Rollover for business startups (ROBS): using retirement money to buy a business
Short answer
A rollover for business startups (ROBS) lets you use retirement savings to buy or start a business without paying tax or early-withdrawal penalties at the start. You form a C corporation, it sponsors a new retirement plan, you roll your existing funds into that plan, and the plan buys stock in the corporation. The corporation then uses the cash, often as the equity for an SBA loan.
The IRS doesn't treat ROBS as an abusive tax shelter but calls them questionable, and its compliance project found most ROBS businesses it reviewed had failed or were heading that way. Get specialist advice before using one.
ROBS is aggressively marketed to people who have retirement savings but not much other cash. The pitch is simple: use your 401(k) as your down payment, no tax, no penalty. What the pitch leaves out is that you're betting your retirement on one small business, and taking on a set of compliance obligations most owners don't understand. Not tax, legal or investment advice.
How the structure works
Who ROBS can suit, and who it usually doesn't
ROBS can make sense for a buyer with substantial retirement savings, other assets to fall back on, strong confidence in a specific business after full diligence, and willingness to pay for proper ongoing plan administration. It usually doesn't suit someone using most of their retirement savings as the only source of equity for a first business, someone who can't afford the annual compliance cost, or a buyer who hasn't verified the earnings. The question to ask yourself: if this business failed, could I rebuild my retirement savings? If not, look harder at a smaller deal or other equity sources.
What the IRS found
The IRS started a ROBS compliance project in 2009. Its published findings are worth reading before you sign anything:
- ROBS plans aren't considered abusive tax avoidance transactions, but the IRS calls them questionable because they may solely benefit one person.
- A favorable determination letter on the plan's terms doesn't protect you if the plan is operated incorrectly.
- Most ROBS businesses in the project had failed or were on the road to failure, with high rates of bankruptcy, liens and dissolutions. Some people lost both their retirement savings and their business.
- Many sponsors didn't file required returns (Form 5500 or 5500-EZ for the plan, Form 1120 for the corporation), often because they didn't understand the plan is a separate entity.
- Large recurring promoter fees were a factor in some cases.
Pros and cons
Why people use it
Access to retirement funds without immediate tax or early-withdrawal penalty. No loan payments on the ROBS money. Can count as equity in an SBA deal.
Why to be careful
Concentrates retirement savings in one small business. C corporation required. Ongoing plan administration and filings. Disqualification risk if done wrong. Setup and annual fees.
Before you consider it
- Verify the business's earnings thoroughly; you're putting retirement money behind them. Start with SDE and proof of cash.
- Get advice from an ERISA attorney or CPA who isn't the ROBS provider.
- Ask your SBA lender how a ROBS affects processing; the SOP routes some loans involving 401(k) or ROBS plans to non-delegated SBA processing.
- Compare with other equity options: SBA equity sources, investors, or a smaller deal.
How ROBS interacts with SBA financing
Lenders often accept ROBS funds as part of an equity injection, because the money is invested in the company's stock rather than borrowed. The lender will want documentation of the plan, the rollover and the stock purchase, and the structure must fit the SOP's ownership and guarantee rules. Remember the ownership effect: the retirement plan owns stock in the company, so ownership percentages, guarantees and who must sign can be affected. Ask your lender early whether they finance ROBS-structured buyers and what they require, and have your own CPA or ERISA attorney review the provider's documents.
Worked example: the trade-off in numbers
Illustrative example, not tax or retirement advice
You have $180,000 in a 401(k) and $40,000 of other savings, and want to buy a business with a $1,100,000 project cost. Minimum SBA equity is $110,000. Option A: use $110,000 through a ROBS structure, keep your $40,000 as a personal reserve, and leave $70,000 in retirement accounts. Option B: cash out $110,000 from the 401(k) directly, paying income tax and, if you're under the age threshold, an early withdrawal penalty, which could take a large share of it and leave you short of the injection. Option C: buy a smaller business you can fund from savings and a standby seller note. ROBS avoids the up-front tax, but your retirement money becomes stock in a C corporation that owns the business. If the business fails, that retirement money is lost, and you also carry ongoing plan administration, annual filings and fees. The IRS's compliance project found many ROBS businesses had failed or were failing. Compare all three with an adviser who isn't selling the ROBS structure.
Questions to ask a ROBS provider
- What do you charge up front and every year, and what does each fee cover?
- Who prepares the plan's annual filings and the company stock valuation?
- How will other employees be offered the plan, and what will that cost?
- What happens to the plan and its stock if the business is sold or closes?
- Which lenders have accepted your structure for SBA equity, and what did they require?
- Will you put in writing what you're responsible for if the IRS examines the plan?
Red flags in ROBS offers
- A provider who says the structure is "IRS approved" because the plan document has a determination letter; the IRS says that doesn't cover how the plan operates.
- No clear explanation of annual filings (Form 5500 or 5500-EZ for the plan) and who prepares them.
- Large ongoing fees for plan administration.
- Using ROBS to pay yourself in ways that could be prohibited transactions.
- No plan for other employees, who may have to be offered the plan.
Ongoing obligations after closing
A ROBS structure isn't a one-time transaction. The corporation sponsors a retirement plan, and that plan has to be operated properly for as long as it exists. That generally means an annual Form 5500 filing for the plan, keeping the plan open to eligible employees, valuing the company stock the plan holds, and paying administration fees every year. The IRS has flagged failures in these areas in its compliance work. Ask any provider which of these they handle, what they cost each year, and what happens to the structure if you later sell the business or close it.
Before choosing ROBS, compare it with the alternatives in writing: a smaller deal, a partner, a seller note on standby or a personal loan repaid from outside the business. Put each option's cost, risk to your retirement and effect on loan approval side by side, and review the comparison with a CPA who doesn't sell ROBS.
Ask the provider for a written fee schedule covering every year, not just setup.
Frequently asked questions
Is ROBS legal?
The IRS says ROBS plans are not considered abusive tax avoidance transactions, but they are questionable because they may solely benefit one individual. A plan can be disqualified if it's operated in a discriminatory way or engages in prohibited transactions, with adverse tax consequences.
Can ROBS money be used as an SBA down payment?
ROBS funds become equity in your corporation, and lenders often accept them as part of the equity injection. Loans involving a ROBS plan may need non-delegated processing by the SBA, which can affect timing. Ask your lender.
What does a ROBS cost?
Providers charge setup fees and ongoing administration fees, and the plan has annual filing requirements. The IRS noted that large recurring promoter fees were a factor in some failures.
What happens if the business fails?
The retirement money invested in it can be lost. The IRS's ROBS project found cases where people lost both their retirement savings and their business.
What ongoing obligations come with a ROBS?
The C corporation sponsors a retirement plan that must be operated under the plan rules: annual filings (Form 5500 or 5500-EZ), valuing the company stock the plan owns, offering the plan to eligible employees, and avoiding prohibited transactions. The corporation also files its own corporate tax returns. Budget for administration fees and professional help every year.
Does ROBS money count as SBA equity?
Lenders often accept ROBS funds as equity because they're invested in the company's stock rather than borrowed, subject to documentation of the plan and the rollover. Ask your lender before you set up the structure, since lender policies vary.
Sources
- IRS: Rollovers as Business Start-Ups Compliance Project
- IRS: ROBS guidelines (memorandum, PDF)
- SBA SOP 50 10 8.1 (401(k) and ROBS plans; delegated processing limits)
- Cornell LII: 26 U.S.C. 4975 (prohibited transactions)
- IRS: About Form 1120-S (S corporations can't be used for ROBS, which needs a C corporation)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.