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By MICHAEL SASSO

msasso@tampatrib.com

Published: December 14, 2008

TAMPA - Even investing in blue-chip companies these days is hair-raising, as anyone with money in the stock market knows.

So Gilbert Arvizu of Tampa and some other small-business people are using a little-known technique to move their retirement money out of the stock market and into their own small businesses, penalty-free.
Conventional wisdom says the money in your retirement account is off-limits, unless you want to incur immediate taxes and a big early-withdrawal penalty. But across the country, companies are marketing complex retirement plans that allow business people to use their retirement account assets without taking those hits if they're using them to buy businesses.

Not surprisingly, the Internal Revenue Service caught wind of the programs recently and is watching them closely. The agency has blessed the procedure if done properly, but warns it can easily fall out of compliance.
Arvizu accessed his retirement account to buy a Max Muscle sports nutrition franchise, and he's happy to have his money invested in his own business instead of the stock market.

"I'm not blind to the fact that's there always a risk," he said. "But just from a pure asset erosion standpoint, I think I'm light-years ahead."

It's not clear how many people are taking this route. Enough are choosing the option, though, that the IRS issued initial guidelines in an Oct. 1 memo. The agency calls them "Rollovers as Business Startups," or ROBS.

At least nine companies market them, the IRS said, and they are especially popular in the franchising industry. The practice may become more popular as entrepreneurs find they can't get loans and have no equity in their homes.

Rick Shampaine, an Odessa consultant with FranNet who helps small business people buy franchises, said three-quarters of his clients nowadays use ROBS-type programs.

Years ago, the most common way to buy a franchise was to tap into home equity, but a plunge in home values has made that more difficult, Shampaine said.

More recently, people have been using a ROBS-type plan to buy a business, but retirement plans, too, have fallen in value as the stock market sinks. Today, people have less money in their 401(k)s and IRAs with which to buy businesses.

The plans' mechanics are complex, so a variety of companies have sprung up to craft them and make sure they comply with tax laws. Among them are BeneTrends Inc. of North Wales, Pa., Guidant Financial Group of Bellevue, Wash., and Houston-based DRDA.

These companies' fees may vary, but one Tampa businessman, Andy Keaton, who purchased a FastSigns signs franchise, paid BeneTrends about $3,000. The company also charges a yearly management fee to maintain the retirement plan, Keaton said.

Generally, the plans roll over assets from a person's existing 401(k) plan or IRA into a newly created corporation, and they create a new retirement plan inside of this corporation. The customer then can use this money to buy a business or fund an existing one, said Larry Carnell, a BeneTrends vice president.

In Arvizu's case, he spent more than two decades in the soft drink business and was looking for a new venture. He considered buying a janitorial franchise or a school tutoring franchise, but chose Max Muscle, a growing chain of weight loss products and meal and bodybuilding supplements.

When Arvizu left his former employer, he rolled over about $300,000 into a ROBS-type plan from Guidant Financial. He is using the assets in his retirement account to start his first Max Muscle store at Fletcher Avenue and Dale Mabry Highway in Tampa.

He also purchased the right to sell other Max Muscle franchises in 12 counties in Florida, he said.

He made his move before the decline of the Dow Jones Industrial Average, which fell as low as 7,392 in November.

"I rolled that $300,000 out of the stock market when it was at 13,800, so I feel pretty good," he said.

Still, the IRS appears skeptical. It wouldn't provide a representative to speak about the programs, but it sent the Tribune the agency's concerns. Among them:

The value of the entrepreneur's new company - Under such plans, a person essentially cashes out his existing 401(k) or IRA and uses the money to buy stock in his own startup company. But what is the stock of a new startup worth?

Discrimination against employees - A company's pension plan is supposed to benefit employees, not just its founder, said Mario Iezzoni, a certified public accountant with the University of South Florida's Small Business Development Center. But under some ROBS-type plans, the entrepreneur creates a new company retirement plan and only he or she can buy the company's stock. A proper plan allows employee purchase, too.

Even with its concerns, the IRS hasn't come out against the strategy. Iezzoni said when done right, it can be a valuable tool for an entrepreneur, especially now, when other types of business financing have dried up.

A bigger concern, Iezzoni said, is the possibility an entrepreneur's business could fail and retirement assets are lost.

Keaton used 90 percent of his retirement assets, which were somewhere between $100,000 and $200,000, to buy a FastSigns franchise on Tampa's Fowler Avenue.

He also got loans through the Small Business Administration. Because he has a fairly new company, he has only filed one tax return. So far, he's had no issues with the IRS and he's been happy with the retirement plan BeneTrends set up.

However, the sign business is slow and businesses around him in the USF area are closing. So he worries about the future of his retirement assets.

"Yes, it was and still is an issue," said Keaton, 47. "As you see every day, if there's not revenue there and profit, if this business goes under, I've lost the largest share of my retirement income."

Tribune researcher Stephanie Pincus contributed to this report. Reporter Michael Sasso can be reached at (813) 259-7865.

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