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What is a Business Funding IRA / ROBS Plan?

Business man in a meetingThe Safeguard Business Funding IRA is a unique retirement plan structure that allows you to use your existing retirement savings to capitalize your own business.  This funding strategy can be used to startup or acquire a business, or for the purposes of expanding an existing business.  The best part is, there are no taxes or penalties.

Investing in Yourself

IRS rules prohibit an IRA or Solo 401(k) from any kind of self-dealing or dealing with disqualified parties.  You and close family, or personally owned businesses are disqualified to your IRA, and as such a conventional self-directed IRA or Solo 401(k) may not invest in your business.

The Business Funding IRA, sometimes referred to as a Rollover as Business Startup or ROBS Plan, is a completely legal means to get around this restriction.  It just requires a different type of retirement plan configuration to achieve this unique goal.

The end result is that you can invest in yourself.  Who do you trust more to help you build wealth?

How it Works

It takes a layered approach to build a proper self-funding structure for your business using retirement funds.

  • It starts with the business itself, which must be formed as a subchapter C corporation.
  • The corporation then sponsors a qualified employer profit sharing or 401(k) plan, depending on which best suits your particular needs.
  • As an owner/employee of the corporation, you can sign up to participate in the new qualified retirement plan.
  • You can then rollover into the plan from any accessible existing retirement plan that is tax-deferred in nature. This includes a 401(k) from a prior employer or an IRA.  A Roth IRA may not be rolled into the plan, however.
  • The retirement plan then purchases shares of the parent corporation in an Employee Stock Option Purchase (ESOP). This type of ESOP into a C Corporation is allowed per the ERISA rules that govern retirement plans.
  • The retirement plan is now a shareholder of the business, and the capital it has provided to the business can be used for any legitimate business purpose. This includes the acquisition or operation of the business, and even your own salary.

 Income & Tax Structure

calculator with pen and financial paperworkWhile there are no taxes or penalties for making your retirement plan a shareholder of your business, the tax implications are quite different from a passive self-directed IRA or 401(k) plan.

Firstly, the corporation itself will operate in the taxable realm.  So, 100% of the plan investment is not going to produce tax-sheltered growth as would be the case in an arm’s length IRA transaction.  The C Corporation that is the operating business will pay corporate taxes.  In addition, you will pay income tax on any salary you earn through the business.

You can pay yourself a salary.  In fact, you have to take a reasonable salary from the business in order for the structure to work.

As part of your compensation, you can also choose to make new contributions to the company profit sharing or 401(k) plan.  This will reduce the tax burden on income and grow your retirement savings at the same time.

Lastly, if the business is profitable, it can issue dividends to the shareholders, of which your retirement plan savings will be one.  These dividends will be tax-deferred to the retirement plan, just like dividends on a publicly traded stock.

So, while the focus of this strategy is to gain access to the funds, there is still a significant wealth building component.

Business Funding IRA Benefits

Using your existing retirement savings to start or grow your business can be a tool to help your venture succeed.  By self-capitalizing, you can retain control and not have to see outside investors or other forms of financing.  Your business can be on a strong footing, and become profitable more quickly if there is cash on hand and no debt overhang.

In Summary

If you have an interest in using retirement funds to capitalize your own business, please feel free to Contact Us.  The first step in determining if self-funding your business venture with retirement savings is right for you is to educate yourself on the options before you.

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