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Surprise. It has always been possible to invest IRA money in nontraditional investments such as real estate, second deeds of trust, unsecured loans, gold, etc., through independent IRA custodians such as Pensco in San Francisco.

These companies operate under special charters that allow them to be custodians for nontraditional or alternative asset types. By comparison, institutional custodians such as banks, brokerage firms or mutual funds restrict their IRAs to investments on which they make some money. They don't see any profit in taking responsibility as custodians for, say, a loan from your IRA to one of your children for a house.

In a similar vein, a new element offering retirement plan flexibility has come out of the woodwork in the form of a "Rollovers as Business Startups" or ROBS. What this tool offers is an opportunity for someone with money in an IRA to access all or a portion of those funds to buy or start a business. The advantage of the ROBS approach is that it triggers none of the usual taxes or penalties associated with a distribution from a retirement plan.

In a typical situation, someone might want to buy an existing business such as a franchise. The only money available in the absence of home equity or bank loans might be assets in a retirement plan account. Normally, a distribution from the account would trigger taxable income on the entire amount. In addition there would be a 10 percent penalty if the person is under age 59 ½.

The ROBS has been created by the application of a sequence of tax code provisions as follows: Step one would be the establishment of a Regular Corporation ("C" corporation) to own the new business. Step two would be to establish a 401(k) plan at this new business that allows for rollover of IRA money into the plan for any employee who wished to transfer their "portable" IRA assets into their new 401(k). Step three is to offer shares in the new corporation as one of several investment choices of the new 401(k). The rest of the choices would look like a typical 401(k) fund selection. Step four would be the investment of the founder's 401(k) rollover account in the brand new corporation that just bought, say, the sandwich shop franchise. The funds for the purchase came from the sale of stock in the new company to the 401(k)s IRA rollover account. No taxes or penalties are triggered.

If the new business hires other employees, they must be offered the same option of investing in the stock of the company they have come to work for. However, if they make any 401(k) contributions at all, their money is better invested in the traditional mutual funds offered by the plan. The success rate for business startups is very low, and while the owner might be wise to take that risk, the average employee intuitively understands that nothing is more worthless than a minority interest in a privately held business.

As time goes by, the company must be valued each year by an independent third-party appraiser. This satisfies the general retirement plan requirement to submit all accounting information to government agencies including the IRS and Labor Department. While mutual funds are valued daily, the biggest asset of the plan, in this case, is the same private company that actually sponsors the plan. An annual outside appraisal limits the potential for abuse.

For those who might be between jobs and considering the possibility of starting a business, this approach could offer a lifeline. Anything short of this approach can be very expensive, tax-wise. Taking the money as a distribution between jobs is always an option, but what's left after taxes and penalties can dramatically reduce what a budding entrepreneur has to work with. Also, once the money has left the retirement plan, it can never be replaced. In this case, the money is always retirement money that happens to be invested in a private business. If the business is actually successful, and is sold for a profit years later, the entire profit is tax-deferred like any other profit made on retirement plan assets.

Sound good? Be careful. The design and operation of your plan needs to be reviewed by tax and legal advisers. The potential for abuse is obvious, but while the IRS initially viewed this as a "scheme" years ago, they now endorse the concept when it's done properly.

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