401k rollover to c Corp business

Tax, SDIRAs & Cost Segregation
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401k rollover to c Corp business

Alec Sithong
Charlotte, NC · Member since 2016 · 56 posts · 8 votes

as I look into starting my C corp I have some questions. When I roll over my 401 K into C Corp do I have the cash to build my business or does it act as a loan to pay back my retirement fund?

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Rajeev Kotyan
Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
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@Alec Sithong: There are two approaches:

(1) Borrow from your existing 401K (loan) and invest in anything (including C Corp stock) and pay back the loan as per its terms --- not always recommended

(2) Start a legitimate business (generally as a C-Corp), start a 401K plan for the business, rollover existing 401K, have a 401K buy the private shares of this business (401K plan become a shareholder of the business). All dividends are appropriately distributed to the shareholders (including the 401K). This is ROBS.

Please work with a very knowledgeable and qualified group of professionals on ROBS, as it requires the following:

(1) ERISA attorney to appropriately draw-up the C-Corp (assuming that is what is the best choice) documents so as to enable 401K shareholders

(2) Plan provider who allows the holding of C-Corp shares in plan

(3) Third-Party qualified appraiser, who can appraise the C-Corp shares on an annual basis

There is also clear requirements for making sure that the transactions within the C-Corp does not created prohibited transaction for the plan participants (such as loan guarantees, etc.)

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    @Alec Sithong

    Are you talking about the ROBS structure for using retirement funds to start a business?

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    not sure what ROBS is but idea is roll the 401 K into to fund my business.

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
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    @Alec Sithong,

    Get with your business attorney and CPA. You should be able to set up a self-directed 401(k) for yourself in your corp (do you REALLY need a C-Corp? Will and S-Corp do?) and roll your existing 401(k) into that. Then, direct your SDRP custodian to invest your new 401(k) in your Corp. That's one way to get checkbook access to your retirement money.

    Your financial / legal professionals should be able to to help you set that up.

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
    - DJ Benedict

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  • Rajeev Kotyan
    Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
    10y

    @Alec Sithong: There are two approaches:

    (1) Borrow from your existing 401K (loan) and invest in anything (including C Corp stock) and pay back the loan as per its terms --- not always recommended

    (2) Start a legitimate business (generally as a C-Corp), start a 401K plan for the business, rollover existing 401K, have a 401K buy the private shares of this business (401K plan become a shareholder of the business). All dividends are appropriately distributed to the shareholders (including the 401K). This is ROBS.

    Please work with a very knowledgeable and qualified group of professionals on ROBS, as it requires the following:

    (1) ERISA attorney to appropriately draw-up the C-Corp (assuming that is what is the best choice) documents so as to enable 401K shareholders

    (2) Plan provider who allows the holding of C-Corp shares in plan

    (3) Third-Party qualified appraiser, who can appraise the C-Corp shares on an annual basis

    There is also clear requirements for making sure that the transactions within the C-Corp does not created prohibited transaction for the plan participants (such as loan guarantees, etc.)

    1Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    @Alec Sithong

    When you use the Rollover as Business Startup, it is as Rajeev notes.

    The operating business must be a c-corporation.  No other entity type is allowed.

    The corporation establishes a 401k or profit sharing plan.

    As an employee if the corporation, you can roll over prior tax-deferred retirement savings into the new plan.

    The plan can then purchase shares of the parent c-corporation via an Employee Stock Option Purchase.  The capital then becomes shareholder capital for the corporation and can be used for any legitimate business start up or operating expenses.

    There are no taxes for using the retirement funds in this way.  The C-corporation will operate in the taxable realm, however.

    This is definitely a sophisticated program that requires solid expertise to implement and maintain, but can be a powerful tool for establishing your business.

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    thank you all for your responses.  I'll be doing:

    Start up business as a C-Corp rolling over existing 401K yes a ROBS. I know of benetrends and guidants out there to start the C-Corp.  Are there others out there as well?

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Alec Sithong

    There are a handful of players out there offering this service.  

    There is more involved than just filings and creation of a retirement plan.  I'd recommend you stay away from the 1-5 person companies that market these services.  They will not have the necessary infrastructure to successfully support you over the long haul.

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    @Brian Eastman

    Brian, your firm handles these structures, right?

    @Alec Sithong You might want to put Brian on the list of people to call as you're performing your due diligence.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Justin Windham

    Yes, we have been offering the ROBS plan since 2005.

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    What kind of problems can occur with c-Corp in a start up business? Are there any road blocks or stumbling blocks to overcome? 

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  • Louis Alvarez
    CPA · Valrico, FL · Member since 2014 · 33 posts · 18 votes
    10y

    Alec,  ROBS definitely have a lot of hair on them.  While 100% legal, the IRS DOES NOT like them and will scrutinize the structure much more than most other structures.  Sooo, make sure every i is dotted and every t is crossed. From some of the prior posts it seems as though there are some members that can certainly help in setting one up. I would highly suggest that you get a good attorney and CPA that are familiar with the stucture, but are not associated with the person that is implementing it for you. Even if the structure is implemented/structured properly, if you don't follow the rules in maintaining the structure you risk having the IRS collapse the structure and taxing your retirement funds as if they were distributed to you (with penalties added for good measure.).  I've seen this stucture implemented in the context of purchasing an operating business (i.e. Someone wants to buy the local sub franchise) but not to start a RE investment company. Not saying it can't be done, just that I haven't seen it. It sounds like some of the other members have assisted in this type of implementation. This is one of those situations where you need to know ALL of potential pitfalls before you risk half of your retirement. 

