What Is A Rollover As Business Startup (ROBS)?
If you have a retirement account, you might look into Rollovers As Business Startups (ROBS) as a small business funding option. Read on to find out who qualifies.
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Editor & Senior Staff Writer
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Key Takeaways
- Rollovers for Business Startup (ROBS) plans allow you to leverage your retirement account to launch or expand your business.
- While a ROBS plan isn't a loan and doesn't require collateral, there is a risk of losing your retirement funds.
- ROBS is a complex process that can have tax penalties if done incorrectly.
A Rollovers as Business Startups (ROBS) plan allows you to use retirement funds to start or grow a small business.
If you need business funding and have a retirement account, find out how ROBS works and what to consider before using one.
Table of Contents
What Is ROBS?
A Rollovers for Business Startups (ROBS) plan is a way to fund a new or existing business using retirement savings. Instead of borrowing money or taking on investors, you roll funds from a qualified retirement account (such as a 401(k) or IRA) into your business.
Because the funds are rolled over rather than withdrawn, a ROBS arrangement allows you to invest retirement money without early-withdrawal taxes or penalties. This option is most commonly used by entrepreneurs who don’t qualify for traditional startup loans.
How A ROBS Plan Works
A ROBS arrangement involves multiple legal and tax steps, which is why most business owners work with a ROBS provider or attorney. Even so, it’s important to understand the basic structure of the process.
Who Qualifies For A ROBS?
You may qualify for a ROBS arrangement if you have an eligible retirement account and meet a few key requirements.
To use a ROBS plan:
- Your retirement funds cannot come from a current employer’s plan
- You must be a legitimate employee of the business, typically working at least 1,000 hours per year
- You must meet the requirements set by your chosen ROBS provider
Commonly eligible retirement accounts include 401(k) and 403(b) plans, as well as certain IRAs and other defined contribution plans. In many cases, funds from prior employers’ plans or self-directed accounts can be rolled over, and multiple accounts may be combined.
Some ROBS providers also set minimum balance requirements or restrict how funds can be used, so it’s important to review provider criteria before moving forward.
Pros & Cons Of Using ROBS
A ROBS arrangement can be a smart funding option in the right situation, but it’s not without tradeoffs. Here’s a clear look at the benefits and risks.
Pros
- No debt: You’re not taking out a loan or borrowing from a lender.
- No interest: Because this isn’t a loan, there are no interest payments.
- Easier to qualify: The requirements of traditional lenders do not apply. Approval doesn’t depend on credit score, revenue, or time in business.
- No penalties: Funds are rolled over, not withdrawn, avoiding taxes and penalties.
- No personal guarantees or collateral: You won’t have to sign a personal guarantee or put up collateral to receive your funds. You aren’t pledging personal assets beyond your retirement funds.
Cons
- Retirement risk: If the business fails, you could lose money set aside for retirement.
- Tax and compliance risk: ROBS requires a C corporation and strict IRS compliance; errors can lead to penalties.
- Fees: Most providers charge setup and ongoing administration fees.
Other Ways To Get Startup Funding
A ROBS arrangement isn’t the right fit for every business. If you don’t have an eligible retirement account or don’t want to put retirement funds at risk, there are several other startup funding options to consider.
Is A ROBS Right For Your Business?
A ROBS arrangement can make sense for some business owners, but it isn’t the right solution for everyone. It’s most often used by entrepreneurs who have an eligible retirement account, understand the risks, and want to avoid taking on debt.
If you need funding quickly or prefer a simpler application process, other options, such as business credit cards or small business loans, may be a better fit.
Erica Seppala
Editor & Senior Staff Writer at Merchant Maverick
Erica has been writing about small business finance and technology since 2008. She joined Merchant Maverick in 2018 and specializes in researching and reviewing business software, financial products, and other topics to help small businesses manage and grow their operations. Her expertise has been cited in MSN, Reader's Digest, Vox, U.S. News & World Report, and Real Simple. She is a Certified ProAdvisor for QuickBooks Online and QuickBooks Payroll, a graduate of Limestone University, and currently resides in Greenville, South Carolina.
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