you were to get a $250,000 unsecured loan from a lender, the payments would be more than $100 per month higher, at $3,881. Significant monthly payments like this can strap your business for cash, tying up cash flow, and impeding development and expansion.

    ROBS also offers a key advantage for business owners by providing cash. If you see an opportunity once the business is up and running, you can have the cash flow to go after it without needing to reach a certain revenue level or seek funding. If youre ready to expand, ROBS can help you grow without a time-consuming search for funding. If you need an influx of new employees or are having trouble easily recruiting good talent, ROBS funding can help you staff up appropriately.

    Filing The Final Form 5500

    IRS Form 5500 must be filed every year the 401 plan is in use. This form is used for information about your plan. Its to ensure the plan adheres to all rules and regulations, what investments are being made and how much is in the plan.

    Its imperative you file Form 5500 even when you need to terminate your 401 plan. Failure to do so will lead to the plan not being considered terminated by the IRS and DOL. Generally, your ROBS provider will file this form on your behalf. Again, make sure you are on constant contact with them throughout this process.

    Once the participants make their final distributions from the plan, IRS Form 1099 must be filed as well. This is another task that will be performed by your administrator.

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    How We Chose The Best Robs Providers

    We looked at a dozen of the top ROBS providers for our initial review with consideration for track records and industry experience. We then narrowed the list further by comparing total costs as well as the value provided for those costs. The level of setup assistance and ongoing support were also important considerations, along with the availability of additional financing options. Each of our finalists excelled in one or more of those areas.

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    What is ROBS?

    ROBS is an acronym that stands for Rollovers as Business Startups. The term was coined in 2008 by the IRSs Director of Employee Plans. The ROBS program allows business owners to use their existing IRA or 401 money to fund a business without taxes or penalties. The funding plan can be utilized for startup funding, for a business purchase, franchise funding or recapitalization of a currently held business.

    Some have noted that while the IRS has never expressed open hostility to the 401 Financing Program, their acronym for it, ROBS, is not very flattering. It should also be noted that it is not very accurate as a descriptor for the typical use of the 401 Financing Program, as a large percentage of program users are in fact using the program to fund the purchase of an existing business or to recapitalize an existing business that they already own. Further if you subtract new franchisees from the category of startup, which is a common separation, only a small minority of 401 Financing Programs are being used for startups.

    • When and how much salary is acceptable to be taken?
    • Should service fees be paid with retirement or non-retirement plan monies?
    • Does the business being funded need to be professionally appraised and if so when?
    • Must the business owner have an independent legal review prior to plan use, or is it acceptable to rely on the service providers advise alone?

    Do you have a question? Click:

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    Should You Use A Robs To Start A Business

    If you’re thinking about starting a business, one of your first major decisions will be choosing where to get funding. Many new business owners will turn to a bank or alternative lender, such as OnDeck, to get funding. Others may borrow money from family and friends or charge expenses to a credit card. However, there is one method that has been steadily gaining popularity in recent years: a Rollover as Business Startup, or ROBS.

    What is a ROBS?

    A ROBS lets business owners use money from a retirement account, typically a 401, without any early withdrawal penalties or taxes for their business. To set up a ROBS, the business owner must roll over funds from his existing retirement account into a new employee retirement plan set up by his business. Then, as the only participant in his company’s plan, he can then use these funds in the company’s plan to purchase stock in the company. He can then use this money for business purposes.

    A ROBS can be tricky to understand and set up, but many business owners use a ROBS as a debt-free way to start a business. Here are some more reasons why you should consider a ROBS:

    While a ROBS may have its benefits, it is not without drawbacks. Below are some the main reasons why you may want to reconsider using a ROBS to start a business:

    Back To You And Your Winning Horse

    Now, with all that information in mind investing in yourself with a ROBS 401k seems like a pretty smart bet, doesnt it?

    Right now, you possess the puzzle pieces required to run a successful business. If the only piece missing is the funding, dont forget to examine the business funding tool you already haveROBS 401k. It could be the answer youve been looking for: a way to go into business for yourself without taking on debt or paying unnecessary taxes.

    If the possibility sounds intriguing, and youd like to learn more about what ROBS 401k could mean for your entrepreneurial future, lets have a conversation. If you dont bet on your own abilities, who will?

    Reach out to CatchFire Funding to hear more about ROBS 401kwere ready when you are!

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    Observe Robs Maintenance And Compliance Requirements

    Once your ROBS arrangement is set up, you must take administrative steps to maintain it and meet regulatory compliance requirements. You must administer your companys retirement plan. Compliance regulations require you to offer eligible employees the opportunity to invest in the plan.

    Eligibility requirements vary based on your state and your plans design. All employees investing in the fund must be actual employees who work at least part-time for your company. You cant discriminate against employees who are not HCEs. Once employees invest in the fund, you must administer their contributions and comply with tax obligations.

    You must file an annual IRS Form 5500 to advise the federal government of your plans assets, expenses and activities. Meeting these obligations can be complex, which is why it is advisable to rely on a ROBS provider or another experienced professional.

    Retirement Plans That Work With Robs

    ROBS 401K – How to Use Your 401k/IRA as an SBA Loan Down Payment: Tax-Penalty Free
  • 401s Money in a 401 plan is eligible for ROBS. A 401 plan is a common type of defined contribution plan in which employees contribute a portion of their pre-tax salary to their 401 account. Participants in many 401 plans also receive a match from their company, meaning that their employer will match a percentage of what the employee contributes, up to 100%. Money in your 401 plan can be used in ROBS funding as long as you are vested. Employees are always vested in their own contributions. Matching contributions from your employer are often subject to a vesting schedule. Vesting can be immediate or take place over a period of years, depending on the schedule the company has adopted.
  • Want to know if ROBS is the way to get your business started? Learn more with our Complete Guide to ROBS.

  • Traditional IRAs Traditional IRAs are eligible for ROBS.Traditional IRAs are self-directed retirement accounts. Your contributions to a traditional IRA are tax-deductible and both your contributions and any investment gains grow tax-free until you withdraw your traditional IRA funds.
  • SIMPLE IRA If you have funds in a Savings Incentive Match Plan for Employees IRA plan, they can be used in ROBS funding as long as it has been two years since the first contribution went into the account. If it has been less than two years, the funds arent rollable until the two-year period is up. A SIMPLE IRA retirement plan is used by small business start-ups that may not have another retirement plan.
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