Rollovers for Business Start-Ups (ROBS) is an innovative method of financing a business. ROBS allows you to access the money in your eligible retirement accounts as funding to buy a business, as a down payment on a larger business loan, or recapitalization for a business. But does ‘eligible’ mean? What retirement plans work with ROBS?
Which Retirement Plans Are Eligible To Be Used With ROBS?
It’s important to know what retirement plans are eligible for ROBS funding. To use ROBS, you need funds in a qualified retirement plan, as defined by the Internal Revenue Service (IRS). The funds must also be in a tax-deferred retirement account. While many retirement plans are both qualified and tax-deferred, some are not.
In addition, while 401(k)s and IRAs are the most common retirement plans in the U.S. and are often used as a kind of shorthand to refer to all retirement plans, many other types of retirement plans exist. Most of them are eligible to be used in ROBS funding.
Note: Some retirement accounts are subject to taxes and early withdrawal penalties if funds are taken out before you are 59 ½ years old. No taxes or penalties are incurred in a ROBS structure, though, so you can use eligible retirement funds for ROBS regardless of your age.
Retirement Plans That Work With ROBS
Money in a 401(k) plan is eligible for ROBS. A 401(k) plan is a common type of defined contribution plan in which employees contribute a portion of their pre-tax salary to their 401(k) account(s). Participants in many 401(k) plans also receive a match from their company, meaning that their employer will match a percentage of what the employee contributes, up to 100%. Money in your 401(k) plan can be used in ROBS funding as long as you are vested. Employees are always vested in their own contributions. Matching contributions from your employer are often subject to a vesting schedule. Vesting can be immediate or take place over a period of years, depending on the schedule the company has adopted.
- Traditional IRAs
Traditional IRAs are eligible for ROBS.Traditional IRAs are self-directed retirement accounts. Your contributions to a traditional IRA are tax-deductible and both your contributions and any investment gains grow tax-free until you withdraw your traditional IRA funds.
- SIMPLE IRA
If you have funds in a Savings Incentive Match PLan for Employees (SIMPLE) IRA plan, they can be used in ROBS funding as long as it has been two years since the first contribution went into the account. If it has been less than two years, the funds aren’t rollable until the two-year period is up.A SIMPLE IRA retirement plan is used by small business start-ups that may not have another retirement plan.
With Simplified Employee Pension plan (SEP) IRAs, large or small businesses can contribute to traditional IRAs set up for their employees. A self-employed person can also set up a SEP-IRA.If you have a SEP IRA, those funds can be used in ROBS funding.
- Governmental 457(b)
A 457(b) retirement plan is offered to state and local government employees and to employees of some 501(c) tax-exempt organizations. The employee contributions are taken out pre-tax, like those in 401(k)s.Governmental 457(b) funds are eligible to be used with ROBS funding.
A 403(b) retirement plan may be offered to employees of public schools, some nonprofits, and churches. They’re a lot like 401(k)s: employee contributions are taken out pre-tax, and some employers may offer a match to employee contributions.
Retirement funds in 403(b) accounts can be used for ROBS funding.
- Keogh plan
A Keogh plan is a tax-deferred pension plan available to the self-employed or unincorporated businesses.
Keogh plan funds are eligible to be used in ROBS funding.
- Thrift Savings Plan
A Thrift Savings Plan (TSP) is a defined contribution plan for employees of U.S. government departments and agencies.
TSP plans are eligible to be used in ROBS funding.
- Other qualified retirement plans
Other types of qualified retirement plans can also be used with ROBS. The first is a profit-sharing plan. If your employer has a profit-sharing plan and you are vested in your account, you can use the funds in a ROBS.The second is a defined benefit plan, such as a traditional pension or money-purchase pension plan. These provide employees with a fixed amount when they retire, either a periodic payment or a lump sum.
If you are vested in your defined benefit plan, the money can be used in ROBS funding.
What Retirement Accounts Can’t Be Used With ROBS?
- Roth IRAs
To use your retirement funds in a ROBS strategy, they must be in a qualified, tax-deferred retirement account per the IRS. Roth IRA accounts are not a qualified plan according to IRS guidelines.
- Roth 401(k), 403(b) or 457(b) accounts
Roth 401(k), Roth 403(b) and Roth 457(b) accounts are far less common than traditional 401(k), 403(b) or 457(b) accounts. They are held in separate accounts from traditional 401(k), 403(b) or 457(b) accounts. The tax treatment of all these Roth accounts means they are not considered a qualified plan for ROBS.
An Innovative Way of Funding Your Business
Funding can be a major obstacle between aspiring small business owners and the realization of their dreams. Business loans from lenders can be very hard to obtain. Only about 25 percent of applications to the U.S. Small Business Administration (SBA) are approved, despite the fact that the SBA guarantees a large part of the loan in case of default.
Funding from lenders also often requires large upfront amounts of cash. Lenders often require down payments of up to 30%, and they may require considerable sums as collateral. Lenders also frequently require business loan applicants to collateralize a loan with a home, boat or other assets.
No wonder that, of current and future business owners surveyed in 2019 Small Business Trends, 33% said that concerns about lack of capital and cash flow were their largest challenges.
Funding with ROBS can help small business owners obtain capital and robust cash flow – because they can access their own money, not money from a financial institution.
How ROBS Helps Business Owners
ROBS funding can help business owners start their business off on a firm financial footing and provide operational flexibility.
As mentioned, business loans can be difficult to obtain and that lenders often require high levels of collateral to grant them. But those aren’t all the challenges that loans can pose to small business owners. Another key issue can be debt. Debt has crippled many small businesses. And loans, of course, result in businesses carrying debt.
Let’s imagine that you receive a loan from the SBA for $250,000. Payments on that loan would cost you approximately $2,775 per month – and those are with the relatively good terms the government provides. If you were to get a $250,000 unsecured loan from a lender, the payments would be more than $100 per month higher, at $3,881. Significant monthly payments like this can strap your business for cash, tying up cash flow, and impeding development and expansion.
ROBS also offers a key advantage for business owners by providing cash. If you see an opportunity once the business is up and running, you can have the cash flow to go after it without needing to reach a certain revenue level or seek funding. If you’re ready to expand, ROBS can help you grow without a time-consuming search for funding. If you need an influx of new employees or are having trouble easily recruiting good talent, ROBS funding can help you staff up appropriately.
ROBS also increases a business’ flexibility. You can use it for multiple types of businesses, such as a start-up, an existing business, or a franchise. The only requirement in regards to the type of business is that the activities must be legal on a federal level and actively produce goods or services. With ROBS’ infusion of cash, it allows small business owners a quicker path to profitability and flexibility to get there.
Finally, the time to close can be as little as three weeks, far less than the SBA or bank application process. ROBS funding is a flexible solution that has helped many business owners start their businesses debt-free and cash-rich. Learn more from a ROBS expert by contacting Guidant today.