Can you use an IRA LLC to invest in your son’s startup business?

QUESTION:

Can you use an IRA LLC to invest in a company that your son is starting up? I would own 30% of the company (investment of $50K from existing IRA accounts) and would be a passive investor? If you cannot use the LLC is there any method of using your retirement funds to do this?

ANSWER:

While the IRA prohibited transaction rules do not allow for investing a father’s IRA or IRA LLC in his son’s startup business,  if the father is  self-employed he can set up a solo 401k and borrow from the solo 401k plan.  The  solo 401k loan proceeds can be used for any purpose including investing the loan proceeds in the son’s business.

Here is quick breakdown of the Solo 401k loan rules.

  • The Solo 401k loan term is 5 years for general loans.
  • The Solo 401k loan term can be more than 5 years not to exceed 15 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.
  • Solo 401k loan payments are made either monthly or quarterly
  • The interest rate for a solo 401k loan is either: A certificate deposit rate plus 2 percent or the prime rate plus 1 percent.
  • Loan payments are fixed payments consisting of interest and principal
  • Solo 401k loan rules do not allow for Interest only payments or principal payments only.
  • The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.

– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)

– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K

– The minimum Solo 401k loan amount is $1,000.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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