Rollover as Business Startup (ROBS 401k) FAQ – What is a reasonable salary for my ROBS Business?

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The 401k business financing plan (ROBS 401k) is perfect for entrepreneurs seeking readily available funding capital, especially those looking for interest-free or no-hassle business funding sources.

-Fund your business start-up with retirement funds: Also known as ROBS 401k, the small business financing 401k plan allows you to fund a business with your retirement funds without taking a taxable distribution.

-Not a taxable distribution: Because you directly rollover your IRA or former employer 401k, 403b, Keogh, SEP, SIMPLE, or other eligible account, to your new ROBS 401k plan, which then funds your business, you incur no taxes or early distribution penalties.

-Not a loan: Unlike traditional 401k plans that allow for a 401k participant loan, that is, borrow up to 50% of the account balance not to exceed $50,000, our 401k business financing plan allows you to use all of your retirement funds to fund your start-up business.

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Rollover as Business Startup (ROBS 401k) is a popular funding option among aspiring entrepreneurs. This method allows individuals to invest their retirement savings into a new business venture, without incurring tax penalties or early withdrawal fees. However, one major consideration when starting a ROBS business is determining a reasonable salary.

What is a reasonable salary for my ROBS business?

As a ROBS business owner, you are also an employee of your company. Therefore, you will need to pay yourself a reasonable salary for the work you do. However, determining what constitutes a reasonable salary can be a bit tricky.

The IRS requires that all employees, including business owners, receive reasonable compensation for their work. The term “reasonable” refers to the amount that would ordinarily be paid for similar services by an employer to an employee with similar qualifications and experience performing similar tasks.

So, how do you determine what is reasonable for your ROBS business? Here are a few factors to consider:

Industry Standards: Look at the salary ranges for similar positions in your industry. This will give you a good idea of what other businesses pay employees with similar qualifications and experience.

Job Duties: Take into account the specific duties you will perform as a business owner. How much would you pay someone else to do the same job?

Profitability: Consider the financial health of your business. If your business is struggling, paying yourself a high salary may not be feasible. On the other hand, if your business is doing well, you may be able to justify a higher salary.

What are the consequences of paying yourself an unreasonable salary?

If you pay yourself an unreasonably high salary, the IRS may consider it to be a disguised distribution of your retirement funds. This could result in tax penalties, as well as potential disqualification of your ROBS plan.

On the other hand, if you pay yourself an unreasonably low salary, the IRS may view it as an attempt to circumvent tax obligations. This could also result in penalties.

How can I ensure that my salary is reasonable?

To ensure that your salary is reasonable, it’s a good idea to consult with a tax professional or financial advisor. They can provide guidance on what constitutes a reasonable salary in your industry, based on your qualifications and job duties.

In addition, you can use online salary calculators to get an idea of what similar positions pay in your area. This can help you determine what a fair salary would be for your work.

Conclusion

Determining a reasonable salary for your ROBS business is a crucial step in ensuring that your retirement savings are protected and that your business is compliant with IRS regulations. By carefully considering industry standards, job duties, and profitability, and seeking guidance from a financial professional or tax advisor, you can ensure that your salary is both fair and reasonable.