BORSA/ ROBS Exit Strategies
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
When you enter into any structure, it’s wise to know how to exit it as well. There are essentially four avenues for clients to exit the BORSA structure, each depending on where they aim for the value growth to accumulate.
First, there’s the “Stay the Course” approach, where business owners utilize their retirement savings accounts to invest in their enterprises. By funneling existing retirement funds into the business and reinvesting the accumulated value back into the retirement account, individuals expedite their wealth accumulation, often outstripping stock market investments. For those inclined towards this method, the exit strategy is clear: maintain the current trajectory and stay the course. Funds are introduced into the BORSA plan, invested in the C corporation, utilized to operate and expand the company, and upon selling the company, the proceeds are reinvested into the BORSA plan. Subsequently, the company can be liquidated, the retirement plan closed, and the funds rolled back into an IRA, effectively restoring the initial financial structure. At this point, individuals are poised to enjoy their retirement with a substantial deferred income nest egg.
Alternatively, some individuals view the BORSA as a mere launching pad, using their retirement funds for an initial capital infusion but aiming to replenish the money in their retirement accounts swiftly and grow the business’s value personally outside the plan. We refer to this strategy as the “Unhook“. This entails a nuanced approach—let’s say the company generates $100,000 in profit in the first year. After paying 21% corporate income tax, $79,000 of after-tax profits remain. These profits can be distributed as dividends, with the plan receiving 95% of the dividends and individual shareholders subject to individual taxation on the remaining 5%. Alternatively, employing the Unhook strategy, the $79,000 could be utilized to repurchase some of the company stock owned by the BORSA. When a company buys back shares from shareholders, it’s termed treasury stock, reducing the number of shares outstanding and enhancing the value per share of the remaining outstanding shares. Over time, this method allows the C Corporation to repurchase all stock from the retirement plan, effectively restoring their original retirement account balances and reclaiming complete ownership of the company individually. At this juncture, the option within the retirement plan can be to terminate it or transition into a standard 401(k) plan. The business no longer has the 401(k) as a shareholder and is no longer required to be a C Corporation. Converting to an S Corporation or other structure is now an option. This encompasses the Unhook strategy.
In cases where rapid company growth is anticipated, leveraging a buyout may prove advantageous. By borrowing from banks at the corporate level, funds can be used to repurchase stock from the retirement plan at current valuations. Subsequent profits can then be allocated towards repaying the bank, preserving the frozen stock value from the date of the transaction. This constitutes the third exit option: the Leveraged Buyout.
Finally, the fourth option involves utilizing the Net Unrealized Appreciation (NUA) Strategy. Typically, an entrepreneur who has engaged in the ROBS business financing strategy, built a successful and profitable enterprise, and now wishes to exit the strategy aims to defer or reduce taxation on their company shares. If the company stock is valued at more than what an entrepreneur wants to pay to buy it back, there are provisions in the Internal Revenue Code (IRS) permitting tax deferral and capital gains tax treatment when employing certain exit methods from a ROBS Plan. The primary method used is the Net Unrealized Appreciation (NUA) transaction.
When it comes to the NUA transaction, several conditions must be met. These include the ROBS participant being at least 59.5 years old, all other defined contribution accounts (sponsored by the employer) are also distributed, employer securities are distributed in-kind and in the same tax year, among others. Once these conditions are met, a ROBS participant exit can be initiated. The participant will owe only ordinary income tax in the year of distribution on the original rollover value of the shares, as of the date of the original ROBS transaction. Long-term capital gains tax will be due when the shares are ultimately sold.
In the end, the chosen strategy depends on whether individuals seek to maximize value growth within their retirement accounts, maintain a symbiotic relationship between business investment and retirement funds, or capitalize on rapid company expansion through strategic leveraging. Each approach offers distinct advantages tailored to varying financial objectives.
DRDA is the only ROBS/BORSA provider that is uniquely qualified to help navigate the right strategy for you. If you would like to discuss which option is best for you, please call Bryan Uecker at (281) 954-6004 or email bryan.uecker@drdacpa.com.
- Published in ROBS 401(k)
Using Your 401(k) or IRA to Start a Real Estate Business: A Quick Guide
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
Thinking about using your retirement savings to enter the real estate market? Here’s a concise guide on how to leverage your 401(k) or IRA for a real estate operating or property management company.
Why Real Estate?
Real estate is a compelling investment due to its potential for passive income and long-term appreciation. It also provides financial benefits like diversification and tax advantages, including depreciation and deductions.
