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How Does a ROBS Work?



Ready to launch or grow your own small business but don’t want to take on debt? A rollover as business startup (ROBS) may be an option to consider, if you’re willing to risk some or all of your retirement savings.

ROBS enable entrepreneurs to fund a business using money held in eligible retirement accounts. ROBS  are complex and costly but can pay off if your business is a success. Before you decide if a ROBS is right for you, here’s an explanation of this startup funding option.


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How does a ROBS work?

With a ROBS, you roll over money from a 401(k) or traditional individual retirement account (IRA) into a new business or franchise without incurring early withdrawal penalties or taxes. If you’re under the age of 59 and a half, any 401(k) withdrawals normally incur a 10% penalty, but that doesn’t happen with a ROBS.

ROBS are not a loan. You don’t pay it back or pay interest. You do need to hire an attorney and/or a third party to set it up for you. “You have to follow very specific rules in order to do it properly,” Matthew Gillman, CEO of SMB Compass, told

To be eligible for a ROBS, you need to incorporate your business and open a new business 401(k). Once you’ve completed those two steps, you can transfer funds from your existing 401(k) or IRA to the business. [Need funding for your business but don’t think a ROBS is right for you? Read our review of the top business loans and alternative funding options.]

What are the requirements to set up a ROBS?

Unfortunately, with ROBS, there are a lot of guidelines to follow. Here are four significant rules you need to be aware of:

  1. You must have an eligible retirement account. To qualify for a ROBS, you need a qualified tax-deferred retirement account. If you have a 401(k), 403(b), IRA, Simplified IRA, Keogh or Thrift Savings plan, you’ll qualify. You can’t use money held in a Roth IRA or Roth 401(k). If you’re still gainfully employed, most companies won’t allow a current employee to roll over retirement savings to a ROB – you’ll need to use a retirement account not associated with your employer.
  1. You must have at least $50,000 in the fund. To use your 401(k) for a ROBS, you need at least $50,000 in retirement savings.
  1. You can’t be a passive investor in the business. The IRS requires you to be a contributing employee of the business you’re funding with your retirement savings. A ROBS is for an entrepreneur who will run the enterprise full-time – it’s not for someone looking for a passive investment.
  1. You must pay yourself a reasonable wage. Just because you’re the owner doesn’t mean you can overpay yourself. The IRS doesn’t say what jobs you must perform in the company, but you have to pay yourself a fair market salary. As a fiduciary of the plan, you must act in the best interest of the plan, and that includes what salary you take.

What are ROBS-prohibited transactions?

You could face tax consequences if you pay yourself an excessive salary, use business property for personal use, or use money from the ROBS to pay ROBS provider fees. If you act in the 401(k) plan’s best interest you should be in the clear.

How do you set up a ROBS?

There are several steps involved with setting up a ROBS plan, which is why most people use a third-party provider. Here’s what it entails:

  • Create a C corporation. To be eligible for a ROBS, your business must be structured as a C-corp. With a C-corp, the owners and shareholders are taxed separately from the business. If you’re operating an LLC or a sole proprietorship, you’ll have to convert the business to a C-corp.
  • Pick a retirement plan. Once you are an established C-corp, you have to choose a retirement plan for your business. Funds from your existing retirement account will be deposited into the new plan. Your new plan can be a 401(k), defined contributions or a profit-sharing plan.
  • Roll over funds into the ROBS. After the plan is set up, you can initiate a rollover from your retirement accounts. It can take two to four weeks for the rollover to be complete.
  • Buy stock in the company. With the new funds in your company 401(k), you then buy shares in your C-corp.
  • Use the proceeds for business operations. Whether you’re growing an existing business or launching a new one, at this point, proceeds from the ROBS can pay for the business’s expenses.

What are the pros and cons of ROBS?

As with any investment, ROBS have many pros and cons that need to be carefully weighed.

Pros of using a ROBS

  • You don’t have to take out a loan. Borrowing money to fund a business is expensive, whether it’s a short-term loan or you’re borrowing against your sales. Besides the monthly payments, there’s interest and other fees. That’s not the case with a ROBS plan. “If you feel confident in what you do, this is a way to access capital,” said Phil Mitchell, a certified public accountant and member of the AICPA Personal Financial Planning Committee. “If I got a loan, I would be responsible via a personal guarantee.”
  • You avoid early withdrawal penalties. Unless you’re over the age of 59 and a half, if you withdraw money from your 401(k) or IRA, you will pay a 10% tax penalty. (Some exceptions apply, such as if you’re using savings to pay for medical expenses.) With a ROBS, you avoid that. “There is no withdrawal penalty, you are simply rolling one 401(k) into another and buying stock later,” said David Nilssen, CEO of Guidant Financial.
  • There’s no underwriting involved. Bad credit may prevent you from getting a loan, but that isn’t a factor with a ROBS. Since you’re using money you saved for retirement, a credit check doesn’t occur.

