An assessor has to be brought in to determine the value of the franchise or business. The tactic requires that a C Corporation be created, which is subject to more taxes than an S Corporation or an LLC, Bergman says.
An alternative that can help some people, and which is safer, is to take a loan from the existing 401(k) fund. The loan can be up to half the value of the 401(k) or $50,000, whichever is less. It has to be repaid within five years in at least quarterly payments.
“That is not a lot of money but it is enough money to help some people out and you are paying yourself back because it is a loan,” Bergman says.
The other alternative is to take a large disbursement from the 401(k), but then taxes and a 10 percent penalty have to be paid at the time of the disbursement.
“The number of people using ROBS is growing, but it is still not a common practice,” says Bergman. “Sometimes people feel like they do not have a choice. They need to use the money in their retirement account because they have no where else to turn, so they feel they might as well use it to start a business rather than just living off of it.”