We are starting a business and intend to use our 401k money as start up capital. I need about 40k in start up money and if I become a C-corp I am told that I can keep all of the funds without penalty or taxes because of the ROBS act. I don't plan on making a profit my first year and expect a minimal profit my second year. We would incur a cost of 4k to have a company start this up for us vs. not paying a dime but having to take out another 25k from our 401k to pay for penalty and taxes and still have the same 40k for start up costs. Besides all the hassle and paperwork/filings of being a C-Corp are there any other downsides I should know about before making this decision?

Thanks

We are starting a business and intend to use our 401k money as start up capital. I need about 40k in start up money and if I become a C-corp I am told that I can keep all of the funds without penalty or taxes because of the ROBS act. ==========>>>>>>>>>>>>>>>>The ROBS technique is controversial both because the IRS tends to frown on the practice and because of the extreme risk involved in taking one’s retirement nest egg to start up a business. ROBS plans, while not considered an abusive tax avoidance transaction, are, according to the IRS, questionablebecause they may solely benefit one individual – the individual who rolls over his or her existing retirement 401k withdrawal funds to the ROBS plan in a tax-free transaction. In most casesStill, with bank financing for new businesses at a virtual standstill, ROBS has been heavily marketed as a legitimate financing plan particularly as a funding method to start a franchise operation. Several firms are marketing their services to walk entrepreneurs through the ROBS process – for substantial fees.An IRS memorandum is critical of the funding method It goes without saying, then, that the legal, tax, and personal finance implications of using ROBS makes it absolutely essential for anyone contemplating this technique to have competent legal and financial advisors at their disposal.ROBS are considered technically legal, but fraught with dangerous pitfalls that could potentially cost you not only your retirement savings, but also extremely stiff IRS penalties and fees.


I don't plan on making a profit my first year and expect a minimal profit my second year. We would incur a cost of 4k to have a company start this up for us vs. not paying a dime but having to take out another 25k from our 401k to pay for penalty and taxes and still have the same 40k for start up costs.Besides all the hassle and paperwork/filings of being a C-Corp are there any other downsides I should know about before making this decision?==========>>>>>>>>>>>>>>> If your funds are limited and credit is tight, you might consider using ROBS;But not everyone is sold on ROBS. In fact, some people maintain a ROBS is fraught with dangerous tax pitfalls.A ROBS strategy sounds amazing ... it all sounds too good to be true because it is.ROBS firms charge a fee to you through the process of creating your C corp. The new corporation starts its own 401(k) plan, which must offer employees the option to purchase stock in the company. The new business owner then rolls over funds from an existing 401(k) into the newly created corporation's plan.Because the assets are moved from one tax-exempt vehicle to another, you avoid taxes and penalties.The sole participant in the plan (e.g., the owner of the new company) can then direct the investment of the 401(k) account balance into a purchase of employer stock in the new corporation. The transferred funds are used to either purchase a franchise or fund the new business essentially creating tax-free working capital.However, you need to know about the dangers associated with ROBS.ROBS approach may sound simple. However, it is actually a complicated process fraught with the potential to lose your whole retirement savings and then some to the IRS.A ROBS may be legal, but it operates in a grey area of IRS codes and regulations;To keep a ROBS transaction legal, the you must heed a slew of IRS regulations and avoid making certain prohibited transactions.The penalties for not complying with the rules are staggering.For example, if the IRS determines the deal is a prohibited transaction, it can trigger excise taxes.If you run afoul of these prohibited transactions, you can run up 110 percent or more in penalties.ROBS deals must be done very carefully and no two cases are exactly the same, so first contact an attorney who is well-versed in ERISA law before venturing into any ROBS deals.