Glossary: ROBS Transactions

calculator and signatureIn the tax world, the term “ROBS” stands for “Rollover for Business Startup.” In a ROBS transaction, a person uses existing retirement account money to fund the startup of a new business, and if done right, the transaction is tax-free.

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:

  1. Have money in an existing 401(k) or IRA
  2. Create a new corporation
  3. Create a 401(k) plan inside your new corporation
  4. Roll the money from the old retirement account into the new 401(k) plan in your new corporation
  5. 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.