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ROBS funding source


Henry Zephyr

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I know that ROBS arrangements aren't really all that well thought of around here, and there does seem to be some sleight of hand involved in how the actual plan can be initially started (business valuation, for example), and there are certainly enough on-going potential PT and other (5500, ERISA bond, etc.) compliance issues that it could be problematic,  but it _may_ be that I am actually in a position where a ROBS might make sense.

One issue, though, is that some promoters, such as mysolo401k, claim that you cannot use Roth 401K funds for the initial investment, and other promoters, such as guidant, claim (obviously correctly because of well-known rollover rules) that you can't start with a Roth IRA, but also claim that a Roth 401K account would work as a funding source.

Several articles about the process also parrot mysolo401k's claim.  I'm trying to figure out if they really found a legal issue with buying QES with 401K Roth account funds, or they just don't want to go to the time and expense of modifying their plan documents.

For me, it certainly wouldn't make sense to do this if I couldn't use 401K Roth account funds, because, as some clever commenter (sorry, forgot who!) around here wrote: "Congratulations!  You just converted capital gains into ordinary income!"

But I'm 62, I have skills that I could utilize on my own (no other employees) without any help to bring in some reasonably significant income with very little capital investment, I have savings that I can live off of (including some non-Roth IRAs I could be drawing down if I am showing very little W2 income from a business), and I have a well seasoned Roth IRA.

So, in theory, it seems that if the ROBS 401K plan documents allow partial in-service distributions, I could continuously roll over corporate dividends received by the 401K into the Roth IRA, where they could be reinvested at a brokerage and/or removed and spent at will.  And if the 401K plan documents allow distribution of plan assets without conversion to cash, I could, after 5 years, distribute the company stock to myself with no tax consequences, which would simplify the chicken and egg problem of needing correct valuations to sell the business out of the 401K plan, because, at that point, it would simply be like a zillion other solo 401K plans.

At current corporate tax rates (and Texas's low franchise tax rate), with no further taxation on the dividends, that seems like a pretty good deal.  There are even some other tax planning opportunities, due to the greenfield nature of starting something up.  For example, if valuation is set to par for injected cash, a contemporaneous co-investment could be immediately gifted to a trust, or directly to grandchildren, at well below any valuation that would trigger gift taxes or GST.

But of course, if an idea seems too good to be true, that means it's time to invite others to throw rocks at it.

So thanks in advance for any boulders you can provide.

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If you are trying to roll from ROTH-IRA to ROBS plan the IRS does not allow ROTH-IRA -> Qualified Plan.

If you are trying to roll from ROTH-401(k) -> ROTH-401(k) the IRS does allow that as a direct trustee to trustee transfer but the accepting plan has to also allow it so that may be the limitation your are hitting.

ROBS are not my thing. As to the rest of your situation I have no comment as it's not my area.

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