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Can Your Retirement Plan Own Your Business?

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Can Your Retirement Plan Own Your Business?

By BarbaraWeltman, Guest Blogger
Published: August 30, 2013

You may have built up considerable money in your 401(k) at a job or in your IRA and now you want to start a business or turn your sideline venture into a full-time activity. Can you use the money in your retirement account as capital for your business without incurring a tax bill? If you follow the rules carefully, the answer is a qualified yes.


Rollovers as Business Startups (ROBS) are a way to optimize the use of money in your retirement account as a funding mechanism to start a business. It works if you have a 401(k) or other qualified retirement plan account with a balance that’s sufficient for your funding needs and you adhere to the tax rules.

Here’s how a ROBS operates: You incorporate your new business and have that corporation set up a qualified retirement plan (usually a profit-sharing plan permitted under the terms of the plan to invest in employer stock). Then you roll over your 401(k) or other retirement account to the new retirement plan (the rollover is tax free). That plan then buys shares in your corporation (i.e., the plan becomes an owner of your business). What ROBS does:

  • Avoids immediate taxation on retirement plan funds. If you wanted to use the funds without the rollover, the distribution from the 401(k) would be immediately taxable, leaving you less after tax to invest in your company.
  • Provides funding for the new company. Regardless of your credit rating or any other factors, you gain access to the money needed to get started.

Downside to ROBS. While there are benefits to this funding mechanism, there are drawbacks to consider:

  • Putting retirement savings at risk. All of your eggs are in one basket; if the business fails, you lose your livelihood and your retirement savings.
  • Increased IRS scrutiny. The IRS’ Employee Plans Compliance Unit ran an audit project that concluded in 2010 to help identify sponsors (promoters) of ROBS that may be noncompliant with tax rules. Since owners of many of the new retirement plans examined by the IRS did not make any new contributions to the plans, these arrangements were dubious. If the IRS can successfully challenge the ROBS, all of the funds rolled over would be a taxable distribution.
  • Costs. You should use a company that specializes in ROBS. Such a company usually charges a hefty fee for helping to set up and administer the arrangement. And there’s annual reporting for the plan.

Annual filing. Qualified retirement plans, such as the new plan set up in the ROBS, are required to file an annual information return in the Form 5500 series. There is an exemption in the requirement to file if the assets of the plan are less than $250,000. However, this exemption does not apply to ROBS. The exemption applies to plans of businesses owned by an individual (or individual and spouse). In the case of ROBS, the plan, not the individual, owns the business. Thus, you must see to it that the plan files annually, regardless of the amount of assets within the plan.

Use a ROBS? While the IRS has concluded that ROBS are not abusive tax avoidance transactions per se, they can be disqualified if they are not properly administered. If you are considering a ROBS, be sure to have your own tax advisor review a sponsor’s program.


ROBS are not the only way to own stock in a company you control. You can use a self-directed IRA for this purpose. The IRA can own stock in any publicly-traded or closely-held corporation. But watch for traps that can be viewed as prohibited transactions. These transactions cause the IRA to become disqualified and all of the funds in it immediately taxable to you. Before you do any transaction in your IRA, run it by your tax advisor, something one IRA owner, who was the subject of a recent Tax Court case, failed to do.

In the case, an IRA owner had his account buy shares in a corporation that he set up. That corporation (“corporation A”) then bought shares in another corporation (“corporation B”) with cash and a note guaranteed by the IRA owner. B flourished and A sold the shares for a considerable profit. According to the Tax Court, the personal guarantee of the A’s debt amounted to an indirect extension of credit to the IRA, which is a prohibited transaction. The result to this IRA owner was that all of the gain that A reaped was taxable to him (and not tax-deferred in the IRA).


It may be tempting to use funds in retirement plans to buy businesses. But caution is advised. The tax savings and ready access to cash—the benefits—may not work out. You could face a big tax bill, and even worse, lose your retirement savings.

About the Author:

Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.


Before doing this one should consider if the structure is financeable before they pay a bunch of money to someone selling them a ROBs package without full and competent legal advice. What frequently happens is that after spending the money and setting this up, they later find out they cannot get financing. Buried at the end of the article is a reference to the Peek case and short description of the facts. However, the significance of that case is not clearly highlighted - most banks will require a guaranty from a live person, who is likely to be the person setting up the ROBs, who controls the borrower company either directly or by control of the retirement plan that is a majority owner of the borrower, and in any event the live person/guarantor will likely have a fiduciary obligation to the plan or otherwise a party in interest under ERISA rules. That most likely will make it a prohibited transaction per the Peek case, and a lender is not going to want to do the deal unless there is no guaranty because of the very bad effect on the borrower/guarantor of it being a prohibited transaction, as well as the risk to the lender of getting sanctions for entering into a prohibited transaction. So unless they can get a loan without a guaranty, this structure does not work. These issues should all be vetted before setting this up, and generally, in my experience as in house counsel for a major bank, the borrowers who get sold this plan are not getting that advice and are surprised when they find out the proposed structure is not financeable by traditional lenders.
Most ROBS providers charge approximately $5,000 to establish the corporation (including filing fees), the plan (401k's are most common), facilitate the rollover and the plan's investment in the private company. The ongoing fees are negligible at $100-$120 a month. ROBS is an interesting vehicle because the entrepreneur, who arguable believes they will be successful, can invest in an asset they control. And, more than 50% of the ROBS businesses do no need additional financing which means they’re not making monthly interest payments or pledging other assets (i.e. – home) as collateral for a loan. Whether the entrepreneur uses ROBS or gets an SBA loan – there are risks. If you’re considering going into business – spend the time to assemble a competent team that can help you evaluate your plan.
completely agree with you. She made me really clear about making my investment plan for business. Thanks a lot Barbara.
"Costs. You should use a company that specializes in ROBS. Such a company usually charges a hefty fee for helping to set up and administer the arrangement. And there’s annual reporting for the plan." The above quote from Barbara's article deserves a some Comments. First, most "companies that specialize in ROBS" are not law firms and some employ no lawyers or other professionals with deep ERISA and Internal Revenue Code experience. Second, Most law firms and lawyers in private practice, including those specializing in the complex areas of tax and ERISA law, would charge fees from 1/2 to 2/3 of the fees that are charged by ROBS "promoters." This is primarily because the "promoters pay substantial referral fees to franchise brokers or to the franchisor. Check with a lawyer of law form specializing in ROBS and tax and ERISA generally.
While this post provides a good introduction to ROBS, there are several other requirements that are not mentioned such as salary limitations, offering the plan to eligible employees, etc. Anyone interested in using his or her retirement funds to finance a business should certainly work with an experienced professional before engaging in a ROBS transaction.
This an amazing and quite helpful resource for me to produce investment plan for organization.I have been searching for this for a thing I can take away and use.
It's really a good way to make investment plan for business.I've never thought about it before.Anyhow it's worth trying.
In my opinion, it is not a good idea. It can lead to major consequences. If the business goes down your whole life's work goes undone. So be careful.
completely agree with you. She made me really clear about making my investment plan for business. Thanks a lot Barbara.
Very informative but its very tempting to use retirement funds so as to make it double and comfortable life ahead!!


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