It’s not surprising that most startups struggle to find to funding for their fledgeling business. But did you know that one way you could obtain financing is through ROBS or Rollovers as Business Startups? You dip into your retirement funds and use the money for your startup costs.
How Rollovers as Business Startups Work
With ROBS, you incorporate your new startup and establish a retirement plan. You and your partners in this new C corporation could then roll over your existing IRAs or 401ks into the new retirement account under your startup name, and you won’t have to pay any taxes on it. After this rollover, your new corporation then employs an eligible employer securities transaction to permit the retirement fund to purchase shares, which in turn puts money in your startup.
Aside from providing financing, ROBS also enables you to avoid potentially high loan payments while you’re business is jus starting out. However, while the Internal Revenue Service (IRS) allows startups to obtain funding from retirement funds, you should also follow to all tax requirements and rules applicable to your specific circumstances to avoid costly penalties, warns a business accountant from a top accounting firm in Utah. You must likewise ensure that you have a solid business plan to avoid the risk of losing your retirement funds.
Also, using ROBS could expose your startup to hefty fees if the IRS rule to tax your funds. Likewise, you must make certain that your ROBS stay qualified retirement accounts and are not used for covering your salaries.
The Bottom Line
Using ROBs for financing your startup could seem like a viable option, but you have to ensure that adhere to each and every requirement imposed by the IRS to avoid costly taxes. If you’re considering using your retirement funds for your startup, think plenty of times before doing so and make sure that you understand the legalities and potential risks in case your startup fails.