How to Explain Rollovers for Business Start-ups (ROBS) to Your CPA, Attorney, and Financial Planner

How to Explain Rollovers for Business Start-ups (ROBS) to Your CPA, Attorney, and Financial Planner

Introduction

Rollovers for Business Start-ups (ROBS) is a financing strategy that allows entrepreneurs to use funds from their retirement accounts to start or acquire a business without incurring early withdrawal penalties or tax liabilities. While ROBS can be a powerful tool for funding a new venture, explaining its intricacies to your CPA, attorney, and financial planner is crucial. This article provides a step-by-step guide on how to effectively communicate ROBS to these professionals, ensuring they have a clear understanding of the process.

Step 1: Educate Yourself Before discussing ROBS with your CPA, attorney, and financial planner, it is vital to educate yourself about the concept. Familiarize yourself with the basic principles, benefits, and potential risks associated with ROBS. Conduct thorough research, review relevant IRS guidelines, and seek advice from experts in the field to enhance your understanding.

Step 2: Prepare Documentation Gather all the necessary documentation related to your retirement accounts and business plans. This includes your retirement account statements, business proposals, feasibility studies, and any other relevant financial information. Ensure that the information is organized, accurate, and up to date. This will help provide a comprehensive overview of your situation to your professionals.

Step 3: Schedule Meetings Arrange individual meetings with your CPA, attorney, and financial planner to discuss ROBS. Inform them in advance about the specific topic and request their undivided attention and adequate time for the meeting. This will allow you to have focused discussions without any distractions.

Step 4: Provide an Overview Begin each meeting by providing a concise overview of what ROBS entails. Explain that ROBS involves creating a C Corporation that establishes a 401(k)-retirement plan. The 401(k) plan then invests in the corporation’s stock, which provides the necessary capital for the business. Emphasize that ROBS is a legal and IRS-approved method for funding a business, but it must be implemented correctly to comply with regulations. It cannot be implemented using an IRA, only a qualified pension plan such as a self-directed 401(k) plan.

Step 5: Explain the Process Next, explain the step-by-step process involved in implementing ROBS. Break it down into the following key stages:

a) Establishing a C Corporation: Describe how a C Corporation must be formed to facilitate the ROBS strategy. Explain the legal requirements, such as filing articles of incorporation and obtaining an Employer Identification Number (EIN). Highlight that the corporation will sponsor a 401(k) plan.

b) Creating the 401(k) Plan: Detail the steps involved in setting up the 401(k) plan, including plan design, documentation, and compliance. Emphasize the importance of engaging a qualified third-party administrator (TPA) or plan provider to handle the administrative aspects and ensure compliance with ERISA regulations.

c) Rollover of Retirement Funds: Clarify that the existing retirement funds will be rolled over into the newly created 401(k) plan. Discuss the rollover process, potential tax implications, and the importance of following IRS guidelines for eligible rollover distributions.

d) Investing in the Corporation: Explain that once the rollover is complete, the 401(k) plan will invest in the corporation by purchasing its stock. Discuss the valuation process, the necessity of conducting a fair market valuation, and the need to ensure compliance with Internal Revenue Code Section 409A.

Step 6: Address Potential Concerns During the discussions, anticipate and address any concerns your professionals might have regarding ROBS. Common concerns may include legal compliance, IRS scrutiny, potential penalties, and the risks associated with investing retirement funds in a business. Provide accurate information, present supporting research, and case studies, and explain how you have mitigated the risks.

Step 7: Collaborate and Seek Advice Encourage collaboration among your CPA, attorney, and financial planner. Their expertise in their respective fields can provide valuable insights and help you optimize your ROBS strategy. Be open to their suggestions and recommendations and seek their advice on specific aspects of your situation to ensure a well-rounded approach.

Step 8: Document the Discussions After each meeting, document the key points, decisions, and action steps discussed. Maintain a record of the conversations and any additional information provided by your professionals. This will serve as a reference point for future discussions and ensure everyone remains on the same page throughout the process.

Conclusion

Effectively explaining ROBS to your CPA, attorney, and financial planner is essential to gain their support and expertise in implementing this financing strategy. By educating yourself, preparing documentation, and conducting focused meetings, you can ensure a productive dialogue that addresses their concerns and results in a well-informed approach to utilizing ROBS for your business venture. Remember to maintain open lines of communication, collaborate, and seek expert ROBS advice to maximize the potential benefits of ROBS while complying with all legal and regulatory requirements.

Ken Lindow | 10/09/2023