Using 401(k)/IRA Funds to Start or Buy a Business
By Jay Barrera, MFA. MS.
Using Rollovers for Business Start-ups (ROBS) such as DRDA’s BORSA® Plan to finance a business isn’t new, but it is unfamiliar to many. As a result, there are a lot of myths swirling around about the use of ROBS structures that may be stopping would-be entrepreneurs from chasing their dreams.
BORSA® Plans involve using money from an eligible retirement account to finance the purchase of a business or franchise. To summarize, a corporation is formed, and that corporation then sponsors a 401(k) plan. Funds are rolled from an existing retirement account into the new 401(k) without triggering a taxable distribution. This new 401(k) purchases (or invests in) shares of the corporation, which can then purchase a business or franchise.
In essence, a BORSA® Plan allows you to invest in your own business where you have control rather than investing in the market where you have no control. Here’s the truth behind the most common ROBS myths:
It’s not tax avoidance.
Using a BORSA® Plan isn’t a way to evade taxes by any means. The Employee Retirement Income Security Act of 1974 (ERISA) was set up explicitly to encourage investment in small businesses – businesses that pay taxes.
BORSA® Plan is an investment, not a loan.
With a BORSA® Plan, you’re investing in your new business or franchise, not taking on debt. This means you won’t have to make monthly loan payments or incur interest.
You can use a BORSA® Plan to diversify your nest egg.
You don’t have to take every penny from your existing retirement fund for a BORSA® Plan to work. Many people only use a portion of their retirement assets, and this arrangement can be used in conjunction with a small business loan or other financing option. So, you can diversify your investments.
Getting funded using a BORSA® Plan can take as little as four weeks.
Depending on the state in which you’re filing, and how fast you’re able to file the necessary paperwork, funding can take as little as a few weeks. Most are completed in less than 30 days.
BORSA® Plans are not the same as Self-directed IRAs.
While it’s possible to finance a business with both self-directed IRAs and a BORSA® Plan, there are some major differences between the two. If you use an SDIRA, the owner may not work for the business or take a salary. The investment amount is also potentially liable for the unrelated business income tax (UBIT), which can get very expensive. With the BORSA® Plan, the 401(k) owner must work for the new business, and UBIT doesn’t apply.
A BORSA® Plan can be used to fund start-ups.
A BORSA® Plan is a great option to finance not only start-ups, but also purchases of existing businesses and franchises.
To some, the BORSA® process can appear to have complex rules and regulations. But if you have a qualified retirement plan with a balance that’s sufficient for your start-up needs and work with an experienced company to support its formation, it can be a great option to start or re-capitalize your business debt-free.
Please visit “BORSA® Plan in ACTION” to learn more about the structure and strategic steps to the solution of the BORSA® Plan.
Are you interested in learning more about DRDA’s ROBS structure, the BORSA® Plan? Give our experienced team a call today 281-488-2022 or email bryan.uecker@drdacpa.com for a free consultation.
