A 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings). 401(k)s have an annual contribution limit of $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older)

A Roth 401(k) is a type of 401(k) that allows you to make after-tax contributions and then get tax-free withdrawals when you retire. While traditional 401(k)s allow pre-tax contributions and the withdrawals in retirement are taxable.

401(k) plans typically allow users to borrow up to half their retirement account balance for a maximum of five years. The current limit is $50,000. 

Pros are that 401(k) loans are cheaper than credit cards, and you pay interest to your own account. There’s no impact on your credit score. But cons are your retirement savings are on the line, sometimes a significant portion of it. Plus, the risks include tax consequences and penalties.

A Rollover as Business Startups is the IRS’s own program to allow business owners to invest their retirement assets in their own companies.

In a ROBS transaction, funds from eligible retirement accounts, including a 401(k) or a traditional individual retirement account, are rolled over in most cases with the help of an attorney or a ROBS provider and invested in a new business or franchise, or used to buy or put money into an existing business.

A ROBS transaction works as follows. First, a C corporation — a corporate structure that allows shareholders — is formed. Then a new 401(k) plan is created for the business. The owner’s existing retirement accounts are rolled into the new 401(k) plan. Most retirement accounts will qualify. The rolled-over funds are used to purchase company stock in the C corporation. The proceeds from the sale of stock is the cash invested in the business.

Rollovers as Business Startups is an option for an entrepreneur who has built up retirement savings but who may not otherwise qualify for a business loan.

You do not take on debt. A ROBS isn’t a loan. You won’t pay penalties or taxes. Normally, if you withdraw funds directly from a 401(k) or IRA before turning 59½, you’ll be hit with a 10% early withdrawal penalty and face a distribution tax. You avoid those with a ROBS.

The biggest drawback is, if your business fails, your retirement money will be gone.

You will also lose out on retirement savings gains. Since you are committing your retirement funds to finance a business, you lose the potential gains from a rising stock market, the tax-deferred savings of 401(k) and IRAs, and the power of compounding as investments grow over time.

Furthermore, you must operate as a C corporation. Since the tax implications differ from a sole proprietorship and a limited liability company, it may not be a good fit for your business.

You will also pay fees, and they cannot be paid using the proceeds of the transaction

Yes! It’s their plan.

You can borrow up to $50,000 from your retirement account penalty-free to start a new business

Nope!