Use your 401(k)/IRA to fund a business — no penalty, no tax.
Roll your 401(k) or IRA into a new C-Corp's 401(k) plan, which then buys stock in the C-Corp. Result: retirement funds capitalize your business tax-free, penalty-free, debt-free. Requires C-Corp structure, qualified 401(k) plan, ongoing compliance ($1,500/yr admin). Best for $50k+ rollovers to acquire or start a business.
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Most writing about ROBS stops at funding. The harder problem is the exit — how retirement money that is now stock in your own company comes back out. There are only four real doors: the company buys the shares back from the plan, the business is sold and the plan receives cash, the plan distributes the stock to you in kind, or the plan terminates and rolls whatever it holds into an IRA.
Which door you use decides the tax. A share redemption or a business sale keeps everything inside the plan, tax-deferred, and you roll cash onward as normal. An in-kind distribution of employer stock moves the shares to you personally: you are taxed at ordinary rates on the plan's cost basis in the stock, and the appreciation above that basis — net unrealized appreciation — is taxed as long-term capital gain only when you eventually sell.
That NUA treatment is the reason in-kind matters. It was written for employees holding appreciated public employer stock, and it applies to qualifying lump-sum distributions of employer securities generally. Getting it requires a qualifying triggering event and a lump-sum distribution of the entire balance from the plan in one tax year — which is exactly the kind of sequencing that is easy to fumble in a one-participant plan.
The mistakes here are sequencing mistakes. Almost all of them are cheap to avoid and impossible to fix afterwards.
Illustrative figures, not a projection. The point is where each layer of tax lands and when.
| Plan's cost basis in the stockWhat the plan originally paid for the shares | $120,000 |
|---|---|
| Appraised value at distribution | $640,000 |
| Net unrealized appreciation | $520,000 |
| Ordinary income taxed this yearThe basis only — at your marginal rate | $120,000 |
| Federal tax at 24% on the basis | −$28,800 |
| Tax due now on the $520,000 of appreciationDeferred until you sell the shares | $0 |
| Capital-gains tax if sold later at 15% | −$78,000 |
| Total tax across both events | −$106,800 |
| If the whole $640,000 came out as ordinary income insteadAt 24% | −$153,600 |
Routing the appreciation through capital-gains treatment saves roughly $46,800 on these numbers, and defers most of it until there is a sale to pay it from. The catch is real: the $28,800 is due for the year of the distribution whether or not anyone has bought a share, so you need cash outside the plan to cover it. Miss the lump-sum condition and the whole $640,000 becomes ordinary income.
Run your own numbers on redemption versus in-kind, and see what an unwind costs before you commit to a door.
Map the tax on your exitYou cannot compare a redemption against an in-kind distribution without knowing the number, and the appraisal also sets the NUA basis split. Order it first.
If you simply want to keep deferring, have the corporation redeem the shares or sell the business — proceeds land in the plan and roll to an IRA. Nothing is taxed. Only reach for in-kind if the appreciation is large and you want capital-gains treatment on it.
Separation from service, 59½, disability or death. Distributing without one costs you NUA treatment and can add the early-withdrawal penalty on the basis.
Everything, one year, including any cash or other assets in the plan. Leaving a residual balance behind is the most common way NUA is lost.
An illiquid holding still generates a required distribution once you reach RMD age. Either hold enough cash in the plan to satisfy it, or distribute stock in kind and accept the annual valuation and tax mechanics that come with it.
Once assets are fully distributed, adopt a termination resolution and file the final Form 5500. A plan nobody has formally closed keeps accruing filing obligations and penalties.
NUA requires the whole plan balance out in one tax year. A forgotten few thousand dollars of cash left in the plan can turn the entire appreciation into ordinary income.
In-kind gives you shares, not money. The ordinary-income tax on the basis is due for that year regardless. Plan the cash before you pull the trigger.
The corporation buying stock back from its own plan is a transaction between related parties. Price it off an independent appraisal or it reads as a prohibited transaction.
Plan obligations do not end when the business does. Unfiled Form 5500s accumulate penalties per year, and they are assessed even on a plan holding worthless stock.
A loss inside a retirement plan is generally not deductible to you. The failed business consumes retirement money without producing a write-off — the sharpest edge of the whole strategy.
Four routes: the corporation redeems the plan's shares, the business is sold and proceeds land in the plan, the plan distributes the stock to you in kind, or the plan terminates and rolls its assets to an IRA. The first two keep everything tax-deferred; the third creates a taxable event with possible capital-gains treatment on the appreciation.
The plan hands you the actual shares instead of cash. You are taxed at ordinary rates on the plan's cost basis in those shares in the year of distribution, and the appreciation above basis is taxed as long-term capital gain only when you sell.
The difference between the plan's cost basis in the employer stock and its value when distributed. It qualifies for long-term capital-gains treatment rather than ordinary income, provided a qualifying trigger occurred and the entire plan balance is distributed in one tax year.
Yes. Once you reach RMD age the plan must distribute a required amount each year even when its only asset is unmarketable private stock. That means either cash inside the plan or annual in-kind distributions with fresh valuations.
Yes, and it is often the cleanest exit. The price has to come from an independent valuation, because the corporation and its own plan are related parties.
The plan holds stock that is now worth little or nothing. The retirement money is gone and you generally get no deductible loss, because the loss occurred inside the plan. You still have to value the holding, file, and formally terminate the plan.
Educational strategy content, not tax, legal, lending or investment advice. Lender overlays and program limits change — confirm current requirements with your lender before committing capital.
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