Your 401(k) has advantages beyond simply being a retirement account.

C Corp’s have their own benefits. For example, profits from a C Corp are not taxed, nor do they affect an individual’s tax bracket. The profits from the C Corp are taxed at the corporate rate. When you compare the C Corp tax rate, which is currently 21%, against individual income tax brackets, which can be as high as 37%, you can see why a C Corp has further tax advantages than simply avoiding a 401(k) early withdrawal penalty. Do be aware that drawing income for your C Corp will result in double taxation: you get taxed at the corporate level and would also pay income tax for anything you pay to yourself.

Other benefits accrue to C corporations themselves, such as the ability to deduct health insurance costs paid for employees, pay salaries that deplete taxable profits, and decide exactly when to file fiscal year reports.

ROBS Disadvantages

There are some disadvantages to using your 401(k) to buy a business using ROBS. There is the paperwork involved and the filing requirements, which are annoying to some and incomprehensible to others. The IRS does not particularly enjoy it when people make a mess of their 401(k) rollovers, so if this is a route you want to take, make sure everything is perfect before filing.

Although we all start businesses in order to make a profit, the reality is that a good number of small businesses fail. In fact, when the IRS initiated and pursued a ROBS compliance project (with the inspirational title of “Rollovers as Business Startups Compliance Project”), they made a point to mention that most ROBS failed or were sold while “on the road to failure.” They further write/warn that it’s not only possible to lose the business but the entirety of their retirement savings if the business fails. The question becomes: does your personal risk tolerance align with the high-risk nature of running an SMB? While buying instead of starting helps de-risk the investment, you are still likely running a higher risk of a bad outcome than with a diversified portfolio.

The main disadvantage of using a ROBS structure is that it is more complicated than a loan and puts your retirement savings at risk. For this reason alone, it could be considered a risky method of funding a business, but if you do your due diligence and have a solid plan, ROBS can be a great way to use your 401(k) to buy a business.

ROBS Frequently Asked Questions

Do I have to quit my job to start or buy a business with ROBS?

The answer is that it depends. Some ROBS-eligible retirement plans prevent performing a ROBS when the plan is tied to an active employee, in which case you would need to leave your job. However, there are a few carve-outs:

You have a retirement plan from a previous employer that has enough funds for a ROBS
Your current retirement plan allows an in-service rollover
You're more than 59 1/2 years old

Do I need to invest my entire retirement plan when using ROBS?

No, you can use as much of your retirement savings as you want. In fact, you're able to do an Additional Rollover Capital (ARC) transaction if you decide that you need to roll over additional funds after the initial transaction.

Is ROBS limited to only assets in 401(k)s?

No, nearly any retirement plan can be used with a ROBS. The distinction is that the retirement plan needs to be rolled over into a 401(k) at the new company. Think of it as the "starting point" and "destination." The "destination" is always a 401(k) at the new C-Corp. The "starting point" can be a Traditional IRA, SEP-IRA, SIMPLE IRA, 401(k), etc.

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