QUESTION: I recently became self-employed and I currently have a former employer 401k at American Funds that I would like to transfer to a new self-directed Solo 401k with your company and then invest in an unsecured promissory note. Can you please shed some light as to whether or not an unsecured promissory note investment to my friend’s start-upcompany located in Silicon Valley CA can be processed using a self-directed Solo 401k?
ANSWER: A Solo 401k plan may invest in unsecured promissory notes even a start-upcompany in Silicon Valley, CA so long as the notes do not violate the exclusive benefit rule in IRC 401(a) or the prohibited transaction rules in IRC 4975.
IRC 4975 (c) (1)(B) prohibits a Solo 401k plan from making any “lending of money or other extension of credit between a plan and a disqualified person.”
Further, a disqualified person includes you as the Solo 401k owner/trustee, your spouse, children, parents, 10% or more partners, and any company that you as the Solo 401k owner or other disqualified party owns 50% more or manages. Therefore, your Solo 401k plan’s investment in an unsecured promissory note to your friend’s Silicon Valley Start-up Company does not to appear prohibited on the surface based on the information that you provided. Nonetheless, you will need to identify if any disqualified parties are employees or investors of the start-up company as detailed above.
