Buying a Business with Your Retirement Funds

If you want to live your dream with an encore career you are most likely exploring what it takes to become an entrepreneur. Once you find the right opportunity, funding it becomes the next hurdle. Besides small business loans, home equity loans and using your personal savings, there is another option.

Budding entrepreneurs can use their retirement funds to finance or grow a business without incurring taxes and penalties. This is not a new procedure but rather a time proven method for funding your new business. Retirement financing services provided by legitimate financial companies has helped entrepreneurs fund small businesses and franchises since the 1980’s.

Through an arrangement called Rollovers for Business Start-ups (ROBS), you can invest your funds from an eligible retirement account into a small business or franchise without taking a taxable distribution or getting a loan. Whether you want to buy an existing business, start one from scratch, or grow one you currently have, ROBS could provide a significant contribution to your capital injection.

Key Benefits of ROBS

  • Starting your business debt-free will lower your overhead and eliminate risking your home equity.
  • Without loan interest to pay, you can make money sooner rather than later.
  • Since this is not a loan, it does not impact your credit and you can still take out a loan later if you want.
  • Unlike the stock market, this is an investment you can control. Essentially, you’re investing in yourself!
  • There are no penalties or taxes! Since you won’t have to take a taxable distribution using this structure, you can save more for retirement.
  • This tried-and-true structure is a fast, legal funding option that’s been available since the Employee Retirement Income Security Act became a law in 1974.
  • Many financial advisors and stock brokers aren’t aware of these investments because they don’t provide sufficient profit for their institutions.

How a ROBS work:

Buyers take their 401(k) account (or other qualified retirement plan) and roll it over into a new plan that buys shares in an operating company that will own their business. Unlike most small businesses, which are set up as limited liability corporations or S-corporations, a business financed through ROBS has to be a C-corporation, which can issue shares and does not prohibit ownership by trusts. Below are the steps you would need to take to fund your new business with your retirement funds;

  1. Contact ABC to be referred to reliable funding companies with proven track records of creating successful ROBS.
  2. After you select your funding company, they will establish a C-corporation on your behalf ensuring the incorporation is completely accurate. 
  3. Your funding company will also file your Employer Tax and Retirement Plan ID numbers with the IRS.
  4. Your funding company will instruct you on opening the corporate and retirement plan bank accounts.
  5. Your funding company will create a customized and qualified plan that suits your needs.
  6. Your funding company analyst will guide you through the process of rolling over your funds from your existing qualified retirement plan or IRA to your new corporation’s customized plan.
  7. Once the plan is funded you are now ready to invest in the newly formed C-corporation by purchasing stock in the corporation.
  8. Your new corporation now has the capital to start, purchase or recapitalize a business or franchise!