Learn - Can You Invest Your Solo 401(k) in a Business?

If you’re self-employed, your Solo 401(k) can be much more than a vehicle for stocks and mutual funds.
With the right setup, your retirement plan can invest directly in private businesses, partnerships, and startups — even your own business in certain cases.

Watch: Learn how you can invest a solo 401k in a business

But before you write that check, there are key IRS rules to understand. Let’s break down what’s allowed, what’s prohibited, and how to invest in a business the right way using your Solo 401(k).

What Makes It Possible: Checkbook Control

A Self-Directed Solo 401(k) — like the one offered by My Solo 401k Financial — gives you checkbook control.
This means you can write a check or wire funds directly from your Solo 401(k) to invest in:

Private companies (LLCs, C-Corporations, Limited Partnerships)
Startups or private equity deals
Joint ventures
Real estate, crypto, and other alternative assets

However, S-Corporations are excluded because IRS regulations prohibit a self-directed IRA or a Solo 401(k) from being an S-Corp shareholder.

Eligibility Requirements

You must be self-employed with no full-time W-2 employees (1,000+ hours per year) other than your spouse.
Your spouse can also participate if they work in the business, even part-time.
Both of you can invest through the same Solo 401(k) plan.

Investing in a Business: What’s Allowed vs. Prohibited

Allowed Investments

Your Solo 401(k) can passively invest in private companies that you do not own or work for.
For example:

Investing in your friend’s IT consulting business structured as a C-Corp or LLC
Participating in a private equity deal as a shareholder
Lending money to a business through a promissory note

In these cases, your Solo 401(k) becomes a passive equity investor, not an operator.
All profits, dividends, and repayments flow back to your Solo 401(k) — not your personal account.

Prohibited Transactions

You cannot use your Solo 401(k) to:

Invest directly in your own business
Invest in a family member’s business
Personally guarantee a business loan using Solo 401(k) funds
Receive direct benefits (such as a salary or compensation) from a company your Solo 401(k) invested in

These actions are considered self-dealing and can disqualify your entire plan.

Investing in Your Own Business — The Indirect Way

While you can’t invest your Solo 401(k) directly into your own business, you can do it indirectly through a Solo 401(k) Participant Loan.

Here’s how it works:

You can borrow up to 50% of your account balance, capped at $50,000.
Once borrowed, those funds are considered personal funds, not plan assets.
You can use them however you want — including funding your own business.

You’ll repay the loan to your own Solo 401(k) — principal and interest — typically over five years with fixed payments.
Interest is based on the prime rate + 2%, and you can pay monthly or quarterly.

At My Solo401k Financial, your plan includes full loan documentation — application, agreement, and amortization schedule — ensuring IRS compliance.

Understanding Unrelated Business Income Tax (UBIT)

If your Solo 401(k) invests in an active business that sells goods or services, the plan may owe Unrelated Business Income Tax (UBIT) — usually around 38% on profits over $1,000.

Example:
If your Solo 401(k) earns $2,000 in profits from a partnership that provides IT services:

The first $1,000 is exempt
The remaining $1,000 is taxed at ~38%
Your plan nets $620 in profit

UBIT does not apply if:

The business is structured as a C-Corporation, or
Your Solo 401(k) invests through a loan (promissory note) rather than equity.

Key Takeaways

Yes, you can invest your Solo 401(k) in a business — but only under strict IRS rules.
Avoid prohibited transactions such as investing in your own or a family member’s company.
Use a participant loan if you want to fund your own business.
Understand when UBIT applies and how to avoid it through proper structure.
Always work with an IRS-approved plan provider like My Solo 401k Financial to ensure compliance.