Startup Investing: How to Invest your Self-directed Solo 401k like a Shark

Technology and legal changes over the past years have dramatically increased the opportunities to invest retirement funds in startup companies.  Please note that if you are looking to invest your retirement funds in your own business, please consider ROBS 401K Business Financing.

Self-Directed 401k/IRA – Benefits of Startup Investing

Investing your self-directed Solo 401k or IRA in startup companies may offer the following benefits:

  • Diversification – Along with traditional investments likes equities, mutual funds, etc. the platforms listed below provides the opportunity to diversify the holdings in your self-directed retirement account including:

o   Private company equity or debt offering

o   Consumer and corporate debt

o   Limited partnerships

o   Limited liability companies

o   Private stock

o   Convertible notes

o   Promissory notes.

  • More investments options at lower costs – Prior to the proliferation of these platforms, these investment opportunities were only available to relatively few investors with the connections or resources to pay for access to these investment options.
  • Due diligence – Many of these platforms provide tools to research the investment opportunities offered on the platform.  Of course, you will want to consider these options in consultation wth your investment advisor.

Self-Directed 401k/IRA – Startup Investing Platforms

Here is a sample of sites that offer crowdfunding/startup investments:

  • Lending Club
  • Fundrise
  • Angel Kings
  • Wefunder
  • Groundfloor
  • CrowdStreet

Self-Directed 401k/IRA – How to Invest in Startups

As long as you and related persons are not part of the company seeking the investment (e.g. you don’t own, work for, etc), you can invest your self-directed retirement funds and below are the steps to do so:

Step 1 –  Open Account

  • Open an account in the name of (i) the self-directed Solo 401k and EIN of the Solo 401k OR (ii) the name and EIN of an LLC owned by your 401k or IRA.

Step 2 –  Fund Account

  • Fund your account with (i) funds from a former employer plan or IRA or (ii) funds that are already in an existing bank or brokerage account for your 401k or IRA.

Step 3 –  Invest

  • After performing your due diligence, start investing!
  • Please note that if the investment is structured as equity (e.g. stock in a corporation, membership interest in an LLC, etc.) the investment may be subject to unrelated business income tax (UBIT) if (i) the entity is an active business (e.g. providing goods or services) and (ii) the entity is NOT taxed as a C Corporation. This means that UBIT does not apply if investing in the stock of a C-corporation.  See more here.

For more on private company investments, please see here.

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About George Blower

I have the privilege of educating our clients about our products and services so that they can make informed and confident decisions about their financial future. Prior to joining My Solo 401k Financial, I served as the general counsel for a subsidiary of a Fortune 500 financial services company. Learn more about George Blower and My Solo 401k Financial >>

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