need to bust my 72T to roll to a ROBS plan?
L1: need to bust my 72T to roll to a ROBS plan? I would like to roll my current IRA, which has a 72t Sepp, into a ROBS plan to start my new business. (roll over business startup) I assume I will have to stop/bust the 72t to do this, correct? It has been going since 3/2008 and is approx $600 per month in in distributions, totallying ~$50K so far. I understand I’d pay 10% penalty – any ballpark idea of how much interest would be owed and any advice on this complicated transaction? DOB 8/3/662014-10-21 17:26, By: gkstart, IP: [220.127.116.11]
L2: need to bust my 72T to roll to a ROBS plan? I always recommend AGAINST using an IRA for a ROBS.
1. You are not allowed to be active in the busines.
2. You cannot be paid a salary, nor anyone in your family.
3. You get no benefit from any cost of sales, expenses or deductions, tax credits, or depreciation.
4. You are obviously looking for the business to grow. However, whenever the business is sold, and you ultimately withdraw the funds, you will be taxed at ordinary tax rates of 25%-35% or higher on all of the proceeds, including the gain. On the other hand, if you had this business outside of a retirement account, then only the gain would be taxed, and at the special lower capital gains tax rate of 15% (20% in the highest tax brackets).
5. It will be difficult, if not impossible, to get buy or rent a property, buy equipment on credit, get insurance, etc. because of titling problems.
6. In addition, there is a strong probability that the IRS will closely examine the transaction, and probably disallow it, despite assurances by companies who charge fees to set up these arrangements, but who do not guarantee that they will not be allowed, nor will they agree to reimburse you for all fees and taxes if or when the IRS disallows it.2014-10-21 18:00, By: dlzallestaxes, IP: [18.104.22.168]
L3: need to bust my 72T to roll to a ROBS plan? Interesting….the VERY well known and reputable franchise which I am going to purchase, referred me to a company called Benetrends to administer the ROBS. They have set up many of these arrangements for other franchises and they guarantee the success.
They actually say almost the opposite of what you are saying, specifically, all parties who transfer money must work at least 1,000 hours and be paid a salary. It’s also only ~10% of the company that will be owned by the Robs plan. Essentially, this money will be used as the liquidity portion of the SBA loan. Essentially, they set up a 401K under the new C corp which they set up,and the qualified money which is rolled into the 401K and nvests in the C corp by purchasing shares instead of a mutual fund. FYI the franchise is a well known, legitimate, for profit business.
I understand you recommended against this, but I have received, from others who have used this process, different opinions and I’ll weigh all when making my decision. I’m still looking for help regarding one of my IRA’s which has a 72T and still want to know what kind of penalty and interest I’ll be hit with if I voluntarily stop the SEPP to use as stated above.
Thanks for your reply.2014-10-21 19:46, By: gkstart, IP: [22.214.171.124]
L4: need to bust my 72T to roll to a ROBS plan? You might want to read the 15-page IRS Memo dated 10/1/2008 prepared by Michael D. Julianelle, Director, Employee Plans, SE:T:EP. The subject is “GUIDELINES REGARDING ROLLOVERS AS BUSINESS START-UPS”.”
“The primary issues raised were 1) Violations of Non-Discrimination Requirements, in that benefits may not satisfy the benefits, rights, and features test of Treas. Reg. 1.401(a)(4)(-4, and 2) prohibited transactions, due to deficient valuation of stock.” These are enumerated under the following sections of the memo :
BENEFITS, RIGHTS, AND FEATURES DISCRIMINATION
PROHIBITED TRANSACTIONS — VALUATION OF STOCK
PROHIBITED TRANSACTIONS — PROMOTER FEES
PLAN NOT COMMUNICATED TO EMPLOYEES
INACTIVITY IN CASH OR DEFERRED ARRANGEMENT
The conclusion states ” ROBS transactions may violate law in several regards. First, this scheme might create a prohibited transaction between the plan and its sponsor. At the time of the exchange between plan assets and newly-minted employer stock, the value of capitalization of the entity is equivalent to the value of all plan assets, when in reality, the entity may be valueless and asset-less for an indefinite period of time. Additionally, this scheme may not satisfy the benefits, rights, and features requirement of the ERISA requirements. The primary utility of the arrangement may only be available to the business’ principal individual.”
” Specific facts will need to be evaluated (examined) on a case by case basis in order to make a proper determination as to whether these plans operationally comply with established law and guidance.”
Since it has been six years since this memo was issued, the various promoters may have been able to design their plans to conform to the IRS regulations and restrictions. At that time, the memo indicates that the IRS had “identified 9 promoters of ROBS, and that they had been referred to the Lead Development Center (LDC) and LDC Investigator. The IRS has also coordinated our consideration of ROBS plans with the Department of Labor.”
2014-10-21 21:21, By: DLZALLESTAXES, IP: [126.96.36.199]
L5: need to bust my 72T to roll to a ROBS plan? Okay, I understand you are not a fan of the ROBS idea and will consult with my accountant. However, the main question I had was stated a couple of times with no answer – can you help with my 72T question? :
My 72T IRA – It has been going since 3/2008 and is approx $600 per month in in distributions, totallying ~$50K so far. I understand I’d pay 10% penalty – any ballpark idea of how much interest would be owed if I voluntarily end the 72t? Taxes were paid annually but no penalty – I know Id owe the 10% penalty but how much interest ????
DOB 8/3/662014-10-21 23:16, By: gkstart, IP: [188.8.131.52]
L6: need to bust my 72T to roll to a ROBS plan? Sorry, we are unable to quote the IRS interest calculations. We can guess that they probably use the applicable quarterly rates over the term of the plan, but they do not know when you took each year’s distributions, so if the rate changed they probably use some sort of average. At least you can take comfort that the underpayment rate has been very low over this entire period. You would just report a voluntarily busted plan and attach a 5329 with an explanation including the gross amount subject to penalty. The IRS will bill the interest later on if they wish to. We do not know how often they neglect to bill it, but I would not count on that.
Separately, I do not follow the ROBs situation, but my impression was that this could be done without taking IRA distributions. If that is true, you may not have to bust your plan. If you are going ahead with this in spite of the risks, you might check into the possibility of not busting the plan.2014-10-21 23:31, By: Alan S., IP: [184.108.40.206]
L7: need to bust my 72T to roll to a ROBS plan? I think Alan’s point is that the ROBS investment is just a replacement of one investment in the SEPP 72-T IRA account (say your mutual funds), which you sell, and then use the proceeds in the IRA account to buy the shares in your ROBS business. In that case, you are not taking a distribution out of the SEPP IRA account at all, and therefore no 10% penalty or interest.
I would have thought that Benetrends would have explained that to you verbally, and in their documents, that there was no 10% penalty. Otherwise, they would have explained that there would be a 10% penalty if you were under 59 1/2.2014-10-21 23:54, By: dlzallestaxes, IP: [220.127.116.11]
L7: need to bust my 72T to roll to a ROBS plan? I know this is a little late but…
With a ROBS, the amount is generally, the amount is withdrawn from the IRA and rolled over to the 401(k) or other qualified retirement plan.
Since a SEPP can be taken from a qualified plan only if the participant is no longer working for the plan sponsor, a ROBS would result in a modification.2014-11-27 07:18, By: Denise, IP: [18.104.22.168]