Using your retirement savings to fund a business is a multi-step process that must be followed carefully and Business Funding Trust is here to help. The good news is that the process is well-established and predictable. When done correctly, it is entirely legal and avoids the taxes and penalties that come with a standard early withdrawal. Here is a step-by-step overview of how the Rollover for Business Startup (ROBS) process works.
Step 1: Form a C Corporation. ROBS requires a C corporation as the business entity. S corporations, LLCs, and sole proprietorships do not qualify. The C corporation is formed in your state of choice and you become its initial director. This entity will eventually employ you and sponsor the retirement plan.
What You Need to Know
Step 2: Establish a New 401(k) Plan. The C corporation creates a qualified retirement plan — a 401(k). This plan must meet IRS requirements and be made available to all eligible employees, not just the owner. Plan documents are created by a ROBS provider.
Step 3: Roll Over Your Existing Retirement Funds. Your existing 401(k), IRA, or other eligible retirement account is rolled over — not withdrawn — into the new corporate 401(k) plan. Because this is a rollover and not a distribution, no taxes or early withdrawal penalties apply.
Step 4: The Plan Purchases Stock in the Corporation. The new 401(k) plan uses the rolled-over funds to purchase shares of the C corporation. This is the core transaction that makes ROBS work — the retirement plan becomes a shareholder of your business.
With the stock purchase complete, your C corporation now has operating capital. These funds can be used for business expenses, leases, equipment, payroll, franchise fees, or any other legitimate business cost.
Each of these steps are provided by a ROBS provider.
Ready to Take the Next Step?
Ready to explore whether your 401(k) can fund your entrepreneurial dream? Contact Business Funding Trust today for a free consultation. Our specialists can walk you through your options, help you understand the process, and lead you to a successfully funded business.
