Real Estate Professional · Smithfield, KY · Member since 2015 · 17 posts · 2 votes
I am going to be leaving my company in a few months and will have to roll over my 401k. I am interested in Rollover for Business Startup (ROBS), but I am currently struggling to find any good information on the topic. I would love to use a portion of my 401k as seed money for my REI (+/- $50K), can anyone point me in a direction to find more information? I have started research Self-Directed IRA's, but because I will be an employee of my startup, that option is out. Any suggestions?
The ROBS plan is not designed for passive holdings such as rental property. In order to establish such a program, the business funded by the plan needs to be an active trade or business such as retail, food service, real estate construction, etc.
You could potentially establish a self-directed IRA and fund it with a rollover from a prior plan. The IRA could then invest in real estate. All expenses and income must go through the plan, however, and you cannot benefit or take a salary personally in any way. This is simply a means to diversify your retirement savings into a different asset class such as real estate.
If your intention is to be personally involved in the rehab process, then a self directed IRA or Solo 401k would not work, as those plans require all transactions occur at arm's length - in exchange for the tax-sheltered status of the retirement plan.
The Rollover as Business Startup program would be an option for you to explore. In that structure you can use existing retirement funds to capitalize a business in which you will be directly involved. The transfer of funds and investment of the retirement funds into the business does not create any tax liability. The business itself will operate in the taxable realm, however.
My general take at this point (I did a ROBS a few years ago with Guidant):
It sounds like the IRS is accepting of ROBS if organized correctly, if employees are offered participation, if all filings and paperwork are done correctly, etc. Your custodian will likely drive whether things are done correctly or not. That said, the paperwork, accounting and legal aspects were onerous -- including annual business appraisals and lots of annual paperwork -- and for me, the risk and effort outweighed the reward. If you have no other options, it might be a good avenue, but I still recommend consulting a good ERISA attorney before jumping in.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
Based on the positive ruling I got from the IRS for my specific ROBS business, they didn't do anything illegal. Which, I guess is the most important thing.
That said, I wasn't thrilled with their customer service, and when I started to get nervous about whether they (and I) was adhering to all DOJ and IRS regulation, they tried to convince me not to go through the process of getting the IRS ruling on my plan. Again, ultimately the IRS said everything was okay, but the fact that they didn't seem to want me to pursue it was a little off-putting.
New to Real Estate · Fayetteville, NC · Member since 2015 · 51 posts · 6 votes
10y
That makes sense. I could see, being in their shoes, that they would want to keep you at "arm's length" from the IRS, lest you unintentionally say something, albeit well-intentioned, that raises a red flag. Even though the IRS probably won't find anything wrong, Guidant probably just doesn't want the hassle and additional paperwork an IRS inquiry might cause. But I also see how you, the investor would lose your warm and fuzzies when Guidant's saying, "Stand aside, we've got this."
Anyone else want to weigh in on this? A ROBS sounds like a great way to further diversify my retirement investments.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
That makes sense. I could see, being in their shoes, that they would want to keep you at "arm's length" from the IRS, lest you unintentionally say something, albeit well-intentioned, that raises a red flag.
I was never speaking with the IRS. It was all handled through an ERISA attorney who Guidant referred me to -- and even then, they weren't happy about it.
I was actually the first Guidant ROBS customer to get approval on my plan from the IRS, and my approval validated their ROBS program. Considering that -- and considering that I spent many thousands of my own dollars to do it -- they should have been thanking me, not trying to stop me.
My guess is that they were concerned that my implementation of their plan was incorrect; as a ROBS owner, there are a LOT of administrative details that you have to take care of, and if you screw those up, it doesn't matter how good of a job Guidant did.
For example, ROBS must be implemented in a C-Corp, which means you have to have annual shareholder meetings (and keep minutes), you have to do annual state filings, you have to ensure that you pay yourself properly (not too much, not too little), you have to ensure that you offer your employees stock participation, you have to get annual appraisals of any assets the company owns, etc. Plus, Guidant was sending new plan docs and complex forms that needed to be filled out a couple times per year.