Can You Use Retirement Funds for Real Estate?
Direct investment in real estate through a traditional 401(k) is not permitted. While self-directed IRAs allow real estate investments, they come with complexities and fees. Direct withdrawals from retirement accounts incur taxes and penalties, reducing your investment capital.
Enter the BORSA: A Tax-Advantaged Solution
BORSA (Business Owners Retirement Savings Account) also called ROBS: (Rollovers for Business Startups) offer a way to use retirement funds without taxes or penalties. Here’s how the BORSA works:
- Start a C Corporation: BORSA requires a C Corp to issue Qualified Employer Securities (QES).
- Start a 401(k): The new C Corp adopts a 401(k) plan.
- Roll Over Funds: Move your retirement funds into the new C Corporation’s 401(k) plan.
- Invest in Real Estate: Use the funds to purchase stock in the C Corp, which then finances your real estate business.
What You Can Start with BORSA
Real Estate Operating Companies (REOCs): Manage and invest in commercial or residential properties.
Property Management Companies: Handle property maintenance and tenant relations for other property owners.
Pros and Cons
Pros:
Diverse Investment: Real estate offers potential for high returns and diversification.
Debt-Free Funding: Avoids debt service and loan complexities.
Cons:
Market Risks: Real estate is affected by local market conditions and economic cycles.
Liquidity Risk: Selling properties can be time-consuming and challenging.
Next Steps
If you’re interested in using BORSA for real estate, consider consulting with a specialist. DRDA can assist with setting up your BORSA, ensuring compliance, and guiding you every step of the way.
- Published in ROBS 401(k)
Understanding the Differences Between DOL and IRS Requirements for Qualified Retirement Plans
By: Bryan Uecker
Navigating the regulatory landscape of qualified retirement plans can be complex for plan sponsors and administrators. The Department of Labor (DOL) and the Internal Revenue Service (IRS) play pivotal roles in overseeing these plans, but they have distinct requirements and regulations. Understanding the differences between the two can help plan sponsors ensure compliance and effectively manage their retirement plans.
DOL Requirements:
The DOL primarily focuses on enforcing the Employee Retirement Income Security Act (ERISA), which sets standards for the operation and administration of retirement plans. Some key DOL requirements for qualified plans include:
1. Reporting and Disclosure: The DOL mandates that plan sponsors provide participants with various disclosures, such as the Summary Plan Description (SPD) and Summary of Material Modifications (SMM). These documents inform participants about their rights, benefits, and obligations under the plan.
2. Fiduciary Responsibilities: Plan fiduciaries have a duty to act prudently and solely in the interest of plan participants and beneficiaries. The DOL oversees fiduciary conduct, ensuring that fiduciaries fulfill their obligations and avoid conflicts of interest.
3. Vesting and Participation: The DOL sets rules regarding vesting schedules and eligibility criteria for plan participation. These regulations aim to protect participants’ rights to their accrued benefits and ensure equitable access to retirement savings opportunities.
IRS Requirements:
While the DOL focuses on ERISA compliance, the IRS administers the tax laws related to qualified retirement plans. Key IRS requirements for these plans include:
1. Plan Qualification: To receive favorable tax treatment, retirement plans must meet specific qualification requirements outlined in the Internal Revenue Code (IRC). These requirements cover various aspects of plan design, such as contribution limits, distribution rules, and nondiscrimination testing.
2. Plan Documentation: The IRS requires plan sponsors to maintain up-to-date plan documents that reflect the terms and conditions of the retirement plan. These documents must comply with IRS regulations and be available for review by plan participants and government agencies.
3. Tax Reporting: Plan sponsors are responsible for filing annual tax returns and informational forms with the IRS, reporting contributions, distributions, and other plan-related activities. Compliance with IRS reporting requirements ensures that the plan maintains its tax-qualified status.
Comparison:
While both the DOL and IRS regulate qualified retirement plans, they have distinct areas of focus and enforcement authority. The DOL emphasizes participant protection, fiduciary oversight, and transparency through disclosure requirements. In contrast, the IRS focuses on tax qualification, plan documentation, and compliance with tax laws to maintain the plan’s favorable tax status.
Conclusion:
Understanding the differences between DOL and IRS requirements is essential for plan sponsors and administrators tasked with managing qualified retirement plans. By adhering to both sets of regulations, sponsors can ensure compliance, protect participants’ interests, and maintain the tax-qualified status of their plans. Staying informed about evolving regulations from both agencies is key to successfully navigating the complex landscape of retirement plan administration.
