Retirement savings in your business (ROBS)

A Rollover as Business Start-up (ROBS) works like this:

1. You set up a C corporation for the business.
2. The corporation sets up a retirement plan, usually a 401(k).
3. You roll your existing retirement savings into the new plan, without tax.
4. The plan uses the money to buy shares in your corporation, which then has the cash to start or buy the business.

What the IRS says: ROBS plans are not an abusive tax avoidance transaction, but they are "questionable" because they may benefit only the one person who rolled over the savings. Promoters market them aggressively and often get an IRS determination letter for the plan, but that letter does not protect you if the plan is run wrongly. A plan that discriminates against other employees or engages in prohibited transactions can be disqualified, with tax consequences.

What the IRS found in its ROBS compliance project: although there were some success stories, most ROBS businesses had failed or were on the road to failure, with high rates of business and personal bankruptcy, liens and dissolutions. Some owners lost the retirement savings they had built up over many years as well as their business, often before they had started selling, and in some cases large recurring promoter fees or legal problems played a part.

Ongoing duties: the plan is a separate entity. It must file an annual Form 5500 (the small one-participant exception does not apply to a ROBS plan, because the plan, not you, owns the business), the corporation files Form 1120, the shares must be valued properly, and the IRS warns that stopping other employees from taking part can break the plan's qualification rules.

With an SBA loan: a business owned by a ROBS plan can get an SBA 7(a) or 504 loan, and a ROBS plan can supply the owner's equity, but the lender must see the plan's IRS determination letter and set-up documents, the plan's sponsor must guarantee the loan in full, and SBA loan money cannot pay for setting up the plan.