As the economy struggles to get back to pre-2005 figures, I have encountered the rise of the entrepreneur. When someone won’t hire you, hire yourself!! One obstacle that stands in the way of potential entrepreneurs is funding. A situation recently arose in my office where a client wanted to know if they could use their IRA money to start up a business. After some research and speaking to the IRS, I am happy to say that it can be done. Whether it is feasible is a case by case determination. The funniest part of my research was when I was talking to the IRS, the agent told me to research “rollover as a business” or a ROBS transaction. I can’t make this stuff up folks. While the IRS makes it difficult to execute, I am convinced that the bright CPA’s of America can pull it off. Here is a roadmap I found on a CCH website:
Progressive steps in a ROBS transaction
The following progressive steps make up a ROBS transaction:
(1) An individual establishes a shell corporation sponsoring an associated and purportedly qualified retirement plan. At this point, the corporation has no employees, assets or business operations, and may not even have a contribution to capital to create shareholder equity.
(2) The plan document provides that all participants may invest the entirety of their account balances in employer stock.
(3) The individual becomes the only employee of the shell corporation and the only participant in the plan. At this point, there is still no ownership or shareholder equity interest.
(4) The individual then executes a rollover or direct trustee-to-trustee transfer of available funds from a prior qualified plan or personal IRA into the newly-created qualified plan. These available funds may be any assets previously accumulated under the individual’s prior employer’s qualified plan, or under a conduit IRA which itself was created from these amounts. Note: Because assets have been moved from one tax-exempt accumulation vehicle to another, all assessable income or excise taxes otherwise applicable to the distribution have been avoided.
(5) The sole participant in the plan then directs investment of his or her account balance into a purchase of employer stock. The employer stock is valued to reflect the amount of plan assets that the taxpayer wishes to access.
(6) The individual then uses the transferred funds to purchase a franchise or begin some other form of business enterprise. Note: All otherwise assessable taxes on a distribution from the prior tax-deferred accumulation account are avoided.
(7) After the business is established, the plan may be amended to prohibit further investments in employer stock. This amendment may be unnecessary, because all stock is fully allocated. As a result, only the original individual benefits from this investment option. Future employees and plan participants will not be entitled to invest in employer stock.
(8) A portion of the proceeds of the stock transaction may be remitted back to the promoter, in the form of a professional fee. This may be either a direct payment from plan to promoter, or an indirect payment, where gross proceeds are transferred to the individual and some amount of his gross wealth is then returned to the promoter.
