Can you use your 401k to start a business?

Few things are as exciting as starting a new business. It can also be a bit overwhelming, especially when it comes to figuring out how to pay for it. But you may have more options than you think, including using the money you’ve already earned to invest in your business.

ROBS

There is a path to entrepreneurship that allows aspiring business owners to roll their 401(k)s over into investment capital. It’s called ROBS, which is short for Rollover for Business Startup. It allows you to use qualified retirement funds to start your business debt-free. There are no monthly payments, no income tax consequences, and no reimbursement is required. And since it’s not a loan, there are no interest expenses, which means more cashflow. As long as you have available qualified retirement savings, this business financing strategy is an option for you.

Although the governmental regulations themselves are stringent, the four steps in the ROBS process are actually quite simple. Here’s a high-level overview of how it works:

  • First, a C-corporation is formed. C corps are taxed separately from their owners, and they are the only type of company eligible for Rollover for Business Startup (ROBS).
  • Next, a retirement plan is formed for your new corporation. 401(k)s are the most common type of plan, but other options are available, including profit-sharing plans.
  • The funds are then transferred from your old retirement account into the new one. At this point, you are the trustee of your new plan, and in control of how your money will be invested.
  • Your funds are now accessible to your new C-corp. This money will be used to purchase stock in the company. It is also available for business expenses.

The ROBS process is governed by the Internal Revenue Service (IRS) and the Department of Labor (DOL). It has been in place since the Employee Retirement Income Security Act of 1974 (ERISA). Not surprisingly, the IRS has strict guidelines regarding the execution of the plans. This makes it critically important to work with an experienced and reputable funding company, not only to do the initial set up of your ROBS plan, but to provide ongoing administration.

Getting Started 

To start your journey to small business ownership, it’s smart to work with a trusted organization that’s in the business of supporting entrepreneurs. There are no shortcuts when it comes to maintaining legal compliance.

FranFund facilitates ROBS through its proven, compliant FranPlan® program, which meets all guidelines and directives issued by the IRS and DOL. To see a visualization of the process, check out this step-by-step infographic. And if you have any questions, or would like to learn more about how you can use a ROBS plan as part of your business funding strategy, we’d love to hear from you.