Hello, I will be assisting you.
I believe you are referring to Rollovers as Business Start-Ups
It is meant for entrepreneurs to roll their IRA into a their startup business. In your case you will be rolling your IRA savings into a Holding company that then invests money in the startup(s).
Let me first address the business risks and business management: You should be aware that under your description you will not be investing directly in the startup business rather you will have equity in a company that holds equity in another company. From the security side you are at least two entities removed from the real value, in that if things go wrong your only claim would be against the holding company which has no assets other than equity in other companies which could be worthless. On the business management end, do you know who will be picking the investment targets? Do they have a track record? Can they point to individuals who invested in such manner that had positive returns? And speaking of returns, generally the returns in startup companies are based on long term investment. A startup typically only becomes liquid upon a sale of the company which could take 10+ years. You need to find out how the holding company will generate profits and how the dividends will be distributed.
In 10 years of working with startups I personally have not seen ROBS used to fund a startup business. Wikipedia has an interesting entry where the practice of high referral fees and questionable industry statistics are discussed (see here). Assuming the company you noted is on the up and up, charges low fees and will obtain a determination letter from the IRS to make sure that the rollover will in fact be pre-approved, my thoughts are that if you were putting "a big chunk of your retirement savings" into a business that you yourself started then you would be taking a calculated risk in that you would be in charge of the business. But being that according to your description someone else is going to be managing the investment decisions and then ultimately the startups companies still need to succeed then it is a VERY risky proposition. In comparison, investors generally allocate less than 10-20% of their investment mix to private equity and venture capital and even then returns for most venture capital funds are abysmal. The model proposed resembles that of a PE or VC fund. So I would caution you from considering of putting a big chunck of your retirement savings on this. You should treat it as a business gamble and decide if you are up for some risk taking. It could be rewarding but be ready to lose your money as 90% of startups fail.
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I appreciate the response. Does it matter in your expert opinion that the business I am looking at is established and has been in existence for approximately 16 years. Another business that I am looking at is an existing franchise that has been in business for approximately 4 years. I am not looking to start a business but buy an existing business. In addition according to my understanding of Benetrends I would be managing the 401K, but for the most part at least initially it would consist of stock from the purchase of the business, and if the business fails the stock would be worthless. As far as managing the 401K I would be the one managing it and I could use such companies as Vanguard for my and my employees investments as well as given employees the opportunity of stock options. The initial start up cost to have Benetrends do the roll over is $5000.00. Than I would be charged $120.00 a month to make sure the plan was in compliance. The other question is I would have to have a C corporation which from my understanding is subject to double taxation, and rather complicated to run. I would need a very good accountant. Does anything I said change your opinion of this type of proposal. I appreciate your assistance in this matter.
Unfortunately I cannot know if a certain business is good or not. The art and science of valuing a business is very complex. Even a business that has been around for 16 years can fail. Similarly under the terms of the site I am not permitted to comment whether $120 a month is reasonable or not. If I were you I would ask for referral of individuals that invested their IRA in business and then were able to take their money out. It's one thing to put your money in a private company it's another thing to take it out even if the company is successful. Unlike public companies that you can buy/sell their stock effortlessly through the stock market, for the most part, private companies do not have marketplaces to buy and sell their stock.
Personally if I had a certain allocation of money that I was willing to gamble with and know that I might lose everything then I could diversify my portfolio, but I would not invest a big chunk of my money through something like because of the risk of failure and the lack of liquidity of private companies' stock.
As far as a C - corp being double taxed you are correct. The corp will be taxed on its profits and then you will be taxed on the dividends. This may erase the IRA advantage. You should a detailed projection chart for this scenario. This is a great question to bring up to Benetrends and see how they explain it and how they propose to handle it.
Thanks so much I appreciate your honesty. I think you pretty much answered my questions. The fact that neither you or my attorney have personally seen ROBS used for a new business kind of makes me question if this is a prudent move on my part. I did get referrals from Benetrends. I was not totally satisfied. One referral in particulars answers bothered me because he is a business broker and they seem to be heavily promoting this kind of an endeavor. To be fair another customer gave them very high marks. So I guess in essence it is how much risk am I willing to take. If this venture fails something that I worked 22 years for could be gone. But, on the other hand I have always wanted to own my own business. You have been very helpful. From a legal perspective if you had anything to add it would be greatly appreciated.
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