Your Guide to Using 401k to Start a Business

Are you eager to buy a business but not sure how to secure the necessary funds? Surprisingly, the answer may lay at the point of your entrepreneurial journey you have yet to think about, your retirement. Using 401k to start a business is a funding option that’s often overlooked. It can provide the financial boost you need without the downsides of taking out a loan. Keep reading this guide to learn about ROBS, a popular 401k financing method, and how you can use it to fund your purchase.

What’s ROBS?

ROBS, or Rollovers for Business Startups, is a strategy that allows you to use the funds from your 401k to finance your business transaction. Instead of taking out a traditional business loan, ROBS enables you to roll over your retirement savings into a new 401k plan established for your business. This means you can access your retirement funds without paying taxes or penalties, providing you with a tax-deferred financing option to kick-start your entrepreneurial journey.

To be qualified for ROBS, you need to:

• Have an eligible retirement account
• Have a registered C-Corp
• Offer a retirement plan to eligible employees
• Have enough assets in your account

How to Use 401k to Buy a Business Using ROBS

While you could also take a loan out against your account or make a withdrawal, ROBS is typically the most logical option for buyers that want to utilize their 401k. By leveraging ROBS, you can sidestep traditional loan requirements and withdrawal penalties, taking control of your finances and future. Here’s how to use 401k to buy a business in four steps.

1. Create a C-Corporation

A C-Corp is a legal business structure that separates the business entity from its owners. You need to register your business as one in order to have the necessary framework to properly manage your retirement money. Since a C-Corp is its own entity, it can act as the recipient of rollover funds, allowing you to separate and safeguard your personal assets from business ones. It also provides liability protection and ensures legal compliance.

2. Establish a New 401k Plan

Once your C Corporation is in place, you’ll need to create a retirement account for it so your rollover funds have a place to go. The plan you choose has to be one qualified by the IRS. This could be another 401k, but you can also choose from a 403B, Thrift Savings, Keogh Plan, and more.

3. Roll Over Your Funds

Next, you can transfer the funds from your existing 401k into the business’s newly established plan. This ensures that your retirement savings become available for investment in your business.

4. Buy Stock in Your Company

Now that you’ve rolled over your funds, you can invest from the retirement account into the C-Corp. You’ll do so by buying stock. Buying stock allows you to become a shareholder, gain ownership of the business, and use your retirement funds to directly support the acquisition of the business and start building its value.

Explore Your Financing Options With Help From the Experts

While Rollovers for Business Startups have advantages, it’s crucial to thoroughly explore all your financing options before making a decision. You’ll also want to work with a professional, like a financial advisor or an experienced ROBS provider, while doing so. By taking a comprehensive and informed approach, you can make the best decision for your financial future and set yourself up for success as a business owner.

Don’t know where to start? Sunbelt has a team of experienced brokers ready to guide you through a successful transaction. Find a location near you today to get in touch with our team!