Most of us think of retirement accounts like 401(k)s and IRAs as untouchable until we’re older. But did you know there’s a way some entrepreneurs tap into that money to launch a business? It’s called a ROBS, which stands for Rollover as Business Start-Up.
A ROBS lets you use retirement funds to invest in your own company without taking out a loan or paying early withdrawal penalties. It sounds exciting, but it comes with rules, risks, and IRS oversight.
Sam’s Story: From Retirement Account to Pizza Shop
Let’s imagine Sam.
Sam has always dreamed of opening his own pizza shop. He has $150,000 saved in his 401(k) from years at his corporate job. Instead of applying for a bank loan, Sam learns he can roll over that money into a new retirement plan for his company, and then use that plan to buy stock in his pizza shop. Suddenly, Sam has the cash he needs to buy ovens, hire staff, and open his doors without borrowing.
It feels like a dream come true. But here’s the catch:
- If Sam’s business fails, his retirement savings go with it.
- The setup must follow strict IRS rules, or Sam could owe big taxes and penalties.
- Sam must run his company in a way that treats the retirement plan fairly, not just as his personal bank.
Sam succeeds because he hires experts to set everything up correctly, keeps good records, and understands the risks. But for every Sam, there are others who lose both their business and their nest egg.
Why the IRS Cares About ROBS
The IRS is running a compliance project to make sure these deals are handled properly. Why?
- Rule-following: If the plan isn’t structured correctly, it’s treated as an early withdrawal. That means taxes and penalties.
- Fairness: Retirement plans are supposed to benefit all employees, not just the owner.
- Risk: Too many people wipe out their retirement savings on failed businesses.
In short, the IRS wants to be sure people like Sam know what they’re getting into.
Should You Use a ROBS?
ROBS aren’t bad or illegal. They can be a powerful tool for the right person with the right plan. But they’re not for everyone.
You should consider:
- Do you want to risk your retirement savings on a business idea?
- Can you follow the strict IRS rules (or pay professionals to help)?
- Would a traditional loan, investor, or other funding option be safer?
Final Takeaway
A ROBS can turn your retirement savings into business capital without debt, but it’s not a shortcut to guaranteed success. For entrepreneurs like Sam, it can open doors. For others, it can close the door on both their business and retirement future.
Before making this move, talk to a qualified financial or tax professional. Your future self will thank you.
