Part II- 8 Steps to ROB(s) Your 401K to Buy a Business and Get Away with It!

The recap from last issue:

• Roll Over Business Startup

• Use your 401k to buy a business

• No Taxes No Penalties

Your new company must be organized as a C Corp. There are no exceptions to this rule. And your C Corp status must be maintained for the duration of this cycle, until the company is terminated, through sale or simply closing the doors. This means holding shareholder meetings, documenting decisions made, keeping business and personal funds separate, filing corporate tax returns, and maintaining a good standing with the state of incorporation to avoid administrative dissolution.

Starting a 401K for your new company should be handled by a firm specializing in this service. Compliance issues are burdensome and should not be taken on lightly. There are ERISA rules to follow, annual filings, favoritism issues and fiduciary responsibilities. If you have trouble sleeping at night, you can read the full Employee Retirement Income Security Act of 1974. It’s guaranteed to knock you right out!

Initiate a rollover transaction to move the funds from your “old” 401K. Here is the first tricky part. If you’ve left your job already, no big deal in rolling the funds over. If you’re still employed, your company may or may not let you roll those funds. Check with your fund administrator and see additional comments below.

Once the money is in NewCo 401k, liquidate all investments so its full of cash. Now the 401K can buy shares of NewCo. NewCo now has cash to buy assets, hire a team or buy another business.

And here’s a big one. No Hands Off Ownership Allowed. If you’re funding your startup with ROBS, or using that money to join the ranks of acquisition entrepreneurs, be prepared to roll up your sleeves and start dishing out the blood, sweat and tears it often takes to be successful. ROBS users must be active employees of the business it’s funding. And there are minimum hour requirements to keep the IRS satisfied. The last thing you want is for the IRS to consider your rollover a taxable event. That would mean any ROBS amount would be considered taxable income and added to all the other taxable income you and your spouse have that year. This could easily throw you into a higher tax bracket and disqualify you for other tax benefits that have limited adjusted gross income cutoffs, like claiming the very valuable college tuition credits. It’s possible to keep your current job and start a new ROBS funded venture, but your record keeping must be impenetrable. Check with your third party administrator, but 20 hours a week with at least a minimum wage paycheck is a good starting point. Make sure at least 1% of that paycheck is going back to the 401K, just as you’d make retirement contributions in a normal situation. You don’t want to be classified as an Employee Stock Option Plan. Catch up contributions are also available for those over the age of 50.

Does ROBS work while you work (for your current employer)? Yes! Sometimes…well, maybe. This is called an in-service rollover, while you’re still “in-service” to your current employer. Many of the rules regarding company retirement plans are set by the government and leave little to interpretation. Others, such as this, are up to each plan administrator, so check with your own retirement plan person. Some plans are very generous in allowing in-service rollovers. Some allow this option only at a certain age, and others prohibit in-service rollovers altogether. If your plan is stingy on this point, you will have to resign from your current job in order to allow for a ROBS implementation. This is a big decision! Proceed with caution! Another option to consider, while still keeping your day job, is to implement the ROBS from a previous employer’s retirement plan. One that has remained with the previous administrator. This keeps your current employer completely out of the loop. Whew...That was a lot of info...

Don't miss the next chapter where we'll cover:

• ROBS alternatives

• Keeping the Big Bad Wolf of the IRS away

• Annual filing requirements