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    Thanks for the advice Louis, Brian, Justin and Rajeev. I really appreciate it. So is starting a c corp for REI going to be difficult? I'll be the only employer flipping homes and potentially buying land and buidling new homes to sell. I hear buying rental homes would not be good here. Shareholders would not like that. Or will irs not like that? Why won't rental income be good here?

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  • Rajeev Kotyan
    Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
    10y

    @Alec Sithong: As Louis mentions, generally an operating business tends to have better use of this structure, something that is generating active income, and where one tends to materially participate. In general (and it depends on the structure and situation), rental real estate is deemed as passive income, so there may no benefit is going with a ROBS structure.

    Having worked with ROBS transactions even before they have been popular, the hardest part of this is maintenance on an annual basis with respect to the 401K plan, and most specifically the private shares valuation. The true third-party valuations from a qualified appraiser, where one can defend the valuation is critical (among other things)

    Please do take the advice of Louis and Brian here and do not waste your time or money simply trying to buy an off-the-shelf product and make your business fit it, work with knowledgeable and qualified specialists who can structure your business correctly in compliance with the ROBS requirements.

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    Thank you Rajeev. Yes I have been in touch with Benetrends who handles the C-corp. How much fee is there for a small one owner start up business in a year? I see paying $5k flat rate but don't want to pay additional monthly fee for just a $20- $40 projected net profit on REI whether flip and/or rentals. at least my first year. FYI i will keep my current full time job while creating this small business. What maintenance as you mentioned is there for my small business (one man shop) in a C-corp other than taxes? I know there's the shareholders I need to meet. What else?

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  • Rajeev Kotyan
    Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
    10y

    @Alec Sithong: (I am not an appraiser): As mentioned it is the valuation of the private shares...  In my experience this has ranged from $1K to $6K depending on the complexity of the business, and what has occurred in the business. There is no one size fits all. I have seen some that provide flat fee, but then I have only seen those when being challenged by the DOL and IRS, and the money has been spent fighting the challenges (so I may be biased in my opinion on flat fee valuations). 

    You may want to check with the plan provider what their annual fees are, including filing fees, and whether they provide valuation services or who they recommend. Those are generally separate from the initial fees.

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    Thanks Rajeev!

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    After further research I'm not so sure C-corp is the best solution for me. I'm comparing that to self directed 401K as I'm the only employee. Either business platform I'm sure there are tax advantages to each. If I'm planning for net revenue of $25,000 the first 3 years with rental properties which is better? By year 3, I'd like to be making over $50,000 net revenue. My goal is to have 2 to 4 rental properties and leave some cash for flipping 1 to 2 homes per year. I don't see making over $50,000 total net revenue each year (if at best) while still employed full time. Any advice? I also need to talk to a good CPA who knows this REI industry well.

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    @Alec Sithong

    The ROBS structure featuring a 401k plan and a C-corp may involve more expense and administration than you are looking for in your situation.

    If you will have earnings from self-employment activity and no full time employees, a Solo 401k may work better for you. You will be able to invest your retirement funds into real estate and will have the potential to borrow funds from the plan if you want to use those funds personally or in your business.

    0Reply
  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    10y

    @Alec Sithong

    See the following IRS resources regarding the ROBS 401k.

    https://www.irs.gov/pub/irs-tege/robs_guidelines.pdfhttps://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project

    1Reply
  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    Thanks Mark

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    I spent the day with my SRDP expert, Mat Sorensen. He provided some info which corrects a mis-impression I was under.

    An SDIRA cannot invest in an S-Corp, but CAN invest in an LLC or a C-Corp.

    Then, of course, there's such a thing as an IRA LLC.

    So, I stand corrected.

    Interesting that one of our local SDRA custodians asked to send their people to our event when they found out Mat was pesenting. Apparently, Mat is well known in the Self-Direction industry.

    Mat teaches the "Raising Private Money" and "Self Directed Retirement Plans" classes in the education I'm connected with. He's a partner in the same law firm - KKOS Lawyers - as my tax and legal expert.

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
    - DJ Benedict

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    Hi everyone I wanted to follow-up from these threads and thank all of you for your advices. I did go with C-corp and incorporated my business entity. So I'm well under way. Next step is to start my active business such as flips. I know I cannot invest in passive income because of my recent rollover (ROBS). I know this business plan needs to be an active business and not passive income to avoid tax penalties. If I did purchase a rental property with monthly incoming revenue to be used for buying and selling other properties doesn’t this justify it as an active business even though I have a rental property? Where is this exception in IRC 4975? Any advice would greatly be appreciated.

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    10y

    @Alec Sithong

    Did the company that you used for the ROBS go over these rules with you as they are very important questions?

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  • Alec Sithong
    OP
    Charlotte, NC · Member since 2016 · 56 posts · 8 votes
    10y

    Benetrends is the company I'm using. They've explained some of it but I still have more questions. Wondered if anyone else has a different angle or exception on it.

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    10y

    @Alec Sithong

    I recommend going back to then and ask to speak to their attorney as that is what you are paying them high fees for.

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