401k Rollover as Business Startup - ROBS May Not Be A Good Idea - How to Use Your 401k to Finance your Small Business Start Up

(January 16th, 2010)

Phoebe ChongChua (Your Financial News): With unemployment rates high and salaries dropping, many recently unemployed people are looking to start or invest in a business. The problem is that many people are getting misguided information about investing their retirement funds in to a business which may lead to robbing their retirement account before the legal distribution age of 59 and ½; learn more about 401k distributions.

This strategy is called ROBS; Rollovers of Business Start-ups.

Jeff Nabers (CEO of Nabers Group): It’s the term that the IRS came up with to describe a strategy promoted by some companies where the start up business is funded with retirement funds. It’s the Department of Labour that is able to interpret the rules about how retirement accounts are run and so a lot of my dealings with the government have been with the Department of Labour. My dealings with the Department of Labour have clearly indicated that these types of schemes are strictly prohibited and results in 100% taxation. The issue is, ROBS promoters are taking the stance that they have created something new that has never been ruled on or they’ve created a loophole. The rule of thumb is, you can’t go off with your retirement funds and do something with it that benefits you TODAY.

Investing in a business can turn a sizable profit but its best NOT to risk your retirement funds using the ROBS strategy. Instead, seek alternative options to legally create and grow your wealth. I think the benefits of growing a profitable and legally compliant business are well worth it.

Using Your 401k Plan to Fund your Business Start – Up

Here is what experts at Research 401k Rollover suggest you do if you aspire to have your own small business and would like to use your retirement funds for funding. First, 2 words of caution:

i) First you need to check your 401k program allows 401k loans from your 401k to start up a small business. The best way to check this is to ask your 401k program administrator.

ii) Second is that the rate of return that you expect from your business will exceed the rate of return that you are currently getting on your 401k plans’ investments.

If you manage to withdraw funds from your 401k plan to finance your business, you have 2 options for financing your business:

i) Use your 401k funds as direct working capital for your business. Examples of this include buying your inventory, equipment, marketing billboards, etc.

ii) Alternatively, you could use your 401k funds as collateral to borrow money to finance your small business.