Tax Litigation Law Office of Scott Kauffman
(949) 474-1820

Hackney Literary Award
Mighty River Short Story Contest Winner

Tapping retirement accounts for start-ups: the tax implications

Acronyms are ubiquitous in our complicated times. At their best, they provide a useful mental shorthand for long and multi-syllabic names and terms.

Sometimes, however, these acronyms have unfortunate connotations. The word that the letters of an abbreviation spell may not necessarily imply what someone who uses those letters really intends.

Consider, for example, the term ROBS, which stands for "roll-overs as investment start-ups." In this post, we'll look at some of the tax implications of this procedure.

The acronym for the procedure is a bit unfortunate because the people who use it probably do not think of it as robbing their own retirement accounts. The increasing popularity of the procedure has been driven by the dynamics of the (relatively) jobless recovery.

With so few old-fashioned jobs with benefits available, more and more people have gone out on their own as entrepreneurs. And many of them have tapped into their retirement accounts, or those of people they know, through the ROBS procedure. They use the procedure to provide the upfront funding to go into business.

The IRS is not the only federal agency that has been monitoring this trend. The labor department is involved as well because it has the main responsibility for the regulation of 401(k)s.

But the IRS definitely has a role. If a ROBS transaction is not structured properly, the result could be a big tax bill for tapping the money from a retirement plan all at once.

On paper, a ROBS involves someone taking their qualified retirement account and rolling it over. The rollover is into a new account that buys shares in a new operating company. It is this new company that will own the startup business.

This is a rather different structure than most small businesses use. It is not an LLC or an S-corporation. Instead, ROBS are C-corporations, which means they can be owned by trusts.

Source: The New York Times, "Financing Start-up Dreams With Retirement Savings," Paul Sullivan, September 13, 2013

No Comments

Leave a comment
Comment Information