Rollovers as Business Startups | Tax Tip of the Week | No. 109

ROBS - A Good Idea?The tax code is full of acronyms.  This week we’ll take a look at “Rollovers as Business Start-ups”—ROBS.   There are an increasing number of promoters that advocate using this method to help taxpayers establish a new business. ROBS is an arrangement in which prospective business owners use their retirement funds to pay for new business start-up costs.    Typically it works like this:  You pay a fee to a plan sponsor to create a corporation, which sets up a profit sharing plan.  Then you roll your retirement assets into the corporate plan and the-now funded plan buys the stock of your new company.  As a result, your new company’s retirement plan owns your company’s stock, and your company has tax-free cash. The IRS admits that ROBS are not considered an abusive tax avoidance transaction.  While profit sharing plans are a legitimate way to reward employees, they must follow strict rules.  These include filing annual tax returns and Form 5500 returns.  These plans must also avoid transactions that discriminate in favor of highly paid employees, including yourself. While the idea of receiving tax-free cash to start a new venture is attractive, there is the potential of many pitfalls. Once again, the old adage of “if it sounds too good to be true, it probably is” applies here. Give us a call if you want to look at this, and other methods, to start your new business.  You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt - the guy behind TTW...until next week.