Funding Your Business Purchase with Your 401(k)

Roll-Over as Business Start-Ups, or “ROBS” as they have come to be known, is a funding mechanism that allows you to access the proceeds in your 401(k) plan or other retirement funds to start or purchase an existing business or a pre-approved franchise.

The advantage of a ROBS is that it allows you to reduce or eliminate your debt when you seek to start of buy a business. But there are downsides as well. Violating IRS regulations can result in a significant tax penalty. Even when you’re 100% compliant with the IRS, a risky business venture could jeopardize your nest egg.

As with anything in which the IRS is involved, compliance matters. We strongly encourage you to work with an experienced attorney, CPA or lender that specializes in this type of financing. They will fully explain your obligations, see if it makes sense in your specific instance, and handle the structuring of the deal. We can recommend several.

While your advisors will be dealing with the nuts and bolts of the transaction, here are the basic highlights of how such ROBS are structured. Remember: the devil is in the details.