A Look at the Step-by-Step ROBS 401(k) Rollover Process
Starting a business often hinges on one crucial factor: capital. While traditional loans and investors are common funding routes, many entrepreneurs prefer a debt-free approach that doesn’t dilute ownership. A Rollover for Business Startups (ROBS) allows you to tap into your retirement savings to fund your venture without incurring early withdrawal penalties or immediate tax liabilities.
This innovative funding method empowers you to invest in yourself while maintaining complete control of your business. However, it involves a specific set of steps designed to satisfy IRS regulations. Navigating this process correctly ensures you secure funding efficiently while maintaining full compliance. Let’s take a look at the step-by-step ROBS 401(k) rollover process.
Establish a C Corporation
The first step is to form a C corporation. The IRS requires this specific business structure for a ROBS arrangement because a C corporation can issue and sell its own stock—a critical requirement for the transaction.
Other business entities, such as sole proprietorships, partnerships, or LLCs, don’t issue stock in the same way and therefore don’t qualify for this transaction. You’ll need to file the articles of incorporation with your state to make the entity official and obtain an employer identification number (EIN) from the IRS.
Adopt a Qualified Retirement Plan
Your newly formed C corporation must sponsor a qualified retirement plan. This typically takes the form of a 401(k) or a profit-sharing plan that meets specific IRS requirements.
The plan documents must specifically include a provision for purchasing employer stock—in this case, stock of your C corporation. This design element distinguishes a ROBS-compliant plan from standard employer retirement plans that typically only offer mutual funds or publicly traded stocks.
Roll Over Your Existing Retirement Funds
Once your retirement plan is established, you’ll transfer funds from your existing 401(k), 403(b), or eligible IRA into the new plan. This rollover is tax-free when executed correctly, meaning you won’t face the 10 percent early withdrawal penalty or immediate income taxes.
The key is making sure the transfer is conducted as a direct trustee-to-trustee rollover, where funds move directly between financial institutions without you taking possession. Working with experienced ROBS 401(k) providers ensures this critical step is handled properly.
Appoint a Plan Trustee
Every qualified 401(k) plan requires a trustee to manage its assets and verify fiduciary responsibilities are met. In a ROBS setup, you usually assume this role, giving you direct control over investment decisions.
As the trustee, you hold the fiduciary responsibility to act in the best interest of the plan and its participants. This authority allows you to make critical investment decisions, including the purchase of company stock with the plan’s assets.
Use Capital for Business Needs
The corporation now holds cash in its operating account. You can use these funds to cover legitimate business expenses. This includes:
- Purchasing equipment and inventory
- Leasing office or retail space
- Paying employee salaries (including your own)
- Covering marketing and advertising costs
It’s crucial that all expenditures serve legitimate business purposes. The funds cannot be used for personal expenses unrelated to business operations.
File Annual Reports
Maintaining your plan’s tax-advantaged status requires ongoing compliance and reporting. You must file Form 5500 with the IRS and the Department of Labor every year. This document details the plan’s financial condition, investments, and operations.
Accuracy and timeliness in filing prevent costly compliance issues, eliminate potential penalties, and maintain your plan’s qualified status. Many businesses work with professional administrators to ensure proper completion and submission.
Maintain Corporate Formalities
Running a ROBS arrangement means managing two distinct entities: the C corporation and the qualified retirement plan. You must hold regular board meetings, keep minutes, conduct annual business valuations, and ensure proper separation between corporate and plan assets. Many business owners partner with experienced ROBS 401(k) providers to handle the complex administration and make sure the plan remains compliant with changing regulations.
Funding your venture through a ROBS arrangement places the control firmly in your hands. You avoid monthly loan payments and interest rates, allowing your business to reach profitability sooner. By following these steps diligently and maintaining compliance, you build a solid financial foundation for your company’s future. Contact the professionals at Pango Financial for a more hands-on approach to the ROBS 401(k) rollover process and check out our funding solutions tool to see how this option can work for your business.