Understanding Rollovers As Business Startups (ROBS)

Looking for business funding? A Rollovers as Business Startups plan (ROBS) is a financing option for your small business that you might not know much about.

If you have a retirement account, read on to learn more about how you can use this account to start or grow your small business.

What Is ROBS?

Rollovers for Business Startups plan — or ROBS — is a type of transaction you can use to fund your new or existing business if you can’t take out a loan or work with outside investors.

This method of funding your business does not involve borrowing money. Instead, you are rolling over funds from your IRA, 401(k), or another retirement account to use as financing for your business.

Since you aren’t borrowing or cashing out your retirement account, ROBS allows you to invest your retirement funds without being penalized.

A ROBS transaction is a financing choice for many entrepreneurs who don’t qualify for startup loans or traditional financing.

How A ROBS Plan Works

A ROBS plan is a complicated transaction, which is why most people who choose this funding avenue work with an attorney or a ROBS provider. However, even if you work with an expert, it’s important to understand how the process works.

Who Qualifies For A ROBS?

Anyone with an eligible retirement plan qualifies for a ROBS plan as long as they meet the following requirements:

• The retirement plan can’t be from your current employer
• You must be a legitimate employee of your business (around 1,000 hours per year)
• You must meet all requirements of your chosen ROBS provider

The most common retirement plans used for this purpose include 401(k) plans, 403(b) plans, and defined contribution plans like Traditional IRAs, Simplified Employee Pensions, and Thrift Savings Plans. You may also use a combination of qualifying plans.

Most employers will not allow you to roll over your account while you’re still working for them. However, plans from prior employers, your own 401(k), or self-directed IRAs are eligible to roll over.

If committing at least 1,000 hours a year to your business doesn’t work for you, consider other financing options for your business.

Some ROBS providers have requirements related to the minimum amount of money in your retirement fund, how you’re using the funds, and the type of retirement account you plan to roll over. Before selecting your ROBS provider, understand their requirements. We’ll offer up provider recommendations a little later in this article.

Pros & Cons Of Using ROBS

Approached correctly, a ROBS can be a financially savvy move.

However, it’s also important to understand that there are drawbacks to using ROBS. Before you dive in, weigh out the pros and cons to determine if this is the right financial solution for your situation.

Other Ways To Get Startup Funding

A ROBS is not going to be the right choice for every new business owner. If you don’t have a retirement account, the one you have is offered through your current employer, or you don’t want to risk losing your retirement funds to start your business, there are plenty of other startup funding options for you to explore.

Some options you can consider when looking for startup funding are:

Is A ROBS Right For Your Business?

Even if you decide not to pursue a ROBS, it’s good to know that it is an option in the future if you are ever in need of a cash injection into your business.

If you have a qualifying retirement plan, you’ve reviewed the pros and cons, and you don’t want to deal with the hassle of securing a traditional business loan, ROBS might be the perfect option for your business.

Need to fund a smaller project ASAP and don’t want to deal with a lengthy application/distribution process? Check out our favorite credit cards for small businesses and startups.