While companies like Guidant argue that the rollovers are legal as long as the correct procedure is followed and the C corporation remains compliant, others disagree.

The ROBS appears to operate within an IRA “gray area.” Entrepreneurs using the rollover might be at greater risk of personal or business IRS audits, and they are susceptible to prohibited transaction penalties if the rollover is improperly handled or the assets misspent.

“The IRS hates these things, so they become complicated, expensive and most of the time unnecessary,” said Hance.

Some internet commenters argue that companies offering these rollovers take advantage of the natural optimism of entrepreneurial people. Guidant, for example, aggressively pitches itself as an option for potential franchisees.

“These are legitimate strategies; it’s not like we’re talking about a scam,” said Sullivan. “People who want to start a business are oftentimes overly optimistic when they get started, and lack of capital is one of the great reasons for that. Most of these people also lack the skills, knowledge, patience and experience to run a business, but they do it anyway. With this kind of rollover, they’re increasing their risk.”

If clients are ready to be entrepreneurs, they should display what Sullivan refers to as his “Five P’s.” These include:

  • Purpose. Clients will know what the purpose of their business will be.
  • People. Clients will know who is necessary to the business and who is involved.
  • Product/Process. Clients will understand what the business is trying to deliver.
  • Pricing. Financial analysis will determine what the business’s pricing needs will be.
  • Profits. The client understands where the business’s profits will come from.

Sullivan said that many people who come to him with an entrepreneurial idea are unable to cover all of his requirements and are unprepared to start a business.

However, in an era where interest rates are rising and banks are reluctant to lend money to entrepreneurs, the rollover for business start-ups may be a solution suited to a narrow segment of clients, Hance said.

“If you’re starting a company where you don’t have to invest too much, if you’re willing to lose a certain amount of your retirement money, and if the new business won’t have a ton of employees so you end up having to maintain a 401(k) for all of them, it might make sense,” Hance said.

Hance, who often works with high-earning, entrepreneurial young people, has had only one client approach him about a ROBS to finance a potential side hustle, but the client was ineligible because he was trying to pull the assets out of his current 401(k).