Start Your Business in Retirement

Author: AB Staff

Start Your Business in Retirement

Editor's Pick Finances Purpose

After spending years of your life having to answer to someone else, it is only natural to want to be your own boss. You’ve decided that you’re intrigued by the prospect of potentially opening your own business within the next few years. Whether it is a small bistro in your neighborhood or a startup that hopes to have an impact on the world, the only way you’re going to be able to see your dream come to fruition is if you have the capital to invest in it.

As you grew older, you began to place much of your money in retirement accounts, and as a result, have developed a sizeable nest egg. Recognizing that you’ve saved a lot, you think to yourself that using a small portion of that money to fund your business seems like a smart idea. The only issue is that if you try accessing it now, you run the risk of being penalized for withdrawing sooner than expected, either through taxes or early withdrawal fees.

Often times people close to retiring face this dilemma. They are interested in starting their second, or even third, career, but they don’t know how to properly invest in it without hurting their retirement savings. But don’t worry, there’s a tool that you can use to help you start the process of achieving your goal.

A “rollover as business startup plan”, or ROBS, is a little-known strategy that allows you to move the money from your 401(k) or IRA and roll it over to your business. Here’s an excerpt from the U.S. Small Business Association explaining how an ROBS operates:

You incorporate your new business and have that corporation set up a qualified retirement plan (usually a profit-sharing plan permitted under the terms of the plan to invest in employer stock). Then you roll over your 401(k) or other retirement account to the new retirement plan (the rollover is tax free). That plan then buys shares in your corporation (i.e., the plan becomes an owner of your business).”

There are positives to using an ROBS. Here are a few:

  1. By using an ROBS, you are funding your new business through your own money rather than taking loans from a bank or directly taking the money out of your portfolio and leaving it subject to being taxed. This means your business will not have to worry about covering any debts, allowing you to fund your business more effectively.
  2. By creating the company, you have the potential to rollover your retirement funds into the 401(k) for the new company. And since you must be an employee of the company to have a 401(k), you are entitled to a salary.
  3. As mentioned earlier, completing an ROBS creates a 401(k) for the new company. As the business continues to grow and generate growth, you can add the money to your new 401(k).

But it is important to be wary of the risks that come with doing an ROBS. For starters, if your business fails to generate revenue, it result in your nest egg being completely wiped out. Furthermore, you will also face increased scrutiny from the IRS, an even be subjected to an audit.

Despite the risks, ROBS remains one of the most cost-efficient ways for you to build the business you’ve always dreamed of starting. Have you or someone you know used the ROBS method to start their company. We would love to hear your thoughts! Just navigate over to the Finance section of our forum page and leave a comment!