The Strategy
Rachael walked through what ROBS actually requires and, more importantly, what it costs. The business must be structured as a C Corp, which means double taxation down the road. The 401(k) becomes the majority owner, triggering strict self-dealing rules around compensation, management decisions, and employee participation. If the account eventually grows large enough to require RMDs, the business must be formally appraised every year. Rachael put it plainly: the IRS doesn’t audit ROBS frequently because 90% of them fail on their own.
The better path: start as an LLC, pull $65,000 from the Roth portion of William’s 401(k) to clear the HELOC and keep the SBA loan viable, and let the remaining $226,000 retirement balance stay protected from SBA creditors. Roth contributions come out tax-free regardless of how long they’ve been in the account, so if William had at least $65,000 in after-tax contributions, the distribution could happen with no income tax and no penalty. The business vehicle (a minivan or utility van over 6,000 pounds gross vehicle weight) would qualify for bonus depreciation, and first-year startup expenses and franchise fee amortization would likely generate a loss to offset any taxable 401(k) distributions. Once the business reaches $100,000 in profit, an S Corp election becomes the next conversation. At that level, the FICA savings alone run close to $10,000 per year.
