As part of our blog series on using retirement savings to start or buy a business, we continue to explore the benefits of a Rollovers as Business Start-ups (ROBS) strategy. In this series, we’ve shared information on how ROBS provides access to cash flow, tax advantages, debt-free financing and asset protection benefits.
Pairing ROBS with a Roth IRA
As a reminder, you can withdraw funds from qualified retirement plans, like 401(k)s, Traditional IRAs, Roth IRAs and SEP IRAs, to fund a business acquisition without any penalties.
In addition to using 401(k) funds, there are also advantages to using a Roth IRA as a capital creation mechanism to buy or start a business.
In short, using a Roth IRA as a source of rollover funds allows you to:
- Avoid adverse tax consequences
- Pay zero on business growth.
There’s no distribution requirement from a Roth IRA, so you can put your business into the plan, you can sell it and you can take the money out whenever you wish.
Advantages of Funding a Business Through a Roth IRA
- Tax-Free Growth on Business Profits: Profits and capital gains can grow completely tax-free, allowing business assets to accumulate wealth without tax interference.
- Reinvestment of Gains Tax-Free: The proceeds from a sale can remain within the plan and continue to grow tax-free without triggering immediate tax liabilities.
- No Capital Gains Tax: 100% of the gain from a business sale is sheltered from capital gains tax, giving the business a significant growth advantage.
- Flexible Exit Strategy: A ROBS strategy using a Roth IRA offers a tax-free exit strategy, allowing the owner to retain more wealth when transitioning out of the business.
In summary, avoidance of future tax liabilities is a key benefit of using Roth IRA funds to start a business. As tax rates are expected to rise, a Roth IRA offers some protection from these tax consequences. Essentially any transaction that occurs within a Roth – whether it’s a capital gain, ordinary gain, dividend, qualified dividend or something else – gets no tax treatment because that’s the nature of how a Roth works. Therefore, capital gains on the sale of a business remain untouched by increasing tax rates.
S.J. Gorowitz Tax and Accounting Services is an experienced Certified Public Accountant (CPA) firm that thoroughly understands the benefits and implementation of a ROBS strategy. For a consultation on your business plans and objectives, please contact us at 770.740.0797 or email info2@SJGorowitz.com.
