​The ROBS Program Offers Ideal Tax Strategies for Active RE Investors

If you ask most CPAs about the ROBS program, they will likely have no idea what you are talking about. ROBS (Rollover for Business Startups), allows for real estate investors to utilize funds from their retirement accounts (e.g. 401K or IRA), into your real estate business without having to pay early withdrawal fees or tax penalties. ROBS isn’t a business loan or a 401K loan, so there is no debt repayment involved in the process. While there is empirical evidence showing that utilizing ROBS leads to higher success rates than traditional business funding, not every real estate investor is a prime candidate.

ROBS is constructed so that your business retirement account becomes the owner of your real estate business. Using ROBS requires one to follow certain federal rules. Normally, if one withdraws from their retirement account before age 59 ½, there will be income tax due plus a ten percent penalty. The amount of borrowing against your qualified retirement account is also limited, has interest attached, and may be required to meet certain compliance standards. ROBS is a specialized financing tool that is dependent on your personal circumstances. The determination as to whether or not someone is a good fit must be assessed on a case-by-case basis.

One must understand that setting up ROBS is a complex process, which will usually involve the assistance of both CPAs and attorneys who are experienced in this area. The setup of ROBS is far more complex than handling typical legal paperwork. ROBS setup can be broken down into 5 steps:

• 1)Form a C-Corporation
• In order to qualify for ROBS, you must be setup as a C-Corporation. The IRS prohibits certain transactions involving qualifying employer securities that can only be legally valid if one is structured as a C-Corp. Therefore, a ROBS will not be doable with some of the most used legal real estate structures, such as limited liability company, limited liability partnership, S-Corporation, or sole proprietorship.
• 2)Open up the Retirement Plan Under Your C-Corp
• Step 2 requires setting up a retirement plan, such as a 401K, for your newly formed C-Corporation. Which type of retirement plan is optimal for your business is dependent on factors such as the number of employees, the number of highly compensated employees, and annual income expectations. You will need to select a custodian to manage the investments within your C-Corp’s retirement plan (e.g. Schwab, Chase, Merrill Lynch). ROBS administrators typically do not offer these services, but should be able to direct you to a custodian who will identify the ideal retirement plan setup.
• 3)Move Your Retirement Funds to Your New Company Retirement Plan
• Your retirement funds now need to be rolled into your new C-Corp’s retirement plan. In order for this to work as planned, the funds you rolled over should be held by a retirement plan from a previous employer (not your current employer), and should be a traditional-structured plan, not a Roth. In order to meet the criteria of the program, the owner must be an active participant in the business. You cannot have an passive business model and qualify for ROBS.
• 4)Your New Retirement Plan Will Buy the Stock in Your C-Corp
• Next, your retirement plan that has been rolled over will purchase stock in your C-Corp. In order for this to happen, the C-Corp will have to have issued ownership shares. You do not necessarily have to utilize 100 percent of your issued shares for your retirement plan’s purchase. Often, one wants to leave some C-Corp shares unpurchased as a way to receive different forms of funding at a later date. The determination as to how much funding should be utilized is case-by-case.
• 5. Your Funds Are Now Set to Use for Business
• After the first four steps have been satisfied, you are able to use your retirement funds for your business. These funds can be used for any normal business activity. Remember, using funds for personal expenses would count as a prohibited transaction. The IRS closely monitors how ROBS is utilized as the possibilities for tax fraud are plentiful.
• Additionally, there are various reporting requirements issued by the IRS and the US Department of Labor. A ROBS administrator, along with assistance from your legal and tax professionals, will be able to handle these for you.