It gets very cumbersome and expensive to correctly manage a ROBS business (at least it was for me with Guidant), and while I made a good bit of money, both personally and in my IRA, it just wasn't worth the headaches for me. And had I screwed it up (even if Guidant did everything right), I was putting my entire IRA at risk of IRS seizure, plus additional penalties in the worst case scenario.
If you're going to do it, make sure you set aside a couple hours per week just for management overhead of the business, dealing with legal issues, dealing with accountants, etc.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Account Closed:
That makes sense. I could see, being in their shoes, that they would want to keep you at "arm's length" from the IRS, lest you unintentionally say something, albeit well-intentioned, that raises a red flag. Even though the IRS probably won't find anything wrong, Guidant probably just doesn't want the hassle and additional paperwork an IRS inquiry might cause. But I also see how you, the investor would lose your warm and fuzzies when Guidant's saying, "Stand aside, we've got this."
Anyone else want to weigh in on this? A ROBS sounds like a great way to further diversify my retirement investments.
I work with them a lot. I've seen a lot of taxpayers royally mess them up. Be very careful because a prohibited transaction can result in massive penalties.
Newtown, PA · Member since 2015 · 2 posts · 0 votes
10y
@Jeff McMahan and @J Scott
What a great group discussion, sorry I am late to the game.
The acquisition by a plan of Employer Securities is exempt from being treated as a prohibited transaction as per Code section 4975(d)(13). As the IRS concluded, when properly structured and administered, ROBS arrangements can satisfy both the requirements and spirit of the tax law and can serve a legitimate tax and business purpose.
And yes, it is VERY important to work with professionals that have a track record of success in deploying and managing ROBS structures.
Especially when audited @J Scott. Glad to hear it worked out, but I would love to connect with you to learn more about the process you went through. We consistently handle audits for our clients and the process seems a lot smoother then what you went through.
Eric Schechterman, Benetrends Financial (leading ROBS provider)
Rehabber/Contractor/Business Manager · Atlanta, GA · Member since 2015 · 140 posts · 70 votes
10y
Jeff,
I just set up a ROBS with Guidant. PM me with any questions you have. All the points made here are valid but I found it a great way to fund my activities.
I have had the transactions going through professionals (Guidant, tax lawyer, CPA's and bankers) experienced with ERISA and the ROBS process and feel confident I can remain within the law.
It is inherently risky to use retirement funds, but it can also be a great tool if used smartly.
Especially when audited @J Scott. Glad to hear it worked out, but I would love to connect with you to learn more about the process you went through. We consistently handle audits for our clients and the process seems a lot smoother then what you went through.
Hey Eric - Happy to answer any questions...I replied to your personal email so you have my contact info...
The type of audit I was referring to wasn't an internal audit by the ROBS provider -- this was an official review of my specific plan by the IRS to make a determination of whether it was done legally (and therefore was safe from all future audit). My ERISA attorney filed IRS Form 5310, paid a couple thousand dollars (in attorney and IRS fees) and waited about 18 months for a determination.
Perhaps overkill, but I sleep better at night knowing that I'm not at risk of losing a 7-figure retirement fund...
I left my job last year and rolled my 401k to a BORSA with drda. Another name for the same product as the robs. For me, it has been a great way to put my $ to work and funnel proceeds to my personal acct prior to 59.5. I rolled my entire 401k and have been using it to flip. Profits are then paid as a salary to me and saved until I can buy the next rental property in my personal name. There are some costs associated with the plan,(a few thousand per year) but in my opinion the costs are worth it. With a lower amount of $ in the plan (you mentioned 50k), the benefits might not be as great and the costs would have a larger impact.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by :
Profits are then paid as a salary to me and saved until I can buy the next rental property in my personal name.
Hopefully you're not paying all the profits to yourself. As per my understanding, your plan must have some benefit from the arrangement. My ERISA attorney recommended taking a "reasonable salary" (about 60% of the net earnings) and then leaving the remaining 40% in the plan as benefit to the plan.
