You cannot invest your own solo 401k in a company the Solo 401k owner and/or disqualified party (e.g.., the son, daughter, spouse, parents or grandparents of the Solo 401k owner) owns or will own an existing interest. To learn more see ERISA Opinion Letter 2000-10A which is summarized in this blog posting.
Summary of ERISA Advisory Opinion Letter 2000-10A
Leonard Adler and his relatives (his son, daughter, father-in-law, and other in-laws) already owned less than 50% of an investment partnership. Leornard Adler planned to transfer approximately $500,000 in funds to a self-directed IRA and then invest the IRA funds into the investment partnership in which he and family members already personally owned. The partnership would be managed by a non-disqualified party. DOL stated that it was not a direct prohibited transaction for the IRA to invest into a company in which Leonard Adler and other related persons already had ownership.
Outcome:
As long as disqualified parties own less than 50% interest in a partnership and do not perform management functions over the partnership, the solo 401k or IRA may invest in the partnership.
Main Takeaways:
A Solo 401k plan or self-directed IRA may invest in an existing company in which the solo 401k or IRA owner, and/or disqualified parties already own provided the following is met:
(1) The investment is passive not an active business (e.g., franchise, restaurant, pool cleaning business, senior care facility, real estate operating company, etc.). Essentially, it cannot be a business that offers goods or services.
(2) The disqualified parties combined own less than 50%, and
(3) The Company is not controlled or managed neither by the Solo 401k or IRA owner, or other disqualified parties.
Cautionary Point
The Solo 401k or IRA may not purchase Company ownership interest from disqualified parties.
Closing Point
Because the IRAs investment in the partnership was not required in order to preserve the disqualified parties existing shares, probably contributed to the issuance of the favorable opinion letter.
Direct link to Opinion Letter 2000-10A
http://www.dol.gov/ebsa/programs/ori/advisory2000/2000-10a.htm
Alternative Route
If you want to use all of your retirement funds to invest in your own active business, then consider using a ROBS 401k.
