The “Jury” Decides on ROBS – Can you legally fund a business purchase or startup with a Self-Directed 401k?

Boy do I get a lot of blowback every time I share my findings about why the government has declared ROBS illegal!

Why is there not a specific government ruling on ROBS?

Great question!

It’s because once an issue has been ruled on, they don’t repeatedly consider it. “They” are the Department of Labor, and the first step of learning about Self-Directed IRA and 401(k) rules is finding out that “prohibited transactions” are an issue outside the jurisdiction of the IRS and in the hands of the Department of Labor (DOL).

When ROBS Was Ruled On

It was 2006. Debra Buchanan, the creator of the IRA LLC, asked the DOL a question about structuring an investment deal to avoid “prohibited transaction” status. (This was before she split with Guidant and became my legal counsel, but that’s another story.)

The DOL came back and said (paraphrased)

It doesn’t matter how you structure things or pursue exemptions. We’ve been clear throughout various rulings ["Advisory Opinions"] that a specific part of the law books [IRC 4975(c)(1)(D)] makes it prohibited for IRA or 401(k) funds to be used to benefit their account owner or family, unless it’s a taxable distribution.

That’s translated into humanspeak. You can see the actual ruling here. Untranslated legal language in it says:

…Department opinions interpreting [regulations] have made clear that a prohibited transaction occurs when a plan invests in a corporation as part of an arrangement or understanding under which it is expected that the corporation will engage in a transaction with a party in interest (or disqualified person).

The ROBS Coffin Is Sealed

This issue is so straightforward because DOL ruled on it as a bigger issue. DOL has received countless letters that ask “But what if I structure my Corporation this way or that way… do I then successfully evade the rules and regulations?”

And they always respond, “No. Using Self-Directed IRA or 401(k) funds to benefit the account owner or their family is always prohibited unless it’s through a taxable distribution.”

Tip: Don’t Piss Off The Government

I know that’s kind of common knowledge, but I wonder if you notice from the DOL language—”Department opinions interpreting [regulations] have made it clear”—that they are already (in 2006) annoyed at all the clever attempts at evading the rules and regulations.

Not a whole lot of wiggle room here. Zero, to be exact.

I know, I know… it’s bitter medicine. Especially if you dreamed up an awesome future all provided to you by ROBS.

But it’s quite easy to swallow if you get real and refocus your attention on legal strategies that actually work.


  1. says

    Please help.
    I opened a account with Guidant in 2006.
    I started with $98,000.00. I have $17,500.00 in the 401k account, and $2,500.00 left in my corporate account. I brought a franchise called Stetch-n-Grow which is a moble pre school fitness program (they didn’t know about Guidant they only set up the contract as directed by my attorney).
    After reading your blog I don’t haveto explain where all the money has gone. I now understand why the IRS couldn’t help. What I thought was an answer to a prayer has turned into the worst nightmare.
    What can I do to get out of this. Any advice or guidence will be greatly appreciated.

  2. Jeff Nabers says

    Hi, Mary Ann.

    I’m sorry to hear you’ve been on a rocky road. Are you saying that your $98,000 has turned into $20,000 because of tax penalties or because the business has been losing money?

  3. says

    I have read that ERISA sec 408(e) indicates that a purchase of employer stock for adequate consideration is not a prohibited transaction? If you can support the value of the C-corp stock purchased, wouldn’t this be legal? Thank you.

  4. patrick says

    What if you want to transfer shares of an existing company into a Roth IRA or Roth 401k? I am not looking to transfer money out of my 401k, I just want to get some of the shares I own into my Roth. I own my business and believe it will continue to grow and will be more valuable in the future. I would love to bank some of this growth in a retirement fund so that I don’t get hit by a single large tax bill but spread it out over retirement. What are the rules around this?

  5. Judy says

    We are in the same boat as Mary Ann Castro above with Guidant and need to get out. We set up the Audeo plan with Guidant in 2007 and set up the 401k in the c corp. Then the 401k bought the majority of stock from the corp to fund buying rental real estate we hoped to have paid for before retirement. They have turned out to be money pits and we no longer have enough capitol to operate with a safety margin. Everyone tells us we need to have a$2000-$3000 business valuation done to find out what the stock is worth to even take and in kind distribution and just go ahead and pay the taxes on payments of course. we don’t sell anything have no cost of goods no good will etc to value only the cost of the 4 houses with two having mortgages on them. We can’t afford recordkeeping fees any more or high price valuations so how do we get out of this mess without selling the real estate and get Guidant out.


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