Investor · Humarock, MA · Member since 2015 · 14 posts · 4 votes
10y
I have a follow on question with the "reasonable salary". I plan on doing this mid 2016 and using my 401K as the 20-25% down I need on commercial loans which I hold for cash flow or sometimes rehab and improve (usually convert 2bed to 3 bedrooms, etc). Bottom line I will be the property manager as well as rehab lead (have my contractor license) and trying to define "reasonable". Most of my deals return 40-45% cash flow and I really don't want to be limited to 10% of cash flow like a typical PM. Any thoughts, comments, or past experience appreciated.
I have a follow on question with the "reasonable salary". I plan on doing this mid 2016 and using my 401K as the 20-25% down I need on commercial loans which I hold for cash flow or sometimes rehab and improve (usually convert 2bed to 3 bedrooms, etc). Bottom line I will be the property manager as well as rehab lead (have my contractor license) and trying to define "reasonable". Most of my deals return 40-45% cash flow and I really don't want to be limited to 10% of cash flow like a typical PM. Any thoughts, comments, or past experience appreciated.
First, I'm not a tax professional, nor am I an ERISA expert...so, take this for what it's worth...
If you're not doing a ROBS, and are just planning on using your 401K as a downpayment on loans to do personal deals will be considered a prohibited transaction. You won't be allowed to secure a loan with your 401K, and taking any money out of a 401K transaction for personal gain is prohibited.
Or did you mean that you were planning to do a ROBS with your 401K?
If so, I believe you're only allowed to do active business activity from a ROBS, not passive investments like owning rental properties. Perhaps others here with more knowledge can clarify. Regardless, you should speak with a good ERISA attorney prior jumping in...
I also am concerned with the point you raise of "passive activity" and have had conflicting input on that very tactic. I do need to find an ERISA attorney since most input has been from the organizations wanting to set up my ROBS/company and therefore have a biased interest.
As we all know holding property, especially in more lower end areas, can be profitable but by no means passive but that is more of the actual interpretation and not that of the IRS. I am just wondering if the fact that some units are rehabbed, even though becoming buy/rehab/hold and not buy/rehab/flip would show that this is an active business. I know this becomes a gray area. Also don't know if these buy-rehab units were "flipped" to my passive real estate business that this would allow it to pass the test.
The ROBS plan is not designed for passive holdings such as rental property. In order to establish such a program, the business funded by the plan needs to be an active trade or business such as retail, food service, real estate construction, etc.
You could potentially establish a self-directed IRA and fund it with a rollover from a prior plan. The IRA could then invest in real estate. All expenses and income must go through the plan, however, and you cannot benefit or take a salary personally in any way. This is simply a means to diversify your retirement savings into a different asset class such as real estate.
Phoenix, AZ · Member since 2016 · 3 posts · 0 votes
10y
Elsewhere I found a reference to BORSA (Business Owner Retirement Savings Account), which apparently does what I wanted to do. they've been doing this since 2002 and claim to be very conservative from IRS regulations perspective; sounded legit to me but complicated.
They setup a C-corp which establishes it's own 401(k) plan, your retirement 401(k) is rolled into the new one, and your newly established 401(k) invests in shares of the C-corp.
It's not inexpensive to setup the legal entities, and the annual IRS 5500 filing would require asset valuations, which for my desired real estate holdings would mean an appraisal every year on top of their costs.
So looks like it's doable but perhaps not very practical for my use-case
What you are outlining is the ROBS program. Such a vehicle is not suitable for passive rental holdings. There needs to be a true business creating earned income at the core of this program.
Phoenix, AZ · Member since 2016 · 3 posts · 0 votes
10y
Just sharing what I learned, not an accountant nor financial adviser. They say you can and have clients that have been doing just this since 2002, and you are able to pay yourself a salary. It's not the route I will pursue given cost and complexity.
As I raised the topic again just wanted to share what I learned