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By Benetrends • July 3, 2019

Using Retirement Money to Fund a Business: The Pros and Cons

Entrepreneurs need many skills to be successful, including ingenuity, creativity, persistence, and strategic thinking. Never are these skills more necessary than when it comes to funding their startup dreams.

One of the most creative of business funding solutions is the use of retirement money and is an attractive option for many entrepreneurs. Commonly referred to as a Rollover as Business Start-Ups (ROBS) funding strategy, this solution has many advantages over more traditional financing options.  As with all financing opportunities, you need to weigh the advantages and risks. 

Let’s take a look at the pros and cons of ROBS funding.

ROBS Defined

A ROBS funding strategy is a flexible option that is designed to provide entrepreneurs with readily accessible financing to purchase, start up or grow a business. Using the ROBS small business funding strategy requires some specific steps:

  1. Establish the Business Structure. Due to unique tax and ownership requirements, a ROBS plan can only be structured as a C Corporation. This structure allows for shareholders in the new company.
  2. Create a Retirement Plan. Once you establish your new business as a C corporation, the next step is to start a retirement plan in the company. The type of plan, whether it be a straight profit sharing, profit sharing with a 401(k) or other features, depends on the number of eligible employees, how many highly compensated employees you will have, and other business properties.  This structure often changes as the business grows.
  3. Transfer Funds. Funds from a qualified retirement plan are transferred into the company’s new retirement plan.
  4. Purchase Stock. C corporations can issue ownership shares. That is the key to this step. Your new retirement plan (not you individually) purchases stock in the new company. The proceeds from buying stock in the company are then available as cash that you can use for startup costs.

While the steps are relatively simple, the process requires using a steady, informed partner to ensure that the right paperwork, documentation, and processes are followed correctly. Therefore, it is important to use a trusted adviser like Benetrends, which pioneered the use of ROBS models for business financing three decades ago, to ensure compliance with IRS/DOL regulations.

Woman holding a help sign.

Advantages to Using ROBS

There are many benefits to choosing to use existing retirement funds to fuel your entrepreneurial vision. Here is a look at a few of those advantages.

No Debt and No Interest

A ROBS is an investment in your business, not a loan for your business. Because a ROBS strategy is not a loan, there is no interest to repay.  Instead of paying back a lender, you have money that can be invested into the business.

No Upfront Taxes or Early Withdrawal Penalties

The way a ROBS is structured, you are not taking a distribution of your retirement funds; therefore, there is no early withdrawal penalties and no taxation on the funds that are being used for the business. It is also worth noting that the IRS does not place any limit on the amount you can withdraw, allowing you to choose how much you opt to use for your new business.

An Option when Options Are Limited 

For some people who do not have the credit scores, track record, or assets to put up for collateral, it can be a challenge to secure traditional bank loans or use venture capital. If you also do not have the personal savings or support from friends and family to finance, your options quickly become limited. 

You believe in your vision for your business and want to get it off the ground right. If you have money in a retirement account, this is an ideal time to turn to ROBS small business funding for a successful launch.

Disadvantages to Using ROBS

As with any small business funding option, there are downsides. Here are a few of the disadvantages of using ROBS for your startup needs.

Risk of Losing Your Investment

Statistically speaking, only half of all established businesses survive five years or longer. With a ROBS strategy, you won’t lose your personal assets, should the business fail, but you will lose your retirement funds.  However, because a ROBS is a retirement plan, for those businesses that do survive and grow, so can their retirement funds, through contributions to the plan.

Fees & Tax Liabilities

Because a ROBS plan requires a C corporation structure, your tax liabilities may be higher than other business structures. Additionally, while a ROBS strategy is a relatively simple process, remaining in compliance with IRS/DOL regulations is imperative. That is why is important to enlist the services of a ROBS provider, who will not only establish the plan, but will keep the plan in compliance, providing important documentation and preparing annual government reporting.

Accessing Your Retirement Funds

You may not be able to use your retirement funds if they are in a company sponsored plan. In most cases you will need to have terminated employment with the company in order to access the funds, unless there is a provision for in-service withdrawals.

Finding the Right Business Partner

If you are going to use the ROBS business funding strategy, it is important to find the right partner that can provide you the guidance, insights, and experience to make the process go smoothly.

Benetrends is the pioneer in providing 401(k) rollover funding for small business owners. We provide worry-free funding and guidance through every step in the process.

In addition, Benetrends provides ongoing support for your growing business, letting you focus on the most critical work. Benetrends has partnered with business service providers that ease some of the operational burdens of running a new business, insurance, legal services and credit card processing.

Let Benetrends help you weigh the pros and cons of the ROBS business financing strategy in your particular case. To learn more about why Benetrends is the right choice for entrepreneurs looking to start a business, download Innovative Funding Strategies For Entrepreneurs.

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