Rental Property Investor · Neenah WI · Member since 2020 · 9 posts · 11 votes
I recently left a job of 18 years and have an existing 401K. I am considering/wanting to take these funds out/use them for real estate purposes and have recently came across a company/recommended by my attorney/that specializes in a custom type of ROBS(Roll Over Business Start up). Their explanation is "An ERSOP® plan is an Internal Revenue Code tax-qualified profit sharing plan that allows for rollover money to be invested into the sponsoring business."
The premise being it allows you to be an active participant in real estate management/which a SDIRA(Self Directed Individual Retirement Account) doesn't allow. There is a lot to the rollover which involves creating a C Corp and Profit Sharing/Trust Plan.
Any one have familiarity with this/can give me their input? Thanks.
The ROBS program is valid and has been in use since the 1980's. You definitely want to work with a qualified provider that knows what they are doing, not a 1-man attorney operation.
The ROBS structure is entirely different from an IRA. There are a few restrictions designed to keep you from pirating your retirement plan personally, but you can invest retirement funds into your own business without taxes or penalties. The normal rules you see about arm's length investing with an IRA to not apply. This is not an IRA.
The underlying business does need to be an active enterprise that creates trade or business income, such as real estate development, frequent flipping, or operating a hotel or self-storage business. This tool will not work for passive investment holdings like rentals.
The ROBS program is valid and has been in use since the 1980's. You definitely want to work with a qualified provider that knows what they are doing, not a 1-man attorney operation.
The ROBS structure is entirely different from an IRA. There are a few restrictions designed to keep you from pirating your retirement plan personally, but you can invest retirement funds into your own business without taxes or penalties. The normal rules you see about arm's length investing with an IRA to not apply. This is not an IRA.
The underlying business does need to be an active enterprise that creates trade or business income, such as real estate development, frequent flipping, or operating a hotel or self-storage business. This tool will not work for passive investment holdings like rentals.
. Thanks so much. Helpful info. The way this was explained/presentation on their website was you could utilize this mechanism for real estate property management/including passive i.e. rentals. I would defer to an expert like yourself on the ROBS but my banker friend said he is seeing this specific utilization lately/relative new usage of a ROBS. I am including a link to their presentation as reference. https://sdcooper.com/presentat...
Sometimes there are solutions that are possible, but make no sense.
Property management is a services business. That service could be capitalized with a ROBS plan. It would be recommended that you provide property management to others besides yourself.
To place additional capital into that services business to acquire passive rentals would be foolish. Why would you put passive rentals in a C-Corporation?
As it was explained in the presentation/the rentals would be in an LLC and the C Corp would be created allowing you to sell shares to the "Profit Sharing/Trust plan". In this manner/as explained/your C Corp would than be funded/no debt/an attractive entity for banks. That is their pitch anyway. The C Corp would be the managing entity/allowing you to draw a "salary" as well for work performed. As I manage my own rentals now/seemed a plausible mechanism to utilize 401K money in a manner I directly control. Make sense?
Bring your CPA into the discussion and they will show you where the flaw is.
Income from the LLC passes through to the corporation. Paying corporate tax on rental income is certainly something you can do, but it is not an optimal approach.
To simplify, running a services business works in a ROBS. Holding passive assets can technically be done with proper structuring, but it is a poorly conceived strategy.