An unusual retirement account rollover could be the strategy that unlocks clients’ entrepreneurial desires—or the mistake that ROBS them of their dream.
A rollover for business start-ups (ROBS) allows investors with a retirement account like an IRA or 401(k) to use their savings, tax-free, to start a business—with a few catches.
Greg Sullivan, president and CEO of Sullivan, Bruyette, Speros and Blayney, a McLean, Va.-based registered investment advisor, argues that if clients require something like a ROBS to found a business, they may not be prepared to own and operate their own company.
“I feel like these ROBS are setting people up for failure,” said Sullivan. “If you don’t have the capital to truly set up the business and you have to turn to your 401(k) or IRA to do that, you may not be well-capitalized to build your business.”
Guidant Financial, a specialist in business and franchise financing that offers these rollovers as its flagship business, reported that the ROBS is the third most popular funding option for entrepreneurs so far in 2018. While most new businesses are purchased with cash, 22 percent of the respondents in a survey of more than 2,600 small business owners told Guidant that they used their 401(k) to launch their business.
Guidant said it has seen a 17 percent increase in lending transactions this year, along with a 23 percent increase in year-over-year revenue.
Guidant often combines a ROBS with other forms of financing, like Small Business Administration loans. The firm noted that it has seen a 97 percent increase in SBA loans year over year.
According to Guidant, a ROBS allows entrepreneurs to roll assets from an existing retirement account into a new 401(k) sponsored by their new business, which then would allow them to purchase stock in the new business.
Doing so, however, could take a bite out of a client’s retirement prospects.
“It’s like saying someone should dip into their Social Security before they’re eligible because they have a good idea that they want to pursue,” said Sullivan. “That’s supposed to be their fallback position, the support for when they get older. A retirement plan shouldn’t be thought of as a tool kit for your day-to-day life or for starting businesses. The whole purpose is to be thinking long term.”