Can you explain further.... What if the c corp had expenses that reduced income to zero? (Paid all profit to me as salary)
It's my understanding that this would be looked upon unfavorably by the IRS. This type of arrangement benefits you personally, but does not benefit your IRA; the purpose any IRA investment should be to benefit the IRA.
The IRS may look at this as an attempt to siphon cash out of your IRA (or use your IRA to generate taxable cash flow) without paying a penalty.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
I had one with Guidant for a few years. While there were some management headaches (it's a C-Corp I used for flipping and I needed to make sure there was no commingling with my other flipping company which used personal funds instead of IRA funds), it worked out just fine.
The biggest issue is that the DOJ has issued some warnings about these types of retirement vehicles and there is some reason to believe that at some point in the future, they may crack down and decide that -- because these vehicles pay salary to the employees right out of their retirement funds -- it's a violation ERISA laws.
Personally, I was concerned enough that I shut my plan down a few months ago, and spent a couple thousand dollars to get a Determination Letter (which I'm currently waiting for) from the IRS.
In the end, I made some money in my IRA, but it wasn't worth the management headaches or the stress of wondering if the DOJ would deem it illegal.
Investor · Chicago, IL · Member since 2011 · 80 posts · 21 votes
15y
Here's a lengthy article I saved from a few months ago discussing ROBS and IRS compliance. It was in a pension update from bna.com. May be useful for someone.
Just spoke with a counselor form Guidant. He indicated I could mingle personal funds with retirement funds through a ROBS. The setup fee is $5000. 3/30/13. Pretty steep fee but the ability to comingle funds is enticing.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
13y
Originally posted by Shawn Miller:
*BUMP*
Just spoke with a counselor form Guidant. He indicated I could mingle personal funds with retirement funds through a ROBS. The setup fee is $5000. 3/30/13. Pretty steep fee but the ability to comingle funds is enticing.
I highly recommend you speak with an ERISA attorney who is NOT affiliated or recommended by Guidant prior to doing this. I wish I had...would have saved me a lot of headache and stress.
It sounds as if the IRS has done some thorough investigation of ROBS over the past couple years, and have found that the reputable providers aren't breaking any IRS or DOJ rules.
That leads me to believe that -- assuming the actual business owner is following the law -- ROBS in general are determined to be a legal use of retirement funds.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
I'm a huge fan of the ROBS method.
As long as there is a profit and salaries are only paid from profits. There should not be a salary if there is no profit, that is where the issue would lie.
Shawn Miller,
You CANNOT mingle personal funds unless you are also personally contributing to the company. If you know how to utilize a C-corp correctly it can be a PERFECT way to do business.
J Scott, Just like most things as long as the rules are being followed there is typically no issue.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
James Hiddle,
ROBS is about utilizing your 401k or IRA funds as capital to invest into a business. This gives a business cash to operate now, you can go ahead and start utilizing it for downpayments to hold property in the C-corp which is not as lucrative; however, it is not something you should NEVER do. There can be some advantages to it.
Investor · Grand Rapids, MI · Member since 2012 · 158 posts · 49 votes
12y
Hi. I'm hoping that @Steven Hamilton II or someone can walk me through the financial implications of doing a ROBS? I know that IRS scrutiny is well documented.
Consider the following:
1. An individual has $150K in savings account and invests in flips or new home construction making $50K in 2014. I would assume he pays income tax on that $50K assuming one declares real estate as her profession (otherwise it would be short0term capital gain)?
2. An individual pays $3k-5k (plus $500/year) to a financial company to set up a ROBS utilizing her $150K IRA funds. The C-corp is established. The C-corp pays her a salary of $50K which she declares on her individual taxes.
Is there additional taxation for the C-corp?
Is it ok to pay out the $50k as salary?
Is there a requirement that the IRA gets refunded by a certain time or any specific intervals?
Hi. I'm hoping that @Steven Hamilton II or someone can walk me through the financial implications of doing a ROBS? I know that IRS scrutiny is well documented.
Consider the following:
1. An individual has $150K in savings account and invests in flips or new home construction making $50K in 2014. I would assume he pays income tax on that $50K assuming one declares real estate as her profession (otherwise it would be short0term capital gain)?
2. An individual pays $3k-5k (plus $500/year) to a financial company to set up a ROBS utilizing her $150K IRA funds. The C-corp is established. The C-corp pays her a salary of $50K which she declares on her individual taxes.
Is there additional taxation for the C-corp?
Is it ok to pay out the $50k as salary?
Is there a requirement that the IRA gets refunded by a certain time or any specific intervals?
1. It would be taxed as ordinary income no matter what. Active trades/business are ordinary income. Sale of capital assets, business assets, collectibles and assets held for investment are treated as capital gains.
2.I would only pay that salary out if the c-corp actually did business; however, I don't think the full profit would be justified unless hours were documented.
No, it owns the stock or a percentage of the stock, that in and of itself makes it ok. You don't have to sell your Microsoft shares by a certain time.
Feel free to ask more questions as this is a VERY particular section of the code that could cost you tens of thousands of dollars with a little slip.
I am planning to resign from my job at the end of the year. I have a 401k that I would like to use to purchase a few rental properties. The ROBS seems like it would work well to help me accomplish this.... Or another similar version called a BORSA I found at a local accounting firm.
If I follow the guidelines and stay within the IRS rules, what potential negatives do you foresee?
I am planning to resign from my job at the end of the year. I have a 401k that I would like to use to purchase a few rental properties. The ROBS seems like it would work well to help me accomplish this.... Or another similar version called a BORSA I found at a local accounting firm.
If I follow the guidelines and stay within the IRS rules, what potential negatives do you foresee?
If you plan to keep these as rentals I would not advise doing it in a robs. The Borsa is essentially the ROBS. You do not want a passive activity taxed in a C-corp.
Can you explain further.... What if the c corp had expenses that reduced income to zero? (Paid all profit to me as salary)
It's my understanding that this would be looked upon unfavorably by the IRS. This type of arrangement benefits you personally, but does not benefit your IRA; the purpose any IRA investment should be to benefit the IRA.
The IRS may look at this as an attempt to siphon cash out of your IRA (or use your IRA to generate taxable cash flow) without paying a penalty.
Rental income is passive, having passive income in a C-corp is a bad thing. This is specifically true if it is greater than 60% of your income as it would be subject to a 20% additional tax.
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
11y
The use of retirement funds such as IRA and former employer funds (e.g., PSP, TSP, 403b, 401a, 401k, etc.) to finance one's existing or new business has bee legitimized by the IRS through several news letters and memos. The IRS has stated that the the use of retirement funds to finance one's own business is not illegal; instead, the IRS has said that their main concern is with individuals not following the rules going forward. Rules such as, not offering the plan to employees, not filing the annual 5500 tax return for the 401k, not filing the tax return for the corporation, to name a few.