Cannot Invest Your Own solo 401k and/or IRA in Your Own Business

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.

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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