Donna Genie breaks down ROBS plans, a way to fund a business purchase using retirement savings without penalties. She covers the real advantages and drawbacks, using a paint-your-own-pottery studio as a concrete example of how the financing works.
Hi. Let's talk about Robs plans and what they are, what the pros and cons are. First, Robs. Some people think Robs means you're robbing your 401k to produce an investment into a business. However, that's not really what Rob stands for. Rob stands for rollover business startup. Now this is a way of taking money out of the 401k plan and investing it into the purchase of a business. Now that may sound like a great thing, but you need to be aware of all of the pros and cons and how this will work. So in buying a business, rather than using traditional financing, a Robs plan is about taking the money out of a 401k plan and investing it into that business. To do this, it's not just a matter of writing a check or pulling money out of the 401k. You'll need to have a third party administrator help you with this. It is by far not a do it yourselfer project. We work with a lot of companies who utilize Rob's plans. The most popular third party administrator is Guidance Financial. They help a lot of people in structuring businesses and business purchases using 401k and retirement dollars. With a 401k administrator like this, you will need to have some extra reporting and extra guidelines that you wouldn't normally have. The extra reporting is the annual Form 5500 for a retirement plan that is produced through the guidelines of ERISA and sent into the Department of Labor each year. That is not a function of the irs. So this is not inclusive of any of the accounting and tax work that would normally need to be done. GUIDN will help you file that form 5500 each year. You'll also have a strict set of rules that you'll need to follow in your investments. There are things that you cannot do with a Robs plan however. You can't break off arms of the business and operate it separately and it must be operated as a C Corp structure. Now as a C Corp you'll have a whole different set of tax consequences than most small businesses. Most small businesses operate under a flow through structure that takes the income of the business and passes it through to appear and be taxed as personal income. You would be filing a C Corp. Which means you pay under corporate tax rates. Currently those aren't that bad, but there are talks in the works of moving those rates up. So that would definitely have a drastic effect on on the C corporation structure. You'll also need to be very careful about how you take money out of that business. You must be an employee of the business and receive a W2 and a paycheck. Now, the timing of that can be a little more flexible to help you with the ownership of the business and the cash flow needs of the business. However, it must be on a payroll. If you take out funds in any other way, shape or form, they're going to go through the process of double taxation. So dividends, for example, are not a tax deduction when a C Corp pays those out and the owner must pay taxes on receiving them. So there are a lot of things you'll need to watch for and plan for. So working with a solid accountant is a must. When dealing with a Robs plan, you'll also need to be very aware of how this structure works. From a cost perspective, it is definitely more costly to do the Robs plan initially. It will take about five to $8,000 to guide them to get all of this set up. You'll also have ongoing monthly fees of about $150 a month in perpetuity until the entity does not exist any longer. Under a Robs plan, you'll have those fees. So it is a very costly way to operate, but many people have said, if that's the only way I can do it, it's still worth it. And that's okay. We just need to know what the risks are and what the pros and cons are. Now there is a way to exit a rob structure, but there are quite a few hoops to jump through. We have successfully helped people exit rob structures to get out from under all of the requirements, but it takes a lot of planning also. So in order to utilize a Robs plan to purchase a business, you need to be aware of the extra hoops you'll need to jump through. Again, it is not a process where you kind of throw a business together and hope it all works. There are a lot of rules you must follow and you may not leave that to chance. Your worst case scenario is that the IRS says you did something wrong and that entire amount of money that you took out for the Robs plan to fund the business is taxable with penalty and early penalty for early distributions. So it's not something you want to mess around with. If you are considering purchasing a business with a Robs plan, I'd love to have the chance to talk with you before you make that final decision. We can also help with a financial analysis to look at traditional financing or other arrangements including distribution from the 401k or IRA and help you decide what the long term of the business looks like and what's best for your future. I'm Donna Bordeaux with pyopaccounting.com Please follow us on Facebook and Instagram. Make sure you check out our blog and our website from the link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. To contact me, email me at Donna P Y O P accounting dot com.
