Understanding Rollovers As Business Startups (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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WRITTEN & RESEARCHED BY
Staff Writer
Last updated onUpdated
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REVIEWED BY
Senior Staff Writer
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Are you a new business owner looking for funding? You’ve most likely run into business loans, crowdfunding, and ROBS, but what is the difference between all of these options? And what, specifically, is ROBS?
A Rollovers as Business Startups plan (ROBS) is a financing option for your small business that you might not know much about. If you have a retirement account, read on to learn more about how you can use this account to start or grow your small business!
Table of Contents
What Is ROBS?
Rollovers for Business Startups plan — or ROBS — is a type of transaction you can use to fund your new or existing business if you can’t take out a loan or work with outside investors.
This method of funding your business does not involve borrowing money. Instead, you are rolling over funds from your individual retirement account, 401(k), or another retirement account to use as financing for your business.
Since you aren’t borrowing or cashing out your retirement account, ROBS allows you to invest your retirement funds without being penalized. A ROBS transaction is a financing choice for many entrepreneurs who don’t qualify for startup loans or traditional financing.
How A ROBS Plan Works, Step-By-Step
A ROBS plan is a complicated transaction, which is why most people who choose this funding avenue work with an attorney or a ROBS provider. However, even if you work with an expert, it’s important to understand how the process works.
Who Qualifies For A ROBS?
Anyone with an eligible retirement plan qualifies for a ROBS plan as long as they meet the following requirements:
- The retirement plan you use can’t be from your current employer
- You must be a legitimate employee of your business (around 1,000 hours per year)
- Meet all requirements of your chosen ROBS provider
The most common retirement plans used for this purpose include 401(k) plans, 403(b) plans, and defined contribution plans like Traditional IRAs, Simplified Employee Pensions, and Thrift Savings Plans. You may also use a combination of qualifying plans.
Most employers will not allow you to roll over your account while you’re still working for them. However, plans from prior employers, your own 401(k), or self-directed IRAs are eligible to roll over.
If committing at least 1,000 hours a year to your business doesn’t work for you, consider other financing options for your business.
Some ROBS providers have requirements related to the minimum amount of money in your retirement fund, how you’re using the funds, and the type of requirement account you plan to roll over. Before selecting your ROBS provider, understand their requirements. We’ll offer up provider recommendations a little later in this article.
Pros & Cons Of Using ROBS
Approached correctly, a ROBS can be a financially savvy move.
However, it’s also important to understand that there are drawbacks to using ROBS. Before you dive in, weigh out the pros and cons to determine if this is the right financial solution for your situation.
Pros
- No Debt: You aren’t borrowing against your retirement account or taking out a loan. With a ROBS, you’re leveraging your retirement account to receive the money you need for your business, so you won’t be indebted to a lender.
- No Interest: Because you aren’t taking a loan from a lender, you won’t have to worry about paying interest for borrowed funds. This means that you’ll have more money to invest in your business.
- Easy To Qualify: If you have a qualifying retirement account, you can get the financing you need with a ROBS. You won’t have to worry about your personal or business credit score, a lack of revenue, or any other factor considered by a lender. Because you are leveraging your own account and aren’t taking out a loan, the requirements of traditional lenders do not apply.
- No Penalties: When you withdraw your retirement funds to finance your business, you may be subject to early withdrawal penalties and taxes. With a ROBS plan, you won’t have to pay these costs, leaving more money in your pocket.
- No Personal Guarantees Or Collateral: Remember, a ROBS is not a loan, so you won’t have to sign a personal guarantee or put up collateral to receive your funds. With a business loan, you may be required to do one or both, which means that if your business fails and you can not pay back your loan, you risk losing your personal assets. With a ROBS, the money invested from your retirement account is the only thing at risk.
Cons
- Risk Of Losing Your Investment: Although you won’t have to worry about losing your personal assets if your business fails, you do risk losing your money for retirement. Of course, there have been many entrepreneurs who have started successful businesses using ROBS. However, you should know that there is always a risk involved. If your business fails, you lose your retirement money.
- Fees & Tax Liabilities: Unlike a business loan, you won’t have to pay interest to a lender with a ROBS plan. However, this doesn’t mean that this strategy doesn’t come at a price. Because you are creating a C-corp, your tax liabilities may be higher than other business structures. If your transaction is not set up properly, you may have to pay penalties to the IRS if you’re audited. This is why it’s so important to select a ROBS provider that understands the process and is able to help avoid missteps when setting up and maintaining your ROBS. Setting up and maintaining your ROBS also has associated costs. With most providers, you’ll be required to pay a setup fee, as well as monthly maintenance and reporting fees.
Other Ways To Get Startup Funding
A ROBS is going to be the right choice for every new business owner. If you don’t have a retirement account, the one you have is offered through your current employer, or you don’t want to risk losing your retirement funds to start your business, there are plenty of other startup funding options for you to explore!
Some options you can consider when looking for startup funding are:
ROBS Final Thoughts
If you don’t have the personal savings or investors to back your new business financially, there are a lot of different options out there for you!
Even if you decide not to pursue a ROBS, it’s good to know that it is an option in the future if you are ever in need of a cash injection into your business.
If you have a qualifying retirement plan, you’ve reviewed the pros and cons, and you don’t want to deal with the hassle of securing a traditional business loan, ROBS might be the perfect option for you and your business!
Need to fund a smaller project ASAP and don’t want to deal with a lengthy application/distribution process? Check out our favorite credit cards for small businesses and startups.
What Is ROBS FAQs
Kymberlin Bush
Staff Writer
Kymberlin started contributing to Merchant Maverick as a freelancer in 2022 and joined the team as the full-time small business health insurance expert in 2023. She earned her Bachelor of Arts in Creative Writing from Pacific University in 2020 and continues to reside in Portland, Oregon.
View Kymberlin Bush's professional experience on LinkedIn.
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