ROBS Transactions – Be Very Careful of Using Retirement Funds to Start a Business

NOTE: I wrote this post in 2014, so be aware of its age. The advice is still good though – ROBS transactions are a bad idea. I have passed on working with a few clients through the years who were doing ROBS transactions within their business. Clients using ROBS transactions often have a hard time finding an accountant and finding a third-party administrator of the retirement plan. That’s because these transactions are a compliance nightmare and are dangerous.


True scenario that happened a couple of years ago:

A client asked the following: I have $20,000 in a retirement account with a former employer. My husband wants to start a new business. We were thinking that he could hire me as an employee, and then form a retirement plan under the business.

I would transfer the money from my old retirement account into my husband’s company’s retirement plan and purchase stock in my husband’s company through the plan. This would give him startup funds without having to pay taxes on the $20,000. Will this work?


This type of transactions is called a “ROBS” transactions (ROBS = Rollovers as Business Startups). Theoretically, it can work.  

The key word is “theoretically.”  There is a risk that the IRS could place ROBS on the list of “abusive tax transactions.”  ROBS are not on that list yet, but the IRS has issued guidance that states that ROBS are on a watch list. (2021 update: see this link,
There are many issues:
  1. Valuation. You’d have to figure out some way of valuing the stock so you knew how much your account was worth.
  2. Getting cash out when you want it or need it. What if your account balance is higher than the cash the company has in the bank when you’re ready to take your money out?
  3. What if the company is a flop? You’ve just lost your retirement account.
  4. What if the business needs to hire employees someday? Non-discrimination rules apply to retirement plans, meaning you can’t have special benefit programs just for the owner and his or her spouse. You’d have to let the other employees into the plan and probably give them access to purchasing company stock.
  5. Issues with UBIT (“Unrelated Business Income Tax”), which could be assessed against the retirement plan.
ROBS are workable in theory, but the transaction and maintenance of the plan need to be done just right. Attorney fees would be steep. 

What I Told the Client

I told them all of these things. I then went on to say that it made more sense, if they really wanted to use the retirement funds to start the business, to just withdraw the money and pay the taxes and penalties on the $20,000. Doing this wouldn’t have been a great option, either. But the taxes and penalties were likely to be in the same neighborhood as the compliance costs over time.

In the end, after learning of the complications, the client dropped the idea entirely and went on to find other means of getting the business off the ground.