ROBS - Rollovers as Business Start-Ups

[Max W]

Has anyone had any experience dealing with ROBS?  What are the pros and cons?

[Lion EA]

If your biz tanks, so does your retirement.

[JohnH]

For many, if not most, situations, the acronym says it all.

More seriously, I've evaluated several of them over the years for clients contemplating doing this for franchises and rental property.  Every situation was filled with landmines and my recommendation was "if you do it, you'll need to find another tax preparer."

[JohnH]

Max: Here's an eye-opening article.  It's from 2014 and some of the interesting data from IRS dates back to 2010.  But a 50% failure rate should make anyone think twice.  PLUS, it seems that IRS considers these arrangements low-hanging fruit because there are so many ways to blow the plan up.  https://www.newsweek.com/2014/08/15/rollovers-business-startups-401k-cashing-your-401k-using-401k-start-business-262633.html

[Max W]

John thanks for the link.  The article is similar to others I have read.   Guidant claims an 80% success rate, but it makes me wonder if they are cherry picking their clients. I think the 50% success/failure rate probably includes businesses that were purchased as on-going concerns and the actual failure rate of start from scratch businesses is a lot higher.  Restaurant and contractors have about a 95% 5 year failure rate.

The scariest part is the IRS.  There are quite a few pitfalls that can sink the entire investment.    The IRS draws a good picture of this.  https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project

Investing in one's new business is always a risk and ROBS is the only way to use retirement funds, without being taxed, and there are the risk takers and doers that are willing to do it .