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Next Generation Trust Services Alerts Entrepreneurs to IRS Concerns about Using IRA Rollovers to Fund Startup Businesses

Published on August 27, 2014

Administrator of self-directed retirement plans notes that the complexities of ROBS Strategy may put business owners into questionable investing territory. Next Generation Trust Services, an administrator of self-directed retirement plans, notes that there has been renewed interest in recent months about Rollovers for Business Startups, or ROBS.

Next Generation Trust Services, an administrator of self-directed retirement plans, notes that there has been renewed interest in recent months about Rollovers for Business Startups, or ROBS. The complex strategy involves using a retirement fund rollover, from a previous employer plan or an IRA, to finance a business startup or buy a business. Jaime Raskulinecz, CEO of Next Generation Trust Services, said that the strategy is becoming more popular but has caught renewed attention of the IRS.

“ROBS is a complex strategy that has been around for decades, but its use has been increasing in recent years, especially in the franchise sector,” noted Raskulinecz. “The IRS issued compliance guidelines about it in 2010 and it has caught the attention of the tax courts and business community, so entrepreneurs are advised to research this strategy very carefully in advance.” ROBS involves using retirement savings early (before the age of mandatory distributions) to buy or launch a business, and avoid paying taxes and penalties for early withdrawal.

Last year, the IRS won two tax court decisions against business owners who misused ROBS:

In Peek v. Commissioner, the tax court said two Colorado entrepreneurs owed more than $560,000 after they used their company’s retirement plan to guarantee a loan.
In Ellis v. Commissioner, the court ruled against a Missouri man who used a ROBS transaction to rent space for his business and pay himself a salary.

There are many steps involved in the ROBS strategy, including setting up a shell corporation that sponsors a qualified retirement plan, such as a 401(k). The individual who set up the plan becomes the only employee and participant, and rolls over or transfers current retirement plan funds into the newly created plan. Any taxes that might ordinarily be owed by taking a distribution are avoided as the assets go directly into another tax-deferred vehicle.

Although many business owners like the idea of not carrying loan debt, implementing ROBS can lead to unintended negative consequences for entrepreneurs who might not fully understand all the trappings; Raskulinecz recommends that entrepreneurs consult with an independent attorney well-versed in ERISA (Employee Retirement Income Security Act) as well as setting up employer-based retirement plans.

Raskulinecz also pointed out that that entrepreneurs may also want to ask their tax professional if it makes sense for them to use retirement savings for this purpose, especially if they are approaching retirement age and have fewer years to bounce back from a potentially risky investment.

“There are IRS and Department of Labor issues to be aware of when using ROBS,” said Raskulinecz. “Rather than veer into potential legal or tax trouble, business owners may borrow money from someone’s self-directed retirement plan instead.” Raskulinecz explained that there are various ways to structure business investment arrangements without using ROBS; in addition to making a loan, an individual with a self-directed retirement plan may also become an angel investor in return for some equity in the business.

Self-directed retirement plans allow for a broad array of nontraditional investments, including unsecured loans, private placements, precious metals, real estate and much more. The self-directed IRA lends the money to the business owner, who pays back the loan at an interest rate and in a time period that the account holder and borrower work out themselves.

“Although we do not give investment advice, we do educate our clients about investing within IRS guidelines, and we strongly recommend that investors carefully research ROBS and other ways to fund a startup business,” said Raskulinecz. “Our transaction specialists can answer questions about using funds from a self-directed IRA to buy a business, or about the many alternative assets allowed within these plans.”

About Next Generation Trust Services

Next Generation Trust Services (NGTS), headquartered in Roseland, New Jersey, is a professional third-party administrator of self-directed retirement plans. NGTS provides education, administrative support, and account maintenance to individuals interested in self-directing their retirement portfolios with a wide variety of investments that are not typically found in an IRA, such as real estate, precious metals, notes and mortgages, private placements, accounts receivables, limited partnerships, hedge funds, and much more. Next Generation Trust Services serves clients globally via its website, https://www.NextGenerationTrust.com.

For more information on self-directing a retirement plan, call:


888-857-8058 (toll free)

or e-mail Info(at)NextGenerationTrust(dot)com.


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