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What is the ROBS (QES) Transaction?

November 04, 2020

In the simplest of terms, the Rollovers as Business Start Ups (ROBS) transaction is a funding vehicle with a built-in tax shelter. It is mostly used by individuals who want to use their retirement savings, such as their 401(k), to fund the startup of a new business venture, or buy or grow an existing business. However, the ROBS transaction is a tricky beast as there are specific steps that need to be followed to not only implement the transaction but also to continue in remaining compliant with federal laws and other government agencies over time.

Here are a couple of examples of why someone would want to use a ROBS transaction.

Example 1: New Business Venture

Susan is an entrepreneur and wants to open a specialty Mexican bake shop that she believes will bring a unique yet substantial value to an underserved population in her area. She eagerly puts her business plan together and begins shopping around to various banks attempting the traditional route for funding a business startup: SBA loans, personal loans, etc. However, what she finds is that she is denied time and again for various reasons: no experience in business, no collateral, whatever.

She thought about using her own money to start her company, but she has very little available savings, and most of her assets are tied up in a 401(k) plan from the company she had previously worked for. She thought about withdrawing money from the 401(k) but knew she would incur heavy penalties and would ultimately loose a large chunk of her 401(k) savings, and she would need most of it if she wanted her dream of a bakery to come to life.

You probably already guessed it, this is where the ROBS transaction comes in to play. Working with a licensed Promoter, which could be any company or individual that markets and/or sells a tax shelter (though beware, not all promoters are licensed and knowing how to select a ROBS promoter is paramount in staying compliant with government regulations), the promoter will design the ROBS transaction to allow Susan to use her pre-tax 401(k) monies to fund her business startup without paying any taxes, thus avoiding the hefty penalties she would have incurred if she had withdrawn the money from her 401(k) directly.

Example 2: Growing an existing business

John has been in the gourmet popcorn industry for five years now and his financials year after year keep indicating that his company is ready for growth. Though his revenues have increased every year, so too has his expenditures. He has found himself in a situation where he can’t take his company to the next level without an infusion of capital to expand into another warehouse. He attempts the traditional route for financing, the same as Susan, but even though he has a successful business and a steady track record of increasing revenues every year, the banks deny him because they are worried about the increase in his company variable expenditures.

John goes to his financial advisors and asks what is the best way for him to use his own money to fund the next level of growth for his company. His financial advisor mentions using a ROBS transaction as a possible alternative to traditional funding. Like Susan from our first example, John uses a licensed Promoter that designs the ROBS transaction to use the pre-tax monies from his Defined Benefit Plan to fund the capital expenditures needed to grow his company without paying any taxes.

These simplified examples above with Susan and John are just to demonstrate scenarios where a ROBS transaction could come into play for individual circumstance. There are other numerous situations in which a ROBS transaction could also work, but we recommend working with a licensed Promoter to figure out if this is the right path for you.

For more information regarding the ROBS strategy, check out our other ROBS Articles or our main ROBS Page. If you’d like to learn more about other strategies for financing your business, including the ROBS strategy, check out our friends over at 401K ROBS PROS!

For more tips and information regarding retirement plans, contact us.

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