Financing business startup with 401K rollover financing

What is a Small Business 401K Rollover?

First Financial 401K Financing, Acquisitions, Franchise Purchase, Starting a Business

If you’ve been an employee for a better part of your professional career and are now considering starting up a business, you may be aware of the possibility to utilize your IRA or 401(k) retirement fund as an investment. It has its benefits but it could prove to be a complicated procedure for anyone not too acquainted with it; easier to get wrong than it is to get right.

Below we’ve outlined everything you’ll need to know to successfully rollover your retirement funds into your new business.

Rollovers as Business Startups (ROBS)

ROBS is what makes it possible. It allows you to utilize your retirement funds to finance a start-up, and will work for you if you own a 401(k) or another account associated with a retirement plan, have sufficient funds to meet your investment needs, and abide by tax laws.


How it works is pretty straightforward, if done right. You establish or acquire a new business and incorporate it. The newly formed corporation will then put a qualified employee retirement plan in place, usually a profit-sharing plan that allows investment in the company’s stock. Once that has been done, you can rollover your funds from your current retirement account into the new plan, without the need to pay any taxes on the rollover. The funds in this plan can now be used to acquire shares in the corporation, making the plan an owner of the business.

Why it’s a good idea:

  • It saves you the need to pay taxes on your retirement funds when you’re rolling them over. If you weren’t rolling them over and wanted to use your 401(k) or other retirement funds to invest in the business, you would be required to pay taxes on the amount, considerably reducing the amount of funds available to you for investment.
  • It makes you self-dependent. It’s difficult to get a bank to provide you with a loan, and even if they do, you’ll be paying back interest for quite some years. ROBS lets you use your funds to finance your venture, leaving you less dependent on anyone else.


Why it isn’t:

As with anything, there are risks and drawbacks to consider as well.

  • The foremost among them Being that it’s your retirement funds you’re putting on the line. If you’re investing a considerable amount or all of them, you’ll be left in a difficult financial position if the business isn’t successful.
  • Due to its dubious nature and the loophole that makes the funds untaxable, ROBS is considered to be a gray area by the IRS. Therefore, it reserves particular scrutiny for business owners that make use of the scheme and failure to pay taxes that your business incurs is sure to be addressed. If, at a future date, the IRS manages to challenge the ROBS, the rolled over funds will become taxable distributions.
  • If you’re new to the idea, it’s important that you get it right on a range of aspects, which is something you might not be able to do on your own. It is advisable to employ services of a retirement planner, or investment advisor that specializes in ROBS. Such agencies will normally charge you a substantial fee to set it up and supervise the process. You’ll also be expected to pay annual fees to an assessment agency to ensure compliance to ROBS rules and regulations.


An important consideration to ensure that you don’t get penalized for noncompliance is annual filing. Qualified retirement plans are expected to file an information return in the 5500 Form series annually. The legislature provides an exception for plans whose assets value below $250,000 but this exemption is only applicable for plans of business that have an individual owner, hence does not apply to ROBS. In case of ROBS, the plan rather than an individual owns the business, so all information returns need to filed regularly.


Although IRS has not challenged the legality of ROBS and it’s not considered abusive tax avoidance, IRS will be on the lookout for the slightest hint of noncompliance or improper administration, which would result in the plan being disqualified.


IRA – An Alternative to ROBS

IRAs are allowed to acquire stocks in any close-knit or publicly-traded corporation, therefore, self-directed IRAs and be used in place of ROBS to purchase stock in your company. The process does come with a set of considerations and you need to be on the lookout for prohibited transactions that that will disqualify the IRA, making all its funds taxable. It is advisable to seeks advice from a tax advisor before you use the IRA to make any transactions to ensure compliance and avoid any Tax Court cases.



Although the appeal of using your retirement savings to fund a start-up is understandable, it requires careful planning and consideration. The initial tax savings and easy access to funds may not prove to be so beneficial in the long run if the process is not administered in compliance to all rules and regulations incurring a hefty tax bill, or if the business sinks, taking all your savings with it.