If you're considering business ownership you probably know that starting a business can be a costly endeavor. Between the cost of goods or services, hiring employees, and marketing your business, there are a lot of expenses to consider. One way to finance your business is by using a 401k rollover-as-business-startup (ROBS). In this post, we'll break down what ROBS are and the pros and cons of using them to finance your business.
What is a ROBS?
A ROBS is when you use money from your 401k to finance your business startup. To do this, you would set up a new corporation and then rollover your 401k into that corporation. The money in your 401k would then be used to purchase stock in the new corporation. By doing this, you would be able to access the money in your 401k without having to pay taxes or penalties.
There are some requirements that must be met in order to qualify for a ROBS. For example, the new corporation must have less than $50 million in assets and it must be set up as an S corporation. Additionally, you must be an active participant in the new corporation—meaning you must work for the company full-time.
Pros of Using a ROBS
There are some advantages to using a ROBS to finance your business. First, it's a quick and easy way to access the money in your 401k without having to pay taxes or penalties. Additionally, using a ROBS can help you avoid taking out loans or selling equity in your company.
Another advantage of using a ROBS is that it can help you diversify your portfolio. By rolling over your 401k into the new corporation, you would be investing in something other than stocks and bonds. This can help reduce risk if the stock market crashes or if interest rates rise.
Cons of Using a ROBS
While there are some advantages to using a ROBS, there are also some disadvantages that you should be aware of before making this decision. One downside is that if your business fails, you could lose all of the money in your 401k. Additionally, if the IRS audits your company and finds that you're not following the rules for ROBS, you could face hefty fines and penalties.
If you're considering using a 401k rollover-as-business-startup (ROBS) to finance your business, it's important to weigh the pros and cons before making a decision. While there are some advantages to using a ROBS—such as being able to access money without paying taxes or penalties—there are also some risks involved. Before making any decisions, it's important to speak with an accountant or financial advisor to ensure that this is the best decision for you and your business.
There are several credible funding providers who can give you guidance on ROBS, as well as other funding options. Companies like Benetrends Financial can help get you on the right path.