- Published in ROBS 401(k), ROBS 401k Provider, Small Business, Starting a Business
Selling Your BORSA Business
By: Bryan Uecker
When a seller has a BORSA™ (Business Owners Retirement Savings Account), also known as ROBS, and is considering selling their business, the decision between an asset sale and a stock sale involves additional considerations due to the BORSA/ROBS structure. Here’s a comparison of the two approaches in this context:
Asset Sale
1. Definition: In an asset sale, the buyer acquires specific assets and liabilities of the business rather than the entity itself. This includes tangible assets (like equipment and inventory) and intangible assets (like trademarks and customer lists).
2. Tax Implications: For the Seller: The business entity may face double taxation. First, the entity is taxed on the gain from the sale of assets at the corporate tax rate. Then, any remaining sale proceeds are distributed to shareholders according to their ownership percentage and taxed accordingly. For the Buyer: The buyer benefits from a step-up in the basis of the acquired assets, which allows for depreciation or amortization based on the purchase price, potentially reducing future tax liabilities.
3. Complexity: Asset sales require detailed purchase price allocation among various assets and involve complex tax considerations.
4. Liability: The buyer assumes only the liabilities specifically agreed upon in the sale. This reduces the risk of inheriting unknown or contingent liabilities.
5. BORSA/ROBS Considerations: The C-Corp will have to estimate its federal and state tax bill, pay the estimated taxes, pay its final expenses, dissolve, and lastly, any remaining cash gets distributed to the stockholders according to ownership percentage. So, if the 401(k) owns 95% of the company, 95% will go to the 401 (k). The double taxation kicks in when the seller eventually takes retirement distributions taxed as ordinary income. The 5% going to the individual is taxed using capital gains rates.
Stock Sale
1. Definition: In a stock sale, the buyer acquires the company’s shares, gaining ownership of the entire entity, including all its assets and liabilities.
2. Tax Implications: Selling stock can be advantageous for the seller. 95% goes to the 401(k) plan with no tax due until the seller takes retirement distributions. The personal stock portion will be taxed using capital gains treatment, potentially resulting in a lower tax rate on the proceeds. For the Buyer, the buyer assumes the company’s existing tax basis in its assets and takes on all of the business’s liabilities, which may include unknown or contingent liabilities.
3. Complexity: Stock sales tend to be less complex from a transactional standpoint than asset sales, as the focus is on transferring ownership rather than valuing and transferring individual assets.
4. Liability: The buyer inherits all the company’s liabilities, known or unknown, which can be a significant risk factor.
5. BORSA/ROBS Considerations: If the seller’s BORSA plan holds stock in the company, the plan will sell its shares for cash as part of the stock sale. The account can then be rolled into an IRA or other retirement plan vehicle and won’t be taxed until withdrawn. The portion owned outside the plan will be taxed using capital gains rates.
Conclusion
The BORSA™/ROBS structure affects both asset and stock sales of a business. The choice between the two will depend on various factors, including tax considerations, liability issues, licensing issues, and the specific goals of both the seller and the buyer. DRDA is uniquely positioned to help you navigate these complex transactions and ensure compliance with tax, Department of Labor, banking and regulatory requirements so you keep more of what you have earned from growing your business.
- Published in Job Posting
Comparing Self-Directed IRAs vs. BORSA/ROBS
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
Self-directed IRAs and BORSA/ROBS (Rollovers for Business Start-ups) offer distinct approaches to investing in businesses:
Business Involvement
BORSA/ROBS: Requires active participation in business operations, including receiving a salary if deemed reasonable. Structured through a C corporation, which is the sponsor of the retirement plan.
Self-directed IRAs: Passive investment vehicles where IRA owners cannot engage in business management or take salaries. Doing so could violate IRS rules on prohibited transactions.
Tax Considerations
BORSA/ROBS: Subject to regular corporate taxes; UBIT (Unrelated Business Income Tax) does not apply since the C corporation is taxable.
Self-directed IRAs: Income from business activities may trigger UBIT if unrelated to the IRA’s tax-exempt purpose.
Loan Guarantees
BORSA/ROBS: Allows funds to be used as a down payment for business loans, including SBA loans.
Self-directed IRAs: Cannot guarantee loans, maintaining separation between IRA assets and personal liabilities.
Ownership Flexibility
BORSA/ROBS: Enables up to 100% ownership of the business, providing full control.
