Can I use my Self-Directed IRA or Solo 401(k) to fund a private business, startup, or venture capital fund?

Created July 22, 2021 19:08

Yes. You can fund startups & existing businesses using your IRA or Self-Directed Solo 401(k) account. You can sign a private agreement with an individual company or send a wire to a venture capital fund.

How does the Checkbook IRA structure work?

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Help Young Companies Grow, keep your tax benefits.

Helping seed and grow a new startup business is one of the great features of self-directed retirement accounts. By committing capital in the form of equity or debt, your IRA or Individual 401(k) can help capitalize a startup throughout its inception and growth stages.

If you end up having an investment with a significant upside, deferring those taxes in a traditional IRA or taking them out in a Roth IRA tax can make the success even more productive for your own situation.

Early investors of Facebook, Yelp, and Linkedin have built up incredibly large retirement accounts.

How do I actually fund the investment?

For a startup funding platform, you open an account in the name of your IRA Trust or LLC but make sure the platform has a process to title your new investment appropriately with an entity rather than your personal name. Then you connect your bank account at our partner bank to the bank funding mechanism of the platform.

For a private investment not on any kind of marketplace, you simply wire or ACH the bank account transfer to the correct bank account with the private party and make sure to complete all agreements in the name of your IRA Trust or LLC. Make sure to go through the same due diligence and risk assessment you would with personal dollars, also considering the tax treatment of your retirement funds and a portion of your retirement portfolio.

For a venture capital fund, make sure to complete all paperwork in the name of the IRA.

Can I do loans and lending instead of buying stock?

Yes! your IRA can make a loan out to another party. Typically, the easiest and cleanest way to do this is a promissory note.

Prohibited Transactions

The primary risk with investing in a business or startup is self-dealing. You cannot invest in a business with your retirement account if you're an officer, director, or 10%+ shareholder of the business. If you plan on being active in decision-making in the business or board instead of just an advisor, you must hold a minority interest. Also, you cannot invest in a business owned by a disqualified person. Disqualified persons include your spouse, parents, grandparents, children, grandchildren, fiduciaries, and several others. For more information see IRS Pub 590-B and IRC 4975. This means your siblings, cousins, nieces, nephews, and in-laws are not disqualified so you can invest in their businesses or they can invest in yours.

If you plan on remaining passive, you can hold unlimited interest in the business.

You cannot invest in a business if the business is an S-Corp because it violates the guidelines for investors in such structures.

If you had more questions about this, it would be helpful to read our prohibited transaction questionnaire.

Unrelated Business Income Tax (UBIT)

Note that investing in an operating business may trigger Unrelated Business Income (UBIT) Tax. If your Self-Directed Solo 401(k) or Self-Directed IRA invests in an operating business, like a limited partnership (LP) or LLC, that sells goods or services and generates more than $1,000 in UBIT, the 401(k) or IRA must file IRS Form 990-T and pay the tax due from the 401(k) or IRA. A C-Corp will pay a corporate tax, so C-Corps do not trigger UBIT. Interest and dividend income are exempt from UBIT. You can read more about UBIT in our article here.