What is ROBS (Rollover for Business Startups)?
The Short Answer
ROBS (Rollover for Business Startups) explained simply
ROBS stands for Rollover for Business Startups. It's a way to use your retirement money, like a 401(k) or IRA, to fund a business. The big deal is that you can do this without paying early withdrawal penalties or taxes.
Here's how it generally works: You set up a new C-corporation for your business. This new company then creates its own 401(k) plan. You roll your existing retirement funds into this new 401(k) plan. The new 401(k) plan then invests in your C-corporation by buying its stock. This provides the capital for your business.
It's a complex process with specific rules from the IRS and Department of Labor. You need to follow these rules carefully to avoid problems. Many people use a third-party administrator to help set it up correctly.
Real-World Example
Funding a Coffee Shop with ROBS
Let's say you have $100,000 in an old 401(k) and want to open a coffee shop.
- Form a C-Corp: You create "Brew & Go Inc." as a C-corporation.
- New 401(k) Plan: Brew & Go Inc. establishes its own 401(k) plan.
- Rollover Funds: You roll your $100,000 from your old 401(k) into Brew & Go Inc.'s new 401(k) plan.
- Invest in Business: The Brew & Go Inc. 401(k) plan then uses that $100,000 to buy stock in Brew & Go Inc.
Now, Brew & Go Inc. has $100,000 in cash to buy equipment, lease a space, and get the coffee shop running. You didn't pay taxes or penalties on that $100,000.
Why this matters
ROBS can be a good way to fund your business without taking on debt or giving up equity. It lets you use your own money that's already saved. But it's not for everyone. It has strict rules and can be risky if not done right. If your business fails, your retirement savings could be gone.
ROBS is a powerful tool, but it's not a DIY project. You need to work with professionals who specialize in ROBS to make sure you follow all the rules. One mistake can cost you a lot in penalties and taxes.
ROBS is a powerful tool, but it's not a DIY project. You need to work with professionals who specialize in ROBS to make sure you follow all the rules. One mistake can cost you a lot in penalties and taxes.
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