ROBS stands for Rollover for Business Startups, a financing method that allows entrepreneurs to use funds from their retirement accounts to start or purchase a business without incurring early withdrawal penalties or taxes. Here are key points to understand about ROBS:
- Structure: ROBS involves creating a C Corporation and establishing a retirement plan, typically a 401(k) plan, for that corporation. The individual’s existing retirement funds, such as those from a 401(k) or IRA, are then rolled over into the new 401(k) plan of the corporation.
- Investment: The funds from the newly established 401(k) plan are then used to purchase stock in the C Corporation. This stock purchase provides the necessary capital to fund the startup or acquisition of the business.
- No Early Withdrawal Penalties or Taxes: By using the ROBS structure, entrepreneurs can access their retirement funds for business purposes without incurring early withdrawal penalties or taxes that would typically apply to early distributions from retirement accounts.
- Legal Compliance: ROBS arrangements must comply with IRS regulations and ERISA (Employee Retirement Income Security Act) guidelines to avoid penalties and maintain tax-deferred status for the retirement funds involved. It’s essential to work with experienced professionals, such as attorneys and tax advisors, who are knowledgeable about ROBS compliance. We have excellent funding partners who can help you leverage self-funding through this program.