ROBS (Rollover for Business Startups)

Classification C, legitimate but aggressive. Defensible, but fact-intensive and audit-attracting.

Sold as: "use your 401(k) to buy a business, no taxes, no penalties, no loan"

The IRS does not call this abusive. It calls it questionable, and its own study found most of these businesses failed and took the retirement account with them.

The pitch

Use your 401(k) to buy a business with no taxes, no penalties, and no loan. Roll the retirement funds into a new C corporation's qualified plan and have the plan buy the company's stock.

What it costs you if it is wrong

The IRS does not treat this as abusive, so the cost is rarely a penalty. Its own compliance project found that most of these businesses failed or were on the way there, and the owners lost the business and the retirement money together, sometimes before operations began. The failures it documented were unfiled Forms 5500, coverage and nondiscrimination violations from amending the plan to keep employees out, valuation problems, and Forms 1099-R never issued.

Red flags

The entity is not a C corporation
The plan is presented as available only to you
You were told no Form 5500 is required
The stock price was set without an independent appraisal
The promoter's role ends at formation
Nobody said out loud that the retirement principal is at risk

Questions to ask the person selling this

1Will the business be a C corporation?
2Will the plan be genuinely available to my employees?
3Who files Form 5500 each year, and what does that cost?
4Who performs the independent valuation of the stock?
5Are you administering this after formation, or does your role end at closing?
6If the business fails, what happens to my retirement money?

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