ROBS - anyone have any experience (vs.self-directed IRA)

14 Replies

I am interested in starting a flipping business with a friend.  This friend is already a successful flipper, but needs more capital (so we can buy at auctions, etc., for cash).

I lost my job of 28 years, and have a 401k with my previous employer. I'm interested in reinvesting my 401k by using some of it to start a ROBS, or a solo-IRA.

Interested in advice on doing this, and which avenue I should go with (ROBS/IRA), what are the benefits/disadvantages of each.

@Jill Green

If your goal is to be able to be hands on in the business of flipping and be able to draw an income, then the ROBS platform is the way to go.  We have worked with many clients to implement such a structure for the purposes of forming or expanding a real estate development company.

The self-directed IRA or Solo 401(k) option would only be a means for you to say, lend to that other party for purposes of their transactions, with all returns going back to the plan. It is a diversification tool.

Jill, welcome to BiggerPockets and congratulations on your first post!

ROBS will allow you to take salary from the business that your 401k will fund. If you don't need the income now and you just want to grow your IRA - then self-directed IRA will be the vehicle you'd want to use.

Solo 401k plan designed for those who are self-employed or own a small business. 

@Jill Green

I would echo @Brian Eastman 's comments.

There is more cost and administration involved with the ROBS, so that should probably only be considered if you want to generate income from the investments in the short-term and/or want to be actively involved in the business. Otherwise, a self-directed IRA or (better yet) a Solo 401k might work for your needs.

Thanks so much for the quick responses!

I'll add the following:

I would want to be involved in the new business.  I would be part-owner with one other person.  No other employees (other than contractors, etc.) would be on payroll.  I would share equally in the profits with the other owner.

What are the reasons I couldn't do this with the self-directed IRA option?

What is the difference between the self-directed IRA and solo IRA?

(And let me see if I have the self-directed IRA scenario figured out. Are you saying that if I set up a self directed IRA, I could "cash" out money to lend to the other person (in order for him to start the business)? Further, if I lend him this money for his business, and there was profit, are you saying that all of that profit must be reinvested in the self-directed IRA)

Thanks for all the advice.  I'm really interested, but want to do it the least complicated and most cost-effective way.

@Jill Green

The IRA LLC or Solo 401k does not align with your goals at all. Neither plan would be able to put capital into a business in which you are providing services or receiving income. Such plans prohibit any form of self-dealing.

The ROBS plan will work for what you are looking to accomplish.

Originally posted by @Jill Green :

Thanks so much for the quick responses!

I'll add the following:

I would want to be involved in the new business.  I would be part-owner with one other person.  No other employees (other than contractors, etc.) would be on payroll.  I would share equally in the profits with the other owner.

What are the reasons I couldn't do this with the self-directed IRA option?

-Internal Revenue Code section 4975. Prohibited transaction rules would get in your way.

What is the difference between the self-directed IRA and solo IRA?

-If you are referring to a Solo 401k: compared to an IRA, Solo 401k contributions limits are roughly ten times higher and there is no custodial requirement for the 401k. You can take participant loans from the plan, you don't need the additional expense and administration of an LLC to have checkbook control, and there is a built in-Roth component. A spouse can also participate in the same plan, there are additional tax benefits compared to an IRA, and there is generally greater privacy. Finally, the plans are often quicker to setup and cost less money over time especially compared to most IRA LLCs.

ROBS is the way to go based on your comments.

THANK YOU EVERYONE!  I'm go glad I found BP.

It seems that based on my statements, the ROBS is the only way for me to go.  I appreciate the clarity.  Not that I'm completely "clear", but I get the gist.

Interesting how another firm told my partner that the solo-401k (or SD IRA) would be the best for us. I should post his email "followup" to his conversation with my soon-to-be partner. It was lengthy, and it spelled out how it would work for us. How very confusing. Incidentally, what you say is what I was thinking anyway. It seems like after doing more research (and trying to figure out who's unbiased), ROBS is my only option.

@Jill Green

I would be really interested to see their justification for steering you in that direction.

@Jill Green I used our SD/IRAs for a flip - once. I found it cumbersome. Had to ask subs to wait while the IRA issued their checks. Couldn't use my credit card to purchase items and then have the IRA pay the bill. And of course we couldn't actively work on the flip nor could I receive a commission when I sold it. You need to be arms length and I found that difficult. Yes, there are other ways around it but for me best to use the IRA $$ another way.

@Teri S.

You'll always have the prohibited transaction rules to follow, but checkbook control would alleviate at least some of the issues you mentioned. This is true even if you choose not to continue flips in the IRA which is likely a good idea.

@Jill Green

As others have written, it sounds like ROBS is the best fit for you. I have started this way myself, and so far so good! One thing to consider are the rules around partnering. I am not an expert in the area, but it is my understanding that any partnership the ROBS C corp is involved in the C Corp needs to be a majority partner. Therefore, if you are partnering with your friend, it may effect how the partnership is structured. There may be more creative ways to set the company and partnerships up, but I would be sure to clarify with the experts and lawyers when you conduct your due diligence. I personally love the ROBS because it has enabled me to start and fund my own company, which promises to bring me the financial and lifestyle independence I desire.

Another scenario to consider, if you are not necessarily tied to working directly with your friend, and you both have retirement funds that could be invested, is to each set up SDIRAs and loan money to each other to conduct for each of you to conduct your own flips. The catch here is you couldn’t work together on the flips, as it is my understanding and stated above, you need to maintain an arms length from your SDIRA funds. In this scenario you would pay the loan back to your friend with interest like any private money loan. The profit from the interest and points would go into their SDIRA; however, you would be able to keep 100% of the profit from the deal. The opposite would be tru for your friend. Therefore, you make a profit and also grow your retirement funds

@John-David Herlihy

What you propose in your second paragraph about loaning money from each others IRAs should be avoided to maintain compliance with the rules.

Originally posted by @Justin Windham :

@John-David Herlihy

What you propose in your second paragraph about loaning money from each others IRAs should be avoided to maintain compliance with the rules.

I have no experience in this, so speaking from what I read, etc. I thought you could use SDIRAs for private money lending? How would routinely lending to a friend not be compliant? Is it the reciprocity that you think is an issue? I guess I could see that, but not really sure why it would be disallowed.

@John-David Herlihy

Private lending is allowed, but schemes to circumvent the prohibited transaction rules are not. In this case, yes, it's the reciprocity that causes an issue.

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