Why NOW might be a good time to use your 401k to fund a business or franchise purchase
Posted 11.1.2023 in ROBS
Are you contemplating buying a business or franchise? Are you unsure about how to fund your purchase? As the economy begins to rebound, many people are reconsidering their career options and seeking ways to leverage their existing assets to make their business ownership dreams a reality. With interest rates climbing, more expensive debt is not an attractive option for financing and your new business may not be able to service the debt. With market volatility, investments in your 401k may not generate growth and could result in losses to your 401k.
Fortunately, there is a funding option that has been used for many years that can leverage an existing asset that you may not have considered: your 401k. The ROBS (acronym for Roll Over Business Startup) has been successfully used by entrepreneurs to fund business/franchise purchases for many years. There has never been a better time to consider using a ROBS to finance a business start-up or acquisition.
Key aspects of the ROBS 401k funding option:
- Instead of investing your 401k in the market, you can invest in yourself by investing in your business.
- ROBS is an arrangement allowed by the IRS and ERISA in which prospective business owners use their retirement funds to pay for new business start-up costs or to finance an acquisition of an existing business.
- Owners roll over money from a 401k or traditional individual retirement account (IRA) into a 401k plan owned by a newly created business entity that can be used to start-up a new business/franchise or to acquire an existing business or franchise. In many cases, owners may not require outside financing and can therefore avoid paying associated interest payments.
- No penalties or taxes exist for rolling over these funds since you are not making a withdrawal, but instead you are rolling over the funds from one qualified retirement account to another.
With interest rates rising over the last few years, starting or buying a business with less debt can make a lot of sense. Working with an expert to understand the pros/cons as well as the associated accounting and compliance requirements of the ROBS 401k is critical to making it work effectively for your business.
If you have set-up a ROBS and you are looking for expert compliance, bookkeeping and tax support for your ROBS, please contact Attaway Linville today at 803-831-0263 or 404-607-8400 to learn more about how we can help.