401K ROBS
The good, the bad, the ugly, and the choices
As mentioned previously, here and here, using a 401K ROBS approach is a phenomenal way to fund a business acquisition.
The Good
My plan originally was to take the pre-retirement withdraw penalty of 10% and pay the tax on my retirement withdraw, which would probably put me in the 37% tax bracket, hence after state taxes were paid I would be looking at less than half the money. Then, thanks to this newsletter and my sister, I discovered the 401K ROBS.
The 401K ROBS allows one to roll over the money, which is a non-taxable event, into your own 401K plan where you can use the money to start or acquire a business. This means I can use 100% of the money without penalty or taxes.
The Bad
Setting up a 401K ROBS requires the business to be a corporation (c-corp). This has tax implications and sale implication if one decides to sell the business. Most small businesses avoid c-corps unless the liability needs require it, and the double tax. This is a really unfortunate reality that to do a ROBS transaction you have to be a c-corp.
It also puts additional restrictions on the business, such as, only allowing a vehicle to be bought for the business if it is necessary and ordinary for the business. Some business owners buy a vehicle for advertising, and hang a magnetic sign on it. Then they can claim it as a business expense, and thus not pay tax on it. With the ROBS structure, this is carefully scrutinized, and having the IRS determine you engaged in a prohibited transaction will really cost you a lot more than the tax on a vehicle.
The Ugly
Setting up a 401K ROBS is rather complicated. There are a ton of steps, and depending on your provider can be really difficult to figure out.
Maybe Most of the Steps
Sign up for service of your choice
Online Application
401K Business Financing - Engagement Agreement
401K Business Financing - Client Certification
401K Business Financing - Credit Card Form
Review key setup documents and confirm understanding of the limitations
The docs above are used to file with the state of my choice for where the c-corp will be established
Forward all emails from the state to the provider so that can track the formation process
Get an employer identification number (EIN) from the IRS for the c-corp
Establish a corporation bank account
Draft new 401K plan and establish an account for the new 401K plan
Work with my old employer 401K plan to roll the funds to my new plan
This has been quite a process, first calling them and spending 20 minutes on hold
Then providing explicit instructions to roll out only a portion of my plan
Get my former employer approval through another form
Wait 3 days for a form that requires a notary and my wife’s signature
Overnight this to my current 401K plan
Wait for the physical check to arrive in my mailbox
Transfer existing retirement funds to the new plan and wait at least 10 days
Fund the purchase of the business with the funds in the plan
The Providers
As mentioned previously, I interviewed three different providers:
Guidant - Largest 401K ROBS firm
Benetrends - Oldest 401K ROBS firm
Mysolo401K - Smaller and more personal service
Of all the providers, Mysolo401K was the fastest to answer all of my questions, and I had a lot of them. Guidant pushed me around to several folks before answering most of my questions, which left a bad taste in my mouth. Benetrends was slow to respond, but when I did get on the phone they answered all of my questions. From second hand experience, both Benetrends and Guidant left other searchers wanting more help, and this with my first-hand experience of talking to them made my choice easy. I chose Mysolo401K as I had spoken to the owner, George Blower, and was satisfied with the answers provided.
Currently, I am a little more than halfway through the process and at this point believe I made the right choice. George and his team have provided me with explicit instructions to walk me through this process. They continue to answer all my questions, and have made this process smooth, even if long. They all said it could be done in 4 weeks, but that likely might only have happened once. The delays depend on the current 401K plan, former employer, the postal service, etc. Mysolo401K has been quick, and so have I in processing all the paperwork.
To give you a comparison, I spoke with an entrepreneur who used Guidant. He warned me that they would not establish the 401K account, that it was up to me to call the list of providers that they provided. He stated that most of the providers did not even understand what he was trying to do, and he finally found Schwab that helped him set it up. Compare that to mysolo401K who sent the form prefilled for a Schwab account that only required me to sign it, which they provided explicit instructions that it could not be an electronic signature. I then returned the form to them, and they faxed it in, and provided me with the confirmation that Schwab received it along with instructions for the next steps with screenshots.
Unlike Guidant, I don’t get any kickbacks for recommending Mysolo401K, but I strongly recommend them.
The result
Had I gone with my original plan of withdrawing my retirement, my retirement account would be near zero. As it sits now, I have a little over half my funds remaining in my old employer plan, and the other half will be used to purchase the business. The way that I have structured the purchase, about 80% of the company I am buying will be owned by my new 401K plan, and the remainder owned by me personally. So at the end of each year if I decide to take distributions, 80% of those will go to my retirement plan account, and 20% to my personal account. If I don’t try to buy out my retirement plan ownership, in 10 years the loan will be paid off and in addition to the distributions my retirement account will own 80% of a multi-million dollar business. Talk about a great return on my investment.