What can you tell me about a ROBS 401k?

Rollover as Business Startup (ROBS) 401(k) Plan Overview

ROBS plans allow individuals to use their retirement funds to invest in a business without taking a taxable distribution. Here are key points to consider:

Legal Framework and Compliance

- ROBS arrangements are legal if set up correctly and administered properly.

- The IRS and DOL have specific compliance standards for ROBS plans.

- Failure to meet these regulations could lead to fines, tax penalties, and audits.

Setting Up a ROBS Plan

- Funds are rolled over from an existing retirement account into a new 401(k) plan associated with a C-corporation.

- The new 401(k) plan purchases stock in the C-corporation, and these funds are used for business financing.

- It is crucial to work with experienced professionals to navigate the complex provisions of the internal revenue code applicable to 401(k) plans.

Potential Pitfalls and Considerations

- The IRS has a compliance program specifically for ROBS plans, indicating heightened scrutiny.

- Prohibited transactions, such as self-dealing, can trigger taxes and penalties.

- The plan must be operated in a manner consistent with ERISA and other retirement plan rules.

Operational Aspects

- The ROBS is not a loan but an equity investment; profits can be retained in the business or distributed as dividends.

- Dividends are paid proportionally based on ownership percentages.

- A common exit strategy for a ROBS plan is a stock buyback at fair market value.

Tax Implications

- While ROBS allows for the tax-free transfer of funds into the business, business taxes will apply to any revenue generated.

- Personal use of business assets or funds for non-qualified expenses can lead to prohibited transactions.

Resources and Assistance

- It is advisable to work with specialized tax professionals or firms with expertise in ROBS arrangements.

- These professionals can provide ongoing advice on compliance with unique tax rules and reporting regulations associated with ROBS.

Conclusion

ROBS plans offer a way to finance a business using retirement funds without immediate tax consequences. However, they require careful setup and strict adherence to IRS and DOL regulations to avoid significant penalties. It is essential to maintain compliance and operate the business in a manner consistent with the retirement plan's rules and objectives.

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Sources:

ROBS Client - - 401(k) Plans - BenefitsLink Message Boards 2024-06-24

7.12.1 Plan Terminations | Internal Revenue Service 2024-06-24

ROBS CPA | ROBS Franchise Accounting | 401k Business Startup 2024-06-30

Financing a Business Startup or Acquisition Using Rollover Funds 2024-06-25

Tax Implications of ROBS — Illumination Wealth Management 2024-04-28

I am contemplating a ROBS with my 401K to partially fund a… - JustAnswer 2024-04-05

Rollover as Business Startup (ROBS 401k) Transaction - mysolo401k.net 2024-06-29

26 U.S. Code § 408A - Roth IRAs 26 U.S. Code Chapter 1 - NORMAL TAXES AND SURTAXES 26 U.S. Code Subchapter D - Deferred Compensation, Etc. 26 U.S. Code Part I - PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC. 2023-12-11

26 U.S. Code § 401 - Qualified pension, profit-sharing, and stock bonus plans 26 U.S. Code Chapter 1 - NORMAL TAXES AND SURTAXES 26 U.S. Code Subchapter D - Deferred Compensation, Etc. 26 U.S. Code Part I - PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC. 2023-12-11

Internal Revenue Bulletin: 2007-51 2007-12-16

Internal Revenue Bulletin: 2007-23 2007-06-03

Internal Revenue Bulletin: 2007-22 2007-05-28