What is 401(k) Business Financing

[Marcus CPA]

Does anyone know if this is true and the downside if any?  

[qbteachmt]

Oh, the "downside if any" is too long to list. Here is one listing for how to do it:

How Does the Rollovers for Business Start-ups Process Work?

ROBS was made possible by the Employee Retirement Income Security Act of 1974, which passed the responsibility of saving for retirement from employers to employees. It allows new or existing business owners the ability to leverage their 401(k), IRA or other pre-tax retirement funds to start or buy a business as a means to grow their retirement investments.

The Five Basic Steps to Set Up the ROBS Structure

1. Create a new C corporation. (A C corp is the only business entity that allows for the purchase of private stock – an integral step in the ROBS transaction.)
2. The new C corp establishes a retirement plan – often a 401(k).
3. Existing retirement funds are rolled into the new retirement plan.
4. The retirement plan uses the funds to purchase stock, called Qualifying Employer Securities (QES), from the C corporation.
5. The C corporation, now cash-rich, can use the funds to start or buy a small business.

[sjrcpa]

Downside is it's a Prohibited Transaction incurring penalties and possibly disqualifying the Plan.

[ljr]

I've had a few clients think about this before but never did it. I'm pretty sure you create a c-corp which establishes a 401k plan. you then do a rollover from your old 401K to your new 401K which buys some of your company stock. Then the cash the corp gets from the stock sale in the 401k  is used to help pay to buy the business. Risk : you better hope your business doesn't fail or not only do you lose the business but your 401K value.

[qbteachmt]

There are some restrictions on using the funds, which can result in prohibited transactions. The concept itself is allowed. It is expensive; we used to laugh about it being called "ROBS" for a reason. It's sort of like a backwards ESOP.

This is not really Financing. It is an investment, and like any risky investment using retirement funds, there is a lot of due diligence to be done. The minimum is $50,000 as I recall, and the fees can be very high, not to mention that now you are running as a C Corp, which is not cheap, either.

[jeffmcpa2010]

I had a client to that (I found out after the fact.) I had never heard of it before but it seemed to work. Now all they have to do is make the business they bought in October of 2019 be successful.