Setting up C Corp with IRA funds? Experience with Guidant Financial?
Parker, CO · Member since 2012 · 7 posts · 0 votes
Looking to possibly set up a C Corp and have our IRA buy shares so that we would have available capital for fix and flip opportunities. Does anyone have this arrangement set up or had in the past that can give me advice as to whether this is a "safe" method for utilizing IRA funds? Viability of this arrangement in the future with the IRS? Any successful exit strategies?
Also, if anyone has used Guidant Financial that would like to share their experiences with this company and their products, I would love to hear your input.
Thanks!
Given the expense, the necessity of 3rd party oversight, the nebulous nature of DOL interpretation, and the likelihood of inadvertent violation, why even discuss this? If you're a small investor, particularly one starting out, why not just roll to a 401K, take the participant loan and go from there. If you borrow the max ($50,000) at the rate of prime + 1% (4.25%) and amortize for the longest period (5 years), your payments will be $926.48 per month. As trustee of your own 401K, you can allow the first payment to be made 3 months from the making of the participant loan.
Is this enough money to start a bakery, open a restaurant, fund a manufacturing company? No, not at all. Is this enough money to place a bunch of options on houses then wholesale the options, buy some tax liens or re-lend to others at hard money rates? ALL DAY LONG!
Rather than beat the ROBS question to death, why not develop some strategies that would allow the beginning investor to get access to his money in the simplest fashion, then profit immediately from it.
IMHO, kill the idea of ROBS and do something with your funds that make you money, both inside and outside your 401K, immediately. I bought a duplex last summer for $9,000 which is making me $600 per month right now. If I had spent $6,000 of that on a ROBS program, I'd have $3,000 and a ROBS program.
As a side note: Someone stated that they don't like the lending restrictions inside a retirement plan. I own 6 duplexes and a 3-unit, and I'm 100% financed on five of them, the other I bought outright with profit from the first five. I don't see any restrictions at all.
So please, forget ROBS, and keep your money for profitable real estate transactions. JMHO
Mike Knowles, thank you for the link to SD Cooper's Exit Strategy presentation. For what it's worth (almost 2 years later now), the link has changed to http://sdcooper.com/ersop/presentations/Exit-Strategy.pdf, but it shows the need for and complexity of an exit strategy for ROBS.
Given the expense, the necessity of 3rd party oversight, the nebulous nature of DOL interpretation, and the likelihood of inadvertent violation, why even discuss this? If you're a small investor, particularly one starting out, why not just roll to a 401K, take the participant loan and go from there. If you borrow the max ($50,000) at the rate of prime + 1% (4.25%) and amortize for the longest period (5 years), your payments will be $926.48 per month. As trustee of your own 401K, you can allow the first payment to be made 3 months from the making of the participant loan.
Is this enough money to start a bakery, open a restaurant, fund a manufacturing company? No, not at all. Is this enough money to place a bunch of options on houses then wholesale the options, buy some tax liens or re-lend to others at hard money rates? ALL DAY LONG!
Rather than beat the ROBS question to death, why not develop some strategies that would allow the beginning investor to get access to his money in the simplest fashion, then profit immediately from it.
IMHO, kill the idea of ROBS and do something with your funds that make you money, both inside and outside your 401K, immediately. I bought a duplex last summer for $9,000 which is making me $600 per month right now. If I had spent $6,000 of that on a ROBS program, I'd have $3,000 and a ROBS program.
As a side note: Someone stated that they don't like the lending restrictions inside a retirement plan. I own 6 duplexes and a 3-unit, and I'm 100% financed on five of them, the other I bought outright with profit from the first five. I don't see any restrictions at all.
So please, forget ROBS, and keep your money for profitable real estate transactions. JMHO
I agree with @Mike McDermott that self-directed Solo 401k is a better idea then ROBS (there are potential issues with ROBS that you might be facing in the future).
The IRS has commented on the use or ROBS 401k for business financing and concluded that it is a legitimate use of retirement funds provided the rules are followed; therefore, it is important to work with at team of professionals that understand the rules at the time of plan set up as well as the ongoing annual compliance filings.
The IRS has commented on the use or ROBS 401k for business financing...
Just the fact that the IRS chose the acronym ROBS was 50% of the reason I decided to shut mine down...
ROBS stands for rollover as business startup.Over 20,000 ROBS have been funded to date and fortunately the IRS has published guidelines on ROBS.
October 2008 Memorandum:
2010 – IRS Telephone Forum
Fall of 2010 Retirement News for Employers: Brief Summary
February 2013 Employee Plans Compliance Unit ROBS Project: Brief Summary
Correct...the IRS has no issue with ROBS transactions so long as they are done correctly.
That said, for a ROBS transaction to be carried out correctly requires knowledge that very few lay-persons would have. Instead, those who initiate a ROBS transaction are trusting that their plan adminstrator is doing things correctly. Even if the individual does everything they are supposed to do, the plan administrator can push the afoul of ERISA law and put their entire retirement accounts at risk.