Cons of using ROBS

  • You’re draining your retirement fund. Using your retirement savings to fund a startup business has significant trade-offs. If your business succeeds and profits surge, you may recoup the money and then some. If the reverse happens and you struggle, your retirement is at risk or, at the very least, is delayed. “It’s the opportunity cost,” said Mitchell. “It’s how well did the C-corp do versus how the stock market did.”
  • You miss out on compounding interest. One of the benefits of investing in stocks and bonds is compounding interest, which is interest that you earn on the investment plus interest earned from previous periods. The longer your money is invested, the greater the return. Your retirement savings won’t grow if it’s tied up in your business.
  • Many small businesses fail. According to the Small Business Administration, about two-thirds of businesses with employees last two years, and only about half pass their fifth anniversary. “One of the biggest risks with ROBS is the high level of businesses that fail,” said Bobby Glotfelty, senior licensed financial professional at Betterment for Business. “Not only can your business fail, but you’re risking your own retirement.” Glotfelty said ROBS should be viewed as a last-resort option.
  • You must structure your business as a C-corp. C-corps can be incredibly complex. You’ll likely need help establishing one and an accountant to handle your taxes.
  • The chance of being audited increases. Run afoul of any IRS rule related to ROBS and your plan may be disqualified. In turn, you’ll face penalties and taxes. “It’s definitely complicated. You open yourself to a higher risk of being audited,” said Gillman.
  • It’s not cheap. While you won’t pay early withdrawal penalties, you will pay an upfront fee, plus a recurring charge to the plan provider. “There’s only a handful of providers that help facilitate ROBS,” said Glotfelty. “It’s expensive, and there’s an ongoing cost associated with it.” For example, Guidant charges $4,995 for setup and $139 per month for plan administration.

Setting up a ROBS plan is not a solution for every entrepreneur. If you want to preserve your retirement savings, ROBS isn’t for you. If you’re confident your business will succeed and aren’t afraid to take the risk, ROBS are a way to avoid taking on debt. It’s incumbent on you to make a decision based on a realistic assessment of your prospects, now and in the future.

“The ROBS is for anyone who is buying or starting a small business, where they believe there is great upside potential and investing in it will yield greater results outside the stock market,” said Nilssen.


What are the costs involved in ROBS?

The ROBS industry is dominated by a handful of players that charge a flat upfront fee and a recurring administration expense charged monthly. Guidant, a leader in the market, charges a one-time fee of $4,995 and a $139 monthly fee to administer their ROBS plan.

How do you unwind a ROBS transaction?

Whether you’re unwinding the ROBS because your business is a success or failure, there are several steps involved. It’s important to follow all of the steps, because, otherwise, you face steep penalties from the IRS.

First, you have to contact your ROBS provider to alert them of your intentions. To unwind the 401(k), you must adopt a board resolution to end the plan. All stockholders must be notified the plan is being terminated. You may have to file IRS Form 5310, depending on your business. Check with your accountant to see if it’s a requirement.

Once that’s done, to complete the transaction, file IRS Form 5500, which is due the last year of the plan after the distribution of the assets. The 401(k) is not terminated in the eyes of the IRS until you file this form.

How is a ROBS different from an ESOP?

ROBS enable business owners to access tax-advantaged retirement dollars to fund a business venture. Employee Stock Option Plans (ESOPs) are similar to profit-sharing plans. The company uses its stock or cash to buy existing shares. It’s often used to reward employees and to fund growth, and is designed to hold employer stock.

How many people can invest in a business using a ROBS?

If you are entering into the business with a partner or multiple partners who also plan to use a ROBS plan to fund the new venture, you’re not limited in terms of who can invest in the business with a ROBS. However, you and your partners must be a contributing employee to the business.

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Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance



Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.

“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.

“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.

“That way you won’t pay any interest.

“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.

“Then you’ll be able to move into the sort of more normal credit card range.

“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”

Consumers of all kinds may not have the best options at the moment as recent analysis from revealed.

In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.

On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.

Rachel Springall, a Finance Expert at commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.

“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.

“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”

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Should you use a balance transfer to pay off debt?



Should you use a balance transfer to pay off debt?
Image source: Getty Images.

A balance transfer might be the solution if you have debts and want to gain control over your finances. But whether a balance transfer is right for you will depend on a number of factors.

