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Creating Value: Using Retirement Money to Start a Business

April 10, 2013 by Leave a Comment
Creating Value

Are you getting the most out of your business?

You’re thinking about starting a company. You’ve decided that the best bet is to buy a franchise. This will give you a leg up because someone else has done the heavy lifting and can give you a road map for success. You’ve discussed opening the business with your spouse, and your spouse is supportive. The only problem is that you need to raise $300,000 to get the franchise off the ground.

You’ve gone to friends, family and your local bank, and they have all turned down your request for a loan. But you really want to do this, and you happen to have saved $500,000 in your Individual Retirement Account. You tell the franchise people about your dilemma, and they tell you that for about $5,000, there is a way you can tap your I.R.A. savings to get the start-up capital you need.

Your franchise company introduces you to a promoter of a strategy known as ROBS, which stands for Rollover as Business Start-Ups. But before you can complete the retirement plan transaction, your spouse says, “Wait just a minute. You’re not doing anything till we check this out.”

This scenario, or a close approximation, is something I often see with my clients. I’ll hear about an idea and a client will ask me to look into it. In this case I decided to do the research without being asked because of two You’re the Boss posts that have appeared in the past year.

I first read about ROBS transactions last June in a post by Barbara Taylor. Then last week there were some comments left on a post written by Ami Kassar about business owners who pay too much for financing. My interest in the strategy was piqued, and I decided to look into whether a ROBS transaction makes sense.

It’s a complicated strategy. First, you need to establish a company with a qualified retirement plan. You then move your I.R.A. money to the new plan in your “shell” company, which takes the proceeds and uses them to buy company stock. Now, you have cash to start a business or, in the example above, purchase a franchise.

Whenever I run across a new strategy that involves retirement plans, I look for a pension administrator who deals in complicated pension issues. In this case I spoke with Tim Voigt from Pension Works in Colchester, Vt. Mr. Voigt told me he had heard of the strategy and thought it was likely to be prohibited, either by the Internal Revenue Service, which often takes the lead on issues like this, or the Department of Labor, which also has jurisdiction over retirement plans. Often, one will rule and the other will remain silent. It may mean only that one agency has not yet reached a conclusion.

I also spoke with Jeff Nabers, of Nabers Financial, who specializes in alternative investments for I.R.A.’s and has spent a significant amount of time researching ROBS. Like Mr. Voigt, he said he thinks the Labor Department might prohibit ROBS transactions — based on conversations he has had with officials there. If the department does rule against ROBS, there are significant penalties that could be levied against those who used the financing tool to start a business.

In 2008, the I.R.S. released a memo that referred to ROBS plans as “questionable” and suggested that they might be used to avoid paying taxes. In February, the agency released a ruling that suggested there is a proper way to do a ROBS plan but didn’t quite put the issue to bed. It did not issue regulations for doing ROBS properly. Nor has it released private letter rulings, revenue rulings or safe harbor rulings on ROBS that would remove any doubt about its legality. Because of that and because the Department of Labor has not ruled on the issue, there is still enough risk to consider ROBS a gray area.

Under the circumstances, I don’t believe I would recommend ROBS for one of my clients. Generally, I find that unless there is specific authority granted, it’s best to stay away from innovative tax plans even if they appear to be legal. And it’s always a red flag for me when the only people I can find to defend a strategy are those who are actively promoting it. And so far, I haven’t found independent accountants and tax attorneys offering support. (If you know of any, please tell us in the comment section below.)

But I also have another concern about the strategy — and that’s what happens when a business owner attempts to exit from a company formed this way. I believe the tax exposure on the sale of the business will be extreme, and I’ll talk about that in my next post.

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/04/10/using-retirement-money-to-start-a-business/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

Bucks Blog: My Resolution: Online Accounts for Allowances

January 2, 2013 by Leave a Comment

Ingo Fast

My colleague Ron Lieber recently wrote about new ways to track your child’s allowance online. He did have some reservations: he prefers children’s early experiences with money to be more tangible so they can see the piggy bank or jar filling up with coins.

He’s got a good point. But after a couple of years of watching my children mishandle their cash in various odd ways, I’ve decided that actual bank accounts are in order. One child kept a roll of bills wadded up with an elastic in her sock drawer, and it eventually went through the washing machine. Her sister kept hers in a blue plastic bucket labeled “Money,” which she and her friends doled out to one another during play dates. We did try actual piggy banks, but the stoppers kept falling out.

So one of my New Year’s resolutions is to create online bank accounts for them. It was so simple that I’ve already done it — and wondered why I didn’t do it a lot sooner.

