These Glossary posts are intended to be short and simple, so this is a major oversimplification of how a ROBS transaction works, but here’s the basics:
- Have money in an existing 401(k) or IRA
- Create a new corporation
- Create a 401(k) plan inside your new corporation
- Roll the money from the old retirement account into the new 401(k) plan in your new corporation
- In the new 401(k), invest all of the money into your new corporation’s stock
The idea is, the transfer from the old retirement account into the new retirement account is tax-free, and because you invested the money in the new account and bought your corporation’s stock, your corporation gets startup funds, and it’s all tax-free.
This can work … but it’s fraught with danger. I wrote about those dangers in this blog post back in 2014.
My bottom line when clients bring up ROBS transactions is: don’t do it.