How to put your IRA funds into something that gives you income right now -- without early penalties
We’re constantly learning here at The Richer Geek, and when we come across new, interesting, and smarter ways to use your income, we love to share them with you. Today’s topic, the ROBS 401k program, is one that I would have loved to know about myself a couple years back. To talk about ROBS and whether it might be the right fit for you, we’re joined by Storm Miller.
Storm is a National Account Manager with Benetrends Financial and tells us all about the ROBS (Rollovers for Business Startups) 401k program and how it allows you to use retirement funds to set up or purchase a business. Storm and I discussed some of the requirements for participating in this program, why it’s become a go-to option for people buying franchises, and how you can use the ROBS 401k program to diversify your investments.
Here's an overview of what we covered:
What is the ROBS 401k Program?
The most common name for the program is the Rob's program, which is an acronym that was coined by the IRS maybe 10 or 12 years ago. And it's ROB as it stands for rollovers for business startups. And essentially what this program is, is this is a funding platform that allows people to use pretax retirement money for the purchase or startup of their own business without tax or penalty. So really, the program is more of a solution to taking a distribution from our Retirement Account, right. If you're looking to access money in an IRA or 401k, and you want to use that money to start your own business, as opposed to taking a distribution and paying a 10%, early withdrawal penalty, and then state and federal income taxes on that distribution, basically, this program gives people the ability to use those pretax dollars to start their own business.
The difference between this and a self-directed IRA.
A self-directed IRAs is really designed for passive real estate investing. Or if you were looking to be an angel investor in a company and make some type of minority passive investment into somebody else's business, that is exactly what the self-directed IRA was designed to be for people. And we actually work with self-directed providers who will send people over to us where the Rob's program may be a better fit for what they're looking to accomplish.
We work with somebody who wants to start their own business using their retirement funds, and they want to have a direct involvement in that business.
That is exactly the type of candidate that would be best suited to utilize the Ross program. We have a lot of people who look into franchise ownership. Or, they are looking into starting their own business from scratch and instead of using all their cash would rather use their retirement funds, so long as that individual wants to have a direct involvement right, so long as they want to be an employee of their own business. ROBS is the right fit for that individual.
How does the program work?
One of the major pre qualifiers for whether or not the program is the right fit for an individual right is what types of accounts qualify. So I think the most important thing to recognize is that in order for you to access your retirement funds, the types of accounts that the money needs to be sitting in, it's got to be in some type of IRA, or it could be really any type of qualified account, so long as it comes from a prior employer. If we were to try to roll somebody's retirement money out of our current employer’s plan, most plans have language that do not allow people to roll out that retirement money until they've officially terminated employment, right. So, for the most part that the people whose funds we are moving, it's money that sitting in a rollover IRA, or some type of, you know, old 401k or 403b. Those are the types of individuals that really take advantage of the program. In terms of the program itself, I think it's something that's pretty easy for most people to understand. It is something that you can simplify into four steps.
Our first step is to create some type of entity for somebody to operate their business out of. And for the purpose of our transaction, the type of entity that we would establish for the business would be a C Corp. So, what we would do is file our client’s articles of incorporation with the Secretary of State where they plan on operating the business. We'll go ahead and establish that brand new Corporation. Once the corporation has been established.
Our second step is to design a brand-new qualified retirement plan for the business and this is not a cookie cutter retirement plan document that we use for every single one of our clients. There's some customization here. We can design a defined contribution plan, we can set up some type of 401k plan for their business. And for some of our clients, frankly, a defined benefit plan is worth considering.
We will custom fit this retirement plan to our client’s business model. We’ll design it open up that plan. And then essentially what we would do from there is roll over the funds from their IRA or from their 401k into that new qualified plan. And because it is a rollover and not a distribution, there's not a taxable event, or just moving money from one qualified plan to another.
And once those funds have been rolled into the new qualified plan, the only thing left for our clients to do is invest that money. But instead of investing in back into a mutual fund for some type of index bond or instead of investing in Apple, Google, Netflix, Amazon, Facebook whoever it might be, what our clients will do is purchase the stock of their own privately held C Corp.
Once they make the investment into their own privately held Corporation, their money is wired from their retirement account straight into that C corporations business account. And once the funds hit that business account, that cord between retirement plan assets and corporate assets is severed, that money becomes operating capital for their business. They have full access to the funds, and the money can be used to cover any standard business expense. It it's a franchise, you know, that will include things like your franchise fees. It includes the purchase of equipment, inventory, marketing, leasehold improvements, and I think the major caveat to the program is that it includes payroll, so they can pay their employees with these funds. But keep in mind, our clients must be an employee of their own Corporation. They also have the ability to draw their own salary from the corporation from day one.
Storm’s Top Tips:
The ROBS 401k option might be a good fit for you if you have a 401k from a former employer - but you can’t use an active 401k to utilize this program.
This is a great option if you’re opening a franchise or buying a business – you can typically get access to your money within a month and save cash that you have on hand for later business expenses.
You do risk your own retirement funds when you use a ROBS 401k program - but this is treated similarly to any other investment that might not work out, without incurring extra penalties or taxes.
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