Using retirement funds to purchase a franchise can be valuable to business owners looking for a way to fund their growth, but it’s critical to understand which transactions the Internal Revenue Service (IRS) allows and which it does not.
Because of two recent U.S. Tax Court cases, Peek v. Commissioner and Ellis v. Commissioner, funding a business through individual retirement accounts has been scrutinized more closely by the IRS. However, many have been confusing a popular way to fund a franchise or small business, known as Rollovers as Business Startups (ROBS), with what is actually being challenged in the court cases: self-directed IRA transactions. In reality, only ROBS, which utilize qualified employer-sponsored retirement plans, can be used to fund franchises or small businesses as a non-passive investment.
While the cases represent significant developments in the tax laws applicable to IRAs, the cases should not adversely affect typical ROBS arrangements which, if properly structured, enjoy a prohibited transaction exemption under Employment Retirement Income Security Act (ERISA) Section 408(e). This exemption relates to the purchase and sale of qualified employer securities.
Retirement planning and ROBS arrangements are extremely focused fields and completely different from self-directed IRA transactions. That is why we have developed a highly specialized practice focused on providing clear and defined paths towards franchise development that is in full compliance with the law.
“For 30 years, Benetrends has helped entrepreneurs purchase franchises using a variety of different programs, including an innovative program that allows an individual to use their retirement savings to purchase their franchise tax-deferred, penalty-free and without incurring any debt or loan payments,” said Steve Caldeira, president of the International Franchise Association. “This program has helped stimulate the franchise industry during this economic downturn when access to capital has been very limited.”
Check out our infographic for more information on how to use your retirement funds to fund a business. If you’re considering using this method, please call us at (866) 423-6387 to speak with a lending expert.