Rollover for Business Startups (ROBS): Using Retirement Funds to Buy a Business Tax-Free

A ROBS is a source of funds for a business acquisition, often used alongside other funding such as the buyer's own cash, an SBA loan, or seller financing. "Rollover" refers to moving the buyer's 401(k) retirement account into the business tax-free — the retirement account becomes an investor or shareholder in the business at whatever percentage it contributes to the purchase. A ROBS business must be structured as a C-Corp.

Why it matters: Setting up a ROBS account can cost close to $5,000, plus hundreds of dollars a month in ongoing maintenance, so most providers advise candidates to have at least $50,000 in their retirement account before considering it. Because it's a rollover and not a loan, there are no monthly loan payments — but the percentage of profit attributed to the retirement fund can't be distributed to the owner tax-free. The owner can still take a salary before that profit allocation is calculated, which is a meaningful piece of how the numbers actually work out in practice.

Example:

• Business Acquisition: $500,000
• Source of Funds: $250,000 from the buyer's savings and $250,000 from the buyer's 401(k) ROBS account
• Owner's Salary: $50,000
• Profit after operating expenses (including owner's salary): $200,000
• Profit attributed to the ROBS account: $100,000
• Profit attributed to the owner: $100,000

The IRS also allows borrowing up to 50% of a 401(k), capped at $50,000, for any reason without paying taxes on it — repaid with interest within five years or upon employment termination. This type of loan can fund a business too, but it's better suited as a bridge loan with a clear repayment path already in place: because the term is only five years, the payments (principal and interest, back into the retirement account) can be high, and the business may not be able to support them.

Related terms: SBA Loan, Seller Financing, Owner's Salary, Personal Guarantee