*Please remember that we are not financial advisors, accountants, or tax attorneys. If you still have questions about ROBS financing, you need to contact your financial advisor, accountant, or a tax attorney in your area.
Some gym owners consider using their retirement savings to fund their new gym. Rollovers as Business Startups (“ROBS”) transactions offer a tax-free way to move money from a retirement account into your new business. However, it’s important to understand the potential risks and complexities involved. In this article, we’ll delve into how ROBS works, help you evaluate whether it’s suitable for your new gym, discuss the associated risks, and explore alternative options.
How ROBS Works:
In a ROBS transaction, funds from eligible retirement accounts, such as a 401(k) or traditional individual retirement account (IRA), are rolled over and invested in a new business or franchise. Here’s a step-by-step breakdown of the process:
- Form a C corporation, which allows shareholders.
- Create a new retirement plan specifically for the new corporation.
- Become an employee of the C corporation and the beneficiary of the new retirement plan.
- Roll over funds from your existing retirement accounts into the new retirement plan.
- Use the rolled-over funds to purchase company stock in the C corporation.
- Utilize the proceeds from the stock sale to fund your business.
Benefits and Eligibility:
ROBS allows you to access your retirement savings without incurring taxes or penalties associated with early withdrawals. By directly rolling over funds, you can safeguard your retirement savings while investing in your gym. ROBS may be suitable for your business if you meet the following criteria:
- Possess significant retirement savings.
- Lack eligibility for other types of financing.
- Prefer not to take on debt.
Potential Risks of ROBS Financing:
It’s crucial to consider the risks involved with financing your gym through ROBS:
- Retirement at risk: If your gym fails, you may lose your retirement savings. Additionally, even if your gym succeeds, you’ll miss out on potential gains from the stock market and the tax-deferred savings of a retirement account.
- Operating as a C corporation: A C corporation structure necessitates tax payments on profits and dividends, annual shareholders meetings, and specific tax filing requirements, which can be complex and require professional assistance.
- Fees and administration costs: ROBS transactions involve setup fees and ongoing administration fees, which can add up over time.
- Beware of noncompliant plans: The IRS has identified cases of noncompliance, including high fees, aggressive marketing, and failure to file or issue required tax forms.
Alternative Financing Options:
If you’re hesitant about using your retirement savings, here are some alternatives we learned from other new gym owners. Keep in mind, each one has a list of pros and cons just like those above:
- Personal business loan: This type of loan utilizes your personal credit history to fund your business. However, be aware that you’ll still be responsible for repaying the debt if your business fails.
- Business credit cards: Ideal for startups, business credit cards are issued based on personal financial history and can provide flexible funding. While they may not cover long-term expenses, they can help bridge financial gaps in the early stages of your new gym.
- Equity financing methods: Explore avenues such as raising capital from friends and family or seeking investment from angel investors to avoid taking on debt and leveraging your personal financial security.
While ROBS transactions offer a tax-efficient way to fund your business using retirement savings, they come with potential risks and complexities. It’s crucial to evaluate whether ROBS financing aligns with your financial goals and risk tolerance. Before proceeding, consult with a financial advisor, accountant, or tax attorney and explore alternative financing options that suit your specific business needs. Remember, it’s essential to protect your retirement savings safety net while pursuing your entrepreneurial dreams.