Self-directed IRAs: Direct ownership risks violating IRA rules if exceeding certain ownership thresholds, jeopardizing tax benefits.
Conclusion: Self-directed IRAs are ideal for passive investors seeking hands-off involvement, while ROBS empowers owners with direct control and tax advantages through a C corporation setup.
- Published in ROBS 401(k), ROBS 401k Provider, Small Business, Starting a Business
Unlocking Success: Navigating the ROBS Journey!
A Persuasive Essay on the Benefits of the ROBS Strategy
By: Eva Jiang, M.B.A., M.S.
Recently, DRDA hosted an enlightening webinar titled “Unlocking Success: Navigating the ROBS Journey,” aiming to demystify the ROBS (Rollover as Business Start-up) strategy for aspiring entrepreneurs. This essay argues that the ROBS strategy offers a unique and advantageous pathway for individuals to leverage their retirement funds to start or buy a business without incurring taxes or penalties. The webinar provided an in-depth exploration of the ROBS strategy, addressing common concerns and illustrating its potential benefits.
Setting the Stage for Success
The webinar began with the foundational steps necessary to ensure a distraction-free environment, emphasizing the importance of focused attention when dealing with complex financial strategies. Attendees were encouraged to silence their phones and find a quiet place, setting the stage for a productive session. The introduction of the Q&A chat box underscored the interactive nature of the webinar, allowing participants to engage directly with the experts, thereby enhancing their understanding of the ROBS strategy.
Expert Insights and Comprehensive Understanding
The session featured two distinguished speakers: Doug Dickey, a Partner at DRDA with credentials such as CPA, CVGA, and CEPA, and Bryan Uecker, the Retirement Plan Manager with qualifications including QPA, QPFC, AIF, and AIFA. Their combined expertise provided a thorough and reliable foundation for understanding the ROBS strategy. This high level of expertise is crucial for individuals considering using their retirement funds to invest in a business, as it ensures that they receive accurate and comprehensive information.
The Mechanics of the ROBS Strategy
Doug and Bryan explained the ROBS strategy in detail, highlighting its core components: forming a C Corporation, establishing a 401(k) Profit Sharing Plan, and rolling over retirement funds into this plan to invest in a new business. This approach allows individuals to use their retirement funds without incurring the taxes and penalties typically associated with early withdrawals. The ROBS strategy thus provides a viable and advantageous option for entrepreneurs who lack sufficient liquid capital but possess substantial retirement savings.
Addressing Common Concerns
A significant portion of the webinar was dedicated to addressing common concerns and questions from the attendees. These included:
Compliance with IRS Regulations: Ensuring compliance with IRS regulations is a primary concern for anyone considering the ROBS strategy. The speakers provided detailed guidance on meeting all necessary requirements, emphasizing the importance of adherence to avoid legal complications.
Eligible Retirement Funds: The types of retirement funds that qualify for ROBS were clarified, providing attendees with a clear understanding of their eligibility.
Tax Benefits: The tax advantages of operating under a C Corporation structure were highlighted, showing how the ROBS strategy can lead to significant tax savings.
Exit Strategy Costs: Insights into the expected costs of an exit strategy were shared, helping attendees plan for the future and understand the long-term financial implications of their investment.
The Value of Personalized Consultation
As the webinar concluded, DRDA offered attendees an exclusive opportunity for a complimentary one-hour consultation. This personalized advice is invaluable for individuals seeking to tailor the ROBS strategy to their specific circumstances. Such consultations can address unique challenges and provide customized solutions, further enhancing the appeal of the ROBS strategy.
Stay Connected
For those with additional questions, the speakers provided direct contact details. Bryan’s email and phone number were shared, along with a link to schedule a consultation. “We’re here to help you on your journey,” Doug assured, his sincerity resonating through the screen.
Bryan Uecker: bryan.uecker@drdacpa.com | 281-954-6004
Schedule a Consultation: Complimentary One-Hour Consultation
Final Thoughts
As the webinar concluded, there was a sense of accomplishment and excitement. The attendees had gained valuable insights into the ROBS journey, feeling more empowered to take the next steps in their entrepreneurial endeavors. The DRDA team was grateful for the opportunity to share their expertise and looked forward to continuing to support these aspiring business owners.
Thank you to all who joined us. Stay tuned for more from DRDA as we continue to help unlock success in entrepreneurial journeys.
- Published in ROBS 401(k), ROBS 401k Provider, Small Business, Starting a Business
