Few old saws have survived the test of time better than “things that appear to be too good to be true usually are.” And that’s the usually reliable adage that the Internal Revenue Service applies to Rollovers as Business Start-Ups (ROBS). In fact, the best thing that the IRS has ever publicly said about ROBS is that they are not “per se” non-compliant. That’s faint comfort for the faint-hearted, but tax professionals say that the IRS has recognized that a properly structured and administered ROBS plan can serve legitimate tax and business planning purposes.
- The prospective business owner forms a new corporation,
- The new corporation adopts a prototype 401(k) plan that specifically allows plan participants to direct the investment of their plan accounts into a selection of investment options, including the stock of the new corporation,
- The prospective business owner then elects to participate in the 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly established corporate plan,
- The prospective business owner then directs the investment of the 401(k) plan account to purchase the newly issued stock of the new corporation, and
- The company uses the proceeds from the sale of the stock to invest in the start-up or acquire an existing business.
This article should not be construed as legal or tax advice or a legal or tax opinion on any specific facts or circumstances. The contents are intended for general information purposes only and you are urged to consult your own legal, financial and tax experts concerning your own situation and any specific questions you may have.
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