I opted against taking them to a local bank, as my mother did with me, and opening a passbook account. For starters, some banks don’t offer passbooks anymore. And even if they did, it wouldn’t be convenient for me, and that’s crucial if this is going to work in practice. I do nearly all of my banking online, and I didn’t foresee any extra time in my schedule for driving them to the bank each week to make deposits. Some parents transfer allowances onto reloadable debit cards for their children, but mine aren’t old enough to keep track of plastic.

I already had an online savings account through ING Direct (soon to become Capital One 360.) The direct bank makes it easy to open “sub accounts” for a designated purpose, so I created one for each of my daughters. (You can, if you want, open entirely separate “kids savings accounts,” but that’s more time consuming and isn’t necessary to do what I wanted to do.)

To open the “sub accounts,” you log onto your account. Don’t look for any heading that says “sub account,” though because there isn’t one. Instead, click “open account” and choose “savings account,” rather than “kids account.” You give your new “sub account” a nickname. (I chose “allowance.” Very creative)

With another click or two,  you can set up an automatic savings plan, which will transfer whatever amount you want from your main savings account — it can be an ING account, or an external account that you’re already using to cover your ING account — into the allowance account. (I chose $5 a week, to start.) You click that you’ve read the proper disclosures, and you’re done. Now, when I go to “My Accounts,” I see my savings account and the new ones, with their nicknames and balances.

My plan is to sit down with my daughters each week and show them the money transferred into their accounts, so they can watch the balance grow. Any extra funds they get for birthday or holiday gifts can be deposited as well. We can discuss goals they want to save for, whether for a personal item or a charitable donation. And before any cash withdrawals are made, we can discuss what it’s going to be used for, and whether it’s a good use of their funds.

It’s not perfect, I know. But I think it beats the sock drawer.

How do you handle your children’s allowance?

Article source: http://bucks.blogs.nytimes.com/2013/01/02/my-resolution-online-accounts-for-allowances/?partner=rss&emc=rss

Filed Under: Your Money Tagged With: , ,

Bucks: Angry Homeowners ‘Foreclose’ on Lenders

June 8, 2011 by Leave a Comment

Owners of a house in Florida have engineered a reverse foreclosure against a bank. That makes two so far this year. Just one more, and it’s officially a trend, right?

Earlier this year, Patrick Rodgers, a “goth and industrial music” event promoter in Philadelphia who bears a slight resemblance to Johnny Depp in “Pirates of the Caribbean,” became miffed because his mortgage lender, Wells Fargo, was making him carry what he deemed excessive insurance on his house.

Philadelphia homeowner Patrick Rodgers. Patrick Rodgers, a Philadelphia homeowner.

Using the Real Estate Settlement Procedures Act to his advantage, he filed suit and wound up with a sheriff’s notice authorizing the sale of the contents of a Wells Fargo branch. The bank settled before a sale actually occurred, but Mr. Rodgers won a special place in the hearts of beleaguered borrowers everywhere.

Now, a couple in Naples, Fla.,  have “foreclosed” on a Bank of America branch after the bank managed to foreclose on their home — even though they never had a mortgage on it. According to reports in The Naples News, Time and elsewhere, Warren Nyerges and his wife paid $165,000 in cash to buy the house from the bank, and never borrowed against it. But last February, in an apparent case of mistaken home identity, the bank began foreclosure proceedings against them.

The couple hired a lawyer and the bank action was eventually abandoned, but the couple then went to court and got a judgment for about $2,500 in attorney’s fees. When the bank didn’t pay, their lawyer, Todd Allen, showed up at a local bank branch last week with sheriff’s deputies and a moving truck to begin cleaning out the building. Not long after, the bank paid them more than $5,700, to cover the fees and additional costs. In a statement to The Naples News, the bank apologized and said the letters had gone to a local lawyer whose office had gone out of business.

A Bank of America spokeswoman emailed this updated statement: “We are very sorry for our errors and the resulting experience Mr. Nyerges had with Bank of America.  He has been fully paid the amount we owed.  While the matter is now resolved, we’re embarrassed by this chain of events and the trouble this has caused him.  We will improve our process to prevent these errors in the future.”

Mr. Allen’s office said he had been besieged by news media from around the world since the incident last week, and wasn’t immediately available to comment.

What does it mean that homeowners have to resort to publicity stunts to get the attention of their lenders?

Article source: http://feeds.nytimes.com/click.phdo?i=319a898c444af8e97f5c0ac9fe3d2b81

Filed Under: Your Money Tagged With: , ,