If you’re like many Americans, your largest savings account is your retirement fund. Your funds are locked away in a 401(k), IRA, or a similar account where they can grow tax-deferred until you reach retirement age. As an aspiring small business owner, it can be tempting to withdraw from your nest egg to cover business start-up expenses. After all, it is your money! You should be able to use it when you want it.
But accessing funds from a pre-tax retirement account before you retire (or leave the company sponsoring the plan) can be difficult. If you take a distribution (or withdraw funds), it may trigger early withdrawal fees if you’re younger than 59 and ½. The funds received are also subject to income tax, which can outweigh the financial benefits of taking the withdrawal in the first place.
There’s a better way to access your retirement funds to start or buy a business without triggering penalties. It’s called Rollovers as Business Startups (ROBS) or 401(k) business financing. For aspiring entrepreneurs who aren’t ready to commit to leaving their jobs, there’s even an option to use your current retirement funds as business capital without having to give your two weeks’ notice.
What is Rollovers as Business Startups (ROBS)?
With Rollovers for Business Start-ups (ROBS), you can use your pre-tax retirement funds (such as a 401(k), IRA, 403(b), TSP) to start or buy a small business or franchise, without triggering early withdrawal fees or tax penalties. ROBS is a popular way to use your hard-earned retirement funds as a way to invest in yourself. According to the Small Business Trends Alliance’s 2020 Small Business Trends survey, 13 percent of business owners reported using ROBS as business financing.
Here’s how the ROBS process works: you, the business owner, create a C corporation, and the C corporation then creates its own retirement plan (usually a 401(k)). You move your existing retirement funds into the new 401(k) (this doesn’t trigger penalties since you are re-investing the funds). The new 401(k) uses its funds to buy stock in the C corporation. The C corp, now cash-rich, is then able to use that cash to start or buy a small business.
ROBS makes the most sense if you have more than $50,000 in rollable funds. For funds to be rollable, you might not work for the company sponsoring the retirement plan. But when you execute an ‘in-service’ rollover, you’re able to roll retirement funds from a current plan – while keeping your job.
What’s an In-Service Rollover?
An in-service rollover lets you access retirement funds from your current employer’s plan and roll them into a new retirement account while you’re still working there. There are two options for an in-service rollover, depending on your age:
- 59 and 1/2 or older: You may roll over the entire balance of your current retirement plan’s assets into a new retirement fund.
- Younger than 59 and 1/2: You may only roll fully vested, employer-matched funds into a new retirement account.
Both in-service rollover options are eligible for ROBS, which means you can use the funds for your new or purchased small business – anything from purchasing real estate to paying franchise fees to down payments on an existing business.
ROBS is ideal if you need money to jumpstart your venture but aren’t quite ready to leave the stability (and income) your job offers. If you’re younger than 59 and 1/2 and still have funds left in your retirement account after the in-service rollover, you can also execute a second rollover if/when you leave your job to further fund your business.
Note: If you have less than $50,000 in vested employer-matched funds, the in-service ROBS process may not be right for you.
In-service rollovers can be augmented by using ROBS to access funds from other retirement accounts, such as those from a past employer. Since you don’t work for the company sponsoring the older plan, you can roll up to 100 percent of assets in these accounts using ROBS, no matter your age. This can help you gather the additional funds needed to get your business off the ground.
Benefits of Using ROBS and In-Service Rollovers
Millions of Americans contribute to a retirement plan every year. With Rollovers for Business Startups, you can control your investment by using your retirement funds to start or buy a business or franchise. Unlike the stock market and its volatility, you have complete control over your business’s success, and you can continue to save for retirement while you’re running it.
Other benefits of ROBS include:
- Leverage retirement funds tax penalty-free. ROBS is one of the few methods that enables you to leverage your retirement funds without incurring tax penalties or other fees.
- No credit score requirements. Since ROBS is not a loan, there are no credit score minimums or lengthy applications timelines. As long as you have at least $50,000 in rollable retirement funds, you’re eligible.
- Start a business without debt payments. Because ROBS isn’t a loan, there’s no need to make payments. You don’t incur any interest, which lets your business make a profit faster.
- Getting your business open sooner. Small business loans can take months to process. But funds from ROBS (including in-service rollovers) are usually available within a few weeks, so you can get your business underway sooner.
- Peace of mind by keeping your job. It can be stressful leaving the stability of your current job to endure the trials of small business ownership. When you complete an in-service rollover, you’ll have funds to jumpstart your small business while continuing to enjoy the benefits of a stable paycheck. It’s a win-win.
- Funds can be used for any business purpose. Some small business loans have strict requirements on what the funds can be used for. With ROBS, you can use the proceeds for anything from paying an initial franchise fee to buying equipment to hiring staff. You can even use the funds to grow your existing business.
- Ability to use retirement funds as the down payment on a loan. For those who need more business funding than is available in their retirement accounts, ROBS makes it possible for business owners to use their pre-tax retirement funds as the down payment for a business loan. This not only allows you to preserve your personal savings for other uses but can help you qualify for a more substantial loan amount with a larger down payment.
ROBS has offered thousands of business owners the ability to use their retirement assets — with no fees or tax penalties — to invest in themselves and their own business. And with in-service rollovers, you have the advantage of being able to stay at your current job while you begin building your company.
Learn more about ROBS and how it works in our Complete Guide to Rollovers for Business Startups.
Guidant has helped launch over 20,000 small businesses – most of which used ROBS as all or some of their financing. We’re here to help you start your small business journey. Ready to go?
Use our two-minute prequalification survey to find out what small business or franchise financing is best for you.