The Rules of Rollovers as Business Startups (ROBs)

An individual can use their retirement funds to invest in a new business startup and use their retirement funds in non-taxable transaction, so long as the retirement assets are used to purchase stock in the new business.

In theory, ROBS is a great way to make use of retirement funds that may otherwise have negative tax implications. However, like any other new business venture, there is definitely a great deal of associated risk involved with this strategy.

Success Stories

Like anything else in life, there are some success stories of individuals using a ROBS tax incentive to start and launch a small business or startup. But like anything else, there are much more cases of individuals losing their retirement funds in their entirety and then having to claim bankruptcy after the fact (so they lost the business as well).

One of the most notable success stories can be seen from a founder taking outsized risk and it paying off can be found from the Founder of FedEx. Frederick Smith flew to Vegas with $5,000 and came back with $27,000 and was able to save his business from rising fuel costs, by playing blackjack, of all things. There are similar stories of people using credit cards or ROBS to launch their business, but the success stories are few and far between, in comparison to reports of bankruptcy filings and business dissolution.

Safer Investments

What would be a safer investment? Buying stock in an already established business that has positive operating cash flow and is very profitable. This can be a great way to make residual income and still benefit from the ROBS tax incentive while also diversifying your retirement plans. This is much safer than investing in a brand-new startup and all the associated costs that come with it.

Small Business Can Be Risky

Small business can be riskier or less risky than a larger firm. What’s more important than the size of the firm is its operating cash flow, the level of profitability and the line of business they operate in. A company can have 5 employees but still be a much safer investment than highly-indebted larger company.

Small businesses are defined as smaller privately held companies that have less than 500 employees. After 500 employees this would typically be considered a medium sized company.

Who Should Take the Risk?

Younger individuals should be more inclined to take risk but yes making this investment at a younger age should be considered less risky, since you still have plenty working years left in your life and time to bounce back from a potential loss.

Whether you should invest in your own business idea or someone else’s really depends on your passion. If you love your idea and are willing to give it everything you have, you should never be afraid to take the risk of starting the business. Even if you fail, the odds are you may hate yourself for not trying and might regret it the rest of your life.

The Biggest Problem with Investing Retirement Money

The biggest problems with investing retirement money into a startup is having a solid business to invest in and whether the business has stock/equity availability. If the company is a “gem” they may not really want to offer equity unless you know them personally or have been involved in their operations before. However, I know many that successfully invested their funds in the business of someone else and have profited greatly for it.

Pros: This can be a great way to diversify your residual income and receive an alternative revenue stream outside of a traditional retirement investment. Moreover, this may be a fun thing to do all-around on the side.

Cons: You are potentially risk your future and availability to retire early. It may also mean that you may have to work extra hard to win back your retirement savings and could force you to retire at a much later age.

Forming a startup can be a very daunting task for anyone and it’s definitely not something you want to do alone. If you go this route you need help from someone that you can trust and who has your best interests in mind.