Things to consider before using a balance transfer

The size of your debt

If you want to apply for a balance transfer credit card, be aware that most providers will allow you to transfer up to 90% of your credit limit.

Your credit limit will be dependent on your own personal circumstances, including your salary, your credit history and your residential status (homeowner or renter).

Be realistic about your debt. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt.

The time taken to pay the debt

The main advantage of a balance transfer credit card is that many offer an interest-free period on the balance. So, if you can pay off your balance in that period, you won’t accrue any further interest charges.

However, these periods typically range from 18 to 24 months, so if you think you will need more time to pay the debt, you may need to factor in additional interest charges when the interest-free period ends.

Whether or not a balance transfer is the right debt payment solution will depend on your personal circumstances. Check our balance transfer calculator if you want to work out how much a balance transfer could save you in interest payments.

Your credit score

The advantage of a good credit score cannot be underestimated in this situation.

When applying for a balance transfer credit card, the company will check your credit score. Based on this score, they could refuse your application.

Even if you are accepted, if you have a bad credit score they could reduce your credit limit. Ultimately, this will determine the benefit of a balance transfer as a suitable debt payment solution.

If you think your credit score might be a problem, it’s worth checking with the credit reference agencies before applying. That way you can avoid any nasty surprises.

There are three main consumer credit reference agencies in the UK. They are Equifax, Experian and TransUnion (Noodle).

Alternative solutions to balance transfers

You could still use a balance transfer even if the size of your debt is bigger than the credit limit.

Transferring part of the debt would enable you to benefit from any interest-free period, where applicable.

Alternatively, if you have multiple debts, you could consolidate all of your debts so that you can make a single regular payment. If necessary, you could do this using an unsecured personal loan over a period longer than 24 months.

Take home

Look at your own personal circumstances with a critical eye. Remember that you need to factor in living expenses when thinking about how long it will take you to pay off your debt.

Balance transfers are a useful method for debt repayment, but be aware that credit cards are an expensive way to borrow money. Take full advantage of any 0% deals wherever possible. Check out our list of the best 0% credit cards.

Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.

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Turn credit declines into a win-win | 2020-11-20



The pandemic has left millions of people needing credit at a time when lending standards are tightening. The result is a lose-lose situation—the consumer gets a bad credit decline experience and the credit union misses out on a lending opportunity. How can this be turned into a win-win?

The case for coaching

Let’s start by deconstructing the credit decline process: The consumer is first encouraged to apply. The application process can be invasive, requiring significant time commitment and thoughtful inputs from the applicant.

After all that, many consumers are declined with a form letter with little to no advice on actions the applicant can take to improve their credit strength. It is no wonder that credit declines receive a poor Net Promoter Score (NPS) of 50 or often much worse.

On the flip side, forward-looking credit unions provide post-decline credit advice. This is a compelling opportunity for several reasons:

  • Improved customer satisfaction. One financial institution learned that simply offering personalized coaching, regardless of whether or not consumers used it, increased their customer satisfaction by double digits.
  • Future lending opportunities. Post-decline financial coaching can position members for borrowing needs even beyond the product for which they were initially declined.
  • Increased trust. Quality financial advice helps build trust. A J.D. Power study noted that, of the 58% of customers who desire advice from financial institutions, only 12% receive it. When consumers do receive helpful advice, more than 90% report a high level of trust in their financial institution.

Provide cost-effective, high-quality advice

AI-powered virtual coaching tools can help credit unions turn declines into opportunities. Such coaches can deliver step-by-step guidance and personalized advice experiences. The added benefit is easy and consistent compliance, enabled by automation.

AI-based solutions are even more powerful when they follow coaching best practices:

  • Bite-sized simplicity. Advice is most effective when it is reinforced with small action steps to gradually nurture members without overwhelming them. This approach helps the member build momentum and confidence.
  • Plain language. Deliver advice in friendly, jargon-free language.
  • Behavioral nudges. Best-practice nudges help customers make progress on their action plan. These nudges emulate a human coach, providing motivational reminders and celebrating progress.
  • Gamification. A digital coach can infuse fun into the financial wellness journey with challenges and rewards like contests, badges, and gifts.

Virtual financial coaching, starting with reversing credit declines, represents a huge market opportunity for credit unions. To help credit unions tap into that opportunity, eGain, an award-winning AI and digital engagement pioneer, and GreenPath, a leading financial wellness nonprofit, have partnered to create the industry’s first virtual financial coach. To learn more, visit

EVAN SIEGEL is vice president of financial services AI at eGain.

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