Do you need alternative funding for your business? There are two arrangements that can make it possible:
Self-directed IRAs are passive investment vehicles. Under Internal Revenue Code 4975 (c)(1)(A-F) — also known as prohibited transactions — it clearly states that an individual (disqualified person) cannot interact with the assets of the plan, meaning they cannot be involved in running the business in which they choose to invest.
Other guidelines related to self-directed IRAs include:
These regulations make self-directed IRAs ideal for those looking only to invest in a business without any disqualified persons as shareholders, and where they won’t be involved in the business’s operation.
Rollovers as Business Start-ups (ROBS) - A Better Option
For those wanting more control over the business they invest in, a ROBS arrangement can be a much better plan. Using 401(k) business financing, you can use funds from an eligible retirement account to invest into a business or franchise without incurring any taxes or penalties — and you can work for the business. In fact, under ROBS regulations, an individual must be involved in the business as a bona fide employee.
401(k) business funding is made possible through exemptions Congress made to the prohibited transactions rules to encourage investments in small businesses, and they require a different structure than a passive investment through a self-directed IRA.
Here’s how the ROBS structure works:
Other rules related to the ROBS arrangement include:
While self-directed IRAs can be a good option for those who aren’t interested in being directly involved in running a business, a number of rules and regulations apply to this method of financing that can make the transaction difficult.
ROBS arrangements, on the other hand, are explicitly for entrepreneurs who want to invest in a business or franchise they control and for which they can work. Both come with ongoing responsibilities one must consider. Feel free to contact us if you have questions on how these two business funding options can work for you.
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Friday 8:00 am - 5:00 pm
Saturday 9:00 am - 12:00 pm
Robert W. Morris & Company, PC
19 E Main St, PO Box 68
New Bloomfield, PA 17068