Don't let ROBS steal your retirement

Retirees are more dynamic today than they have been at any other time. They are more active in their communities. They are traveling more than ever (at least, those who want to travel). They are even building businesses at a faster rate today than in previous times.

One of the biggest challenges of starting a new business is accumulating the capital needed to fund that business initially. One intriguing option is to access your existing 401(k) funds. This can be done without withdrawing the funds and therefore avoiding any interest or penalty payments.

"Buying or starting a new business can be very expensive and risky," says Megan Slatter, wealth management advisor at Crewe Advisors in Salt Lake City. “Rollovers as Business Startups (“ROBS”) can be a powerful solution for someone who has a great business idea but might otherwise not have access to start-up capital. This allows them to use retirement assets saved in a 401(k) or IRA for their business and avoid paying income taxes or the 10% early withdrawal penalty. Since you are not paying the money back to your retirement plan, it is not considered a loan. »

There are specific rules for qualifying for a ROBS. Additionally, the IRS issued guidelines for ROBS that outlined several issues.

There is a real possibility that using a ROBS could pose significant risks. For this reason, it is not surprising to find finance professionals who avoid them.

“I would never recommend them,” says Dick Billings, senior document and compliance specialist at PCS Retirement, LLC in Philadelphia. "If a person is considering a ROBS plan and does not have a good enough credit rating to get a loan directly from a bank or the SBA, they should not risk their protected retirement plan benefits on a new business."

The downside can be quite dramatic. New businesses always have a chance to fail. In the case of ROBS, losing his business also means losing part of his retirement.

“There are several downsides, but the main risk is that if the small business goes bankrupt, the stock certificates lose their value,” says Jason Grantz, general manager of Integrated Pension Services in Highland Park, New Jersey. "Basically, this puts not only current income at risk, but also retirement assets in the same risk basket."

Beyond business failure, there are other hurdles to using ROBS that you need to consider.

"The first drawback is the C-Corporation requirement, as this structure offers the highest likely tax rates," says Ryan Shuchman, investment advisor and partner at Cornerstone Financial Services in Southfield, Michigan. “The second major drawback is that all profits must go to the pension plan, not to the business owner. The owner simply takes a salary at the market rate as compensation. »

ROBS also puts you in an environment that adds additional pressure on the business owner, both in terms of cash flow and compliance.

"Companies that facilitate these transactions tend to charge high fees, it's easy to get in trouble with the IRS in these transactions, and you're essentially putting your retirement money on the line," says Josh St. Laurent, founder and CEO of Wealth In Yourself, in South Lake Tahoe, California.

The compliance issue is one of the main barriers to using a ROBS. As this is a complicated transaction involving both tax law and ERISA, you should not take a casual approach with a ROBS strategy. It is best to get advice from a competent lawyer to reduce the risks...