Personally, I consider myself pretty well versed in basic tax and ERISA law, but reading through the ROBS documentation and rulings was something I wasn't comfortable enough doing myself. So, I hired a private ERISA attorney who helped with my ROBS implementation and ultimately helped me dismantle it.
Guidant Financial is one of the largest firms handling these types of transactions, and they were the firm that handled mine. When I got uncomfortable with my ROBS setup (based on information I had received from both my CPA and my ERISA attorney), I decided to shut it down. When I did, my ERISA attorney recommended that I get a Determination Letter from the IRS on my plan (basically, ask the IRS to review my plan implementation and verify that I didn't break any laws).
I called Guidant to talk to them about this and they basically said, "Oh, don't worry about that, we're confident you're okay." I asked them if they had ever had one of their customers go through the process with the IRS and actually get a favorable determination (that would have made me feel better about my particular plan implementation). They said they hadn't ever had someone get a determination from the IRS, so I moved forward with mine. And they tried to dissuade me from getting one myself. That was a big red flag for me, and made me realize (again) how much the plan administrator is in control of the ROBS transaction getting done correctly.
It took over a year and a couple thousand dollars, but ultimately, I got a favorable determination from the IRS, which basically indicated that they could never come after me for my ROBS transaction. While I didn't need to spend the time and money to get the determination letter, I sleep better at night knowing that I don't have to worry about the IRS coming after me at some point in the future because my plan administrator might have screwed up (accidentally or purposefully).
Here is the current recap from the IRS on ROBS transactions:
http://www.irs.gov/Retirement-Plans/Employee-Plans...
Here are a couple noteworthy (in my opinion) parts:
Regarding the use of ROBS by business owners: "Overall, the research we conducted and the responses we received to the compliance checks indicated that while some of the ROBS were successful, many of the companies in the sample had gone out of business within the first 3 years of operation, experiencing significant monetary loss, bankruptcy, personal and business liens, or had their corporate status dissolved by the Secretary of State (voluntarily or involuntarily). However, since many of the ROBS we contacted had just started their business within the last few years, it was difficult to get a long term view of the characteristics of successful ROBS and those that failed."
Regarding the risk that plan administrators aren't well versed on the transactions: "We determined that a large reason many sponsors in the sample were non-filers was because they and their advisers were incorrectly interpreting an exemption to the Form 5500 series filing requirement which does not apply to ROBS plans. The filing exemption only applies if assets are less than a specified dollar amount ($250,000) and the plan provides deferred compensation solely for an individual or an individual and his or her spouse who wholly own a trade or business, whether incorporated or unincorporated. However, in ROBS arrangements, the plan rather than the individual owns the trade or business. Therefore, this filing exemption does not apply and the annual Form 5500 return is still required."
Regarding the requirement to turn over control to your plan administrator when it comes to legally fulfilling ROBS requirements: "Please be advised that as long as your qualified retirement plan and related trust are in existence, certain plan administration actions need to be taken in order to keep your plan qualified."
Btw, if you plan to start a ROBS and you plan to hire any employees, keep in mind that one of the requirements of a ROBS business is that you give your employees an opportunity to buy-into the business -- this is because ROBS businesses are essentially just a loophole in ERISA law for employee-owned businesses.
Last thing I'll say here -- Anyone that wants to go this route, go for it. But, if you do, I recommend the following:
- Spending some money to hire a PRIVATE (not provided by the plan) ERISA attorney to review your implementation documents;
- If you plan to hire employees, make sure you understand your responsibilities to them under ROBS rules;
- Remember that, in many ways, you still have an obligation not to personally benefit from your retirement plan. In our case, my ERISA attorney even recommended getting a business credit card that didn't provide frequent flier miles as an incentive -- he claimed that if we personally used the frequent flier miles obtained through a credit card used for our ROBS business, we'd be violating ERISA law.
- Make sure you truly plan to operate your business like a business, as you will be required to do all the paperwork, filings, board meetings, public filings, resolutions, etc. that any C Corporation has to do (no, you can't run a ROBS under an LLC).
- Make sure you plan to make money in your business. If you don't make any money, you put yourself in a weird catch-22 situation...you own and are working for your ROBS business as an employee, so you have to pay yourself a reasonable salary. But, if the business doesn't earn any money, it can appear that you're just siphoning off retirement funds to your personal account.
All that said, keep in mind that I'm not a tax, retirement, ERISA or ROBS expert or professional...these are just my experiences...
Takeaways:
RESOURCES:
http://www.irs.gov/pub/irs-tege/robs_guidelines.pd...
http://www.irs.gov/Retirement-Plans/Employee-Plans...)-Completed-Projects-Project-with-Summary-Reports-%E2%80%93-Rollovers-as-Business-Start-Ups-(ROBS)