Items to Consider
Buying a franchise as a retirement planning tool may not be all it’s cracked up to be. Essentially the IRS still allows but frowns upon ROBS plans as they look at them as a way for retirement plan administrators or single 401(k) owners to invest and not pay the required income tax.
Further, the IRS reports most ROBS investments don’t do well and many are in non-profitable situations meaning investors look at this as a way to offset income with 1099-R losses from the business.
In addition, the owners of a pension plan may have some restrictions on what they can and can’t invest in, often meaning a startup franchise or a business area showing areas of failure or potential doom. These types of restrictions protect all the investors (employees) in the plan from losing contributions meaning the plan administrators may have to invest more to pay back 401(k) members on contributions and company matches—even promised returns on those investments.
ROBS plans must be approved and structured appropriately in order to stay in compliance and avoid IRS audits.
If you feel this is the right choice for your retirement planning or if you’re a plan administrator (owner of company 401(k) plan), it’s best to consult tax and legal professionals to guide you through the process and ensure required forms are distributed and filed.
Finally, some franchisors may not approve a ROBS plan as a way to invest so each franchisor must be contacted to ensure a ROBS plan is indeed allowed.
It’s best to review what the IRS has to offer on such plans (links below) to avoid penalties for breaking IRS rules—often these penalties are severe and according to the IRS can be as high as 110 percent of the initial investment.
Ask a personal finance advisor or other professional to help you make the determination if this type of retirement choice to invest in a franchise or any other startup business is an avenue for your pension plan or if it’s something to skip altogether.