@Ryan Blake thanks for all of the great information!
@Alex Grosvenor thanks for the information as well. I'm still getting the company up as well as finishing some last bits of business right now. When the time comes I'll keep you in mind and hit you up!
@Kyle Mccaw thanks for the encouraging words. If you fail to plan, you plan to fail!
@Brian Paine dude you're in Alameda!? I was in Castro Valley my last year in the Bay. I love Faction Brewing and St George's Gin. When I look back on the little things the pandemic has ruined, I'm sometimes think of going to those places with my friends and dog.
ROBS stands for Rollovers for Business Start-ups. It's a way of pulling money out of your 401k to invest in your business. Most people's money has little liquidity because it's all tied up in their house or 401k. Very few people have a couple hundred grand on hand to invest on a flip or what have you. Traditionally if you have enough in your 401k, you can give yourself a free loan up to 50% of the value of the account or 50k, whichever is first. Frankly 50k doesn't go very far in real estate, and the loan has to be paid back within a year. Another method that recently has been brought on by the pandemic is the CARES Act that Congress passed that allows you to pull out 100k tax and penalty free for up to three years if you have been affected by the pandemic. You're supposed to pull this money out to spend on stuff to live though, not necessarily investing. Consult with your CPA or attorney on how much colouring outside the lines you can do with that one. Here's a good video talking about that:
I love those guys' videos by the way. I've literally watched and rewatched over a dozen hours of their stuff. They have very interesting strategies on how to set up entities for investing.
So with ROBS, you can access all of your 401k tax free and penalty free, which is why it's so ninja. How it works is you form a C corporation, and only a C corporation, call it Paine Inc., establish a company ran/sponsored 401k plan that'll be through Fidelity or an equivalent, roll over your existing 401k plan to the Paine Inc. one, use your new 401k plan to buy shares that Paine Inc. issues (only a C corp can issue shares), and now Paine Inc. has money in its bank account from selling those shares, and then Paine Inc. can use that money to start a business.
I apologize if I'm telling you things you already know, but I want to state that Paine Inc. is a separate legal entity from you, so you're not giving yourself the money from your 401k, nor is it even a loan; you're buying shares that Paine Inc. issues, and now your 401k owns part of Paine Inc. It'll be no different that if you had an IRA and used it to buy shares of Apple or Amazon. The only difference here is that (assuming you're solo) you're the owner of Paine Inc. via your 401k. Because there's a thin line between you and Paine Inc. and a lot of opportunity for mischief, the IRS scrutinizes this structure very closely and has strict regulations on how they are ran. This is why I mentioned in my post the requirement about being an active company and the 50% rule. Because of how complicated this can get, you kind of need a lawyer/firm to set it up. Technically you could do it yourself, but I don't think it's worth the risk. You also have to file special paperwork with the IRS every year that the company you hire will do.
I also do want to mention that your 401k has to be transferrable. If you're currently employed, you likely can't roll that employer sponsored one into a new one. Although if you had an old 401k that you rolled into your current employer's, you'll likely be able to roll that bad boy out. It also doesn't work with Roth IRA's because those things are taxed differently. It also is only worth it if you have a lot of money in the 401k because the fees alone are in the thousands. I paid $2,500 because of a COVID special, and after the first year my company will pay $900/yr for ongoing compliance. To get out from these ROBS operating restrictions, the company can buy back shares from your 401k at fair market value. There are other exit strategies, but this is the most common one.
There are a lot of nitty gritty details that I skipped over, but I covered all of the main ones. You can also hit up George Blower from My Solo 401k. He's a Harvard educated lawyer, while I almost burned myself making toast this morning. He's the one I'm working with and I like him a lot so far. Let me know if you have any other questions! If you're ever in DFW, hit me up and we can grab a socially distanced beer.
