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Do You Qualify for 401(k) Business Financing?

One of the biggest hurdles when it comes to starting a business is finding the money to make your dreams a reality. 401(k) business financing doesn't require a down payment, interest, or a high credit score.

Quick 401(k) Business Financing Facts:

  • Your retirement fund needs to be rollable – most retirement plans are, but some, like ROTH IRAs, aren’t.
  • Because of the costs of setting up a ROBS transaction, Guidant recommends you roll over at least $50,000 in funds
  • If you’re using the retirement plan sponsored by your current employer for your 401(k) business financing, you may need to leave your job – but not always.
  • The business you start must be active, and you have to be an active employee of that business.
  • If you don’t have enough money in your retirement fund, you can still use 401(k) business financing to help start your business by using that money as a loan down payment.

One of the biggest hurdles when it comes to starting a business is finding the money to make your dreams a reality. Though there are a lot of financing options out there, many options need a down payment or come with interest rates. But 401(k) business financing, all known as Rollovers for Business Start-ups (ROBS), doesn’t need a down payment, come with interest rates, or require you to have a high credit score. Since 401(k) business financing isn’t a loan, you can use it to start your business debt-free and cash-rich.

There are some criteria to meet if you want to fund your small business with 401(k) business financing. Read on to learn more about how you can qualify for ROBS.

What kind of retirement funds do you have?

To understand why your type of retirement fund is important, it helps to understand a little bit about how 401(k) business financing works.

401(k) business financing lets you roll your retirement funds into a new business without taxes or penalties. But since ROTH IRA funds have already been taxed, they aren’t eligible for 401(k) business financing.

Though ROTH IRAs aren’t eligible, there are many types of ROBS-eligible retirement accounts. Some of the most common 401(k) business financing eligible retirement accounts include:

  • 401(k)
  • Traditional IRAs
  • 403(b)
  • Keoghs
  • TSP
  • SEP

Learn more about ROBS-eligible retirement accounts.

How much do you want to rollover?

Compared to other methods of small business funding, 401(k) business financing is one of the more affordable solutions. When you consider costs that include interest rates, fees, down payments, 401(k) business financing often comes out ahead. Since 401(k) business financing isn’t a loan, you don’t have to pay monthly principal or interest payments, and there’s no down payment.

Tailored Funding Options for You

The main cost associated with 401(k) business funding is the initial setup fee. The secondary cost is a monthly plan administration fee if you decide to work with your ROBS provider for their 401(k) plan administration. Plan administration helps make sure your 401(k) account and business stay IRS compliant – Guidant strongly recommends you work with a plan administration service.

Because of the fees, it usually doesn’t make sense to use 401(k) business financing if you want to roll under than $50,000. Other ROBS providers may quote a lower number. In Guidant’s experience, we find the money saved with ROBS generally doesn’t outweigh the cost of fees if you roll over less than $50,000.

Check out our in-depth small business financing comparison chart to learn more about associated costs.

It’s also important to know that you’re not required to roll over everything in your retirement account. It’s common for 401(k) business financing clients to leave significant funds in their original retirement account.

Part of the ROBS structure includes setting up a new 401(k) retirement account for your small business. This new account gives you another way of growing your retirement nest egg.

Are you currently employed?

As we covered, an essential step in ROBS funding process is rolling funds from an existing retirement account into a new 401(k) account. To use the funding process, the retirement account with the money you want to use has to be roll-able.

In some cases, you can’t roll funds from an employer-sponsored account while you’re still employed. This means if you’re still working at the company that sponsors the 401(k) plan you’d like to use for 401(k) business financing, you might need to leave your job first.

However, many plans let you roll over the vested employer match amount without quitting your job first. You can find out if your plan allows this by contacting your 401(k) custodian (e.g., Fidelity, Vanguard, or Transamerica). Most plans also allow an “in-service rollover” after you reach 59 and a half years old.

If you have a retirement plan that isn’t sponsored by your current employer, you can use it with ROBS without it affecting your current job. This means if you have an old 401(k) account from a previous employer in a separate account, your employment status doesn’t stop you from using these funds.

What kind of business do you want to start?

Nearly all types of businesses are eligible for funding with 401(k) business financing. But there are a few exceptions that the IRS stipulates as ineligible.

The business has to be active – not a passive investment. Often this means that the business should be involved in the sale of a product or service. Businesses that work in generating money through passive investments, for example, can’t be funded with ROBS.

You’ll also need to be an active employee in your business – not a passive investor. This means you can’t use your retirement funds to buy a business for a family member to run if you aren’t involved. But you can buy a business for a family member if you’re actively involved in the business. Guidant recommends you work about 1,000 hours a year (about 20 hours a week) to be considered an active employee.

Finally, the business you fund with 401(k) business financing has to be federally legal. For example, even if the sale of marijuana is legal in your state, you still can’t start a marijuana-related business – since currently, the sale of marijuana isn’t legal on the federal level.

Learn more about what kinds of business you can fund with 401(k) business financing.

Will you need more funding?

Even if you need more money for your small business than what’s in your retirement account, 401(k) business financing can still be a helpful tool.

You can use ROBS as the down payment on other types of small business financing. Bank loans, SBA loans, and other funding options that need down payments can all be met with your ROBS funds. Having a large down payment available can help you earn better rates on these types of loans.

And if you’re looking for a business to buy, using 401(k) business financing to get cash on hand can benefit your search. Learn more about how ROBS can help make your business search easier.

Finally, if you need more 401(k) business funding down the road, you aren’t limited to just one ROBS rollover. With Additional Rollover Capital (ARC), you can put more funds from your retirement account into your small business to help you grow – or get through tough times.

The Benefits of 401(k) Business Funding

It’s easy to see that qualifying for 401(k) business financing is simple, but that’s not the only benefit. Funding can be completed in as little as three weeks. The total cost of financing is considerably lower than other options. And if you need more funding than what’s in your retirement account, ROBS can help get you there.

Take the next step to living your dream of small business ownership today. Use our quick pre-qualification tool to learn how much 401(k) business financing you can access and what other funding methods are a good fit for you.

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Want to Use ROBS to Start a Business?

Our step-by-step Guide to Rollovers for Business Startups is a complete handbook of everything you need to know about using ROBS to start or buy a small business or franchise.

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