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Private Equity Investing with your 401k

Or how to invest in private business with your retirement money

A Solo 401k offers unrivaled investing potential.

From the ability to invest in real estate to stocks and bonds, precious metals, and virtually anything else you can think of, combined with the ability to bypass custodian approval and with no need to set up an LLC to invest, a Solo 401k is the ideal retirement account for investing.

However, in addition to the above mentioned investment options, you may also invest in private business, a unique investment option allowing you to further diversify your portfolio.

The Basics: Investing in private business with a Solo 401k

Before deciding to invest in a private business (or businesses), it’s important to know a few basics about doing so with a Solo 401k.

First, a Solo 401k can invest in any entity, including an LLC, C corp, or partnership, except for an S corp. Because a retirement account cannot be a shareholder of an S corporation, investing in an S corporation with any retirement account is prohibited.

With this in mind, it’s also important to be aware of what kinds of transactions are prohibited with a Solo 401k.

A Solo 401k prohibited transaction is any transaction between the Solo 401k and a disqualified person or persons that directly benefit them; a disqualified person being you, a family member, or any person or entity directly or indirectly connected with the Solo 401k.

UBTI tax and Solo 401k investing

In addition to the above, keep in mind that investing in an active business with any retirement account is likely to trigger the UBTI tax. The UBTI, or Unrelated Business Taxable Income tax, is a steep tax (with rates often as high as 40%) triggered when a business invests in another business which isn’t generally associated with it. For example, a software company that invests in agriculture.  

If you make ‘passive’ investments with your Solo 401k, including stocks, precious metals, rental property, and others the returns generated by said passive investment with not be subject to the UBTI tax.

However, if your Solo 401k (or any other retirement account) invests in an active business, such as a restaurant or software company, using what’s referred to as a ‘pass-through entity’ such as an LLC, your Solo 401k will be subject to UBTI taxation.

How to invest in private business with your Solo 401k

Investing in private business, whether that be an LLC, partnership, or C corp, with a Solo 401k is simple and straightforward, but it’s important to know what to expect each step of the way so you can be properly prepared.

Let’s say we want to invest in our friend Jack’s virtual reality company, SmartVR. There are 6 steps to investing in SmartVR with your Solo 401k:

1. Open your Solo 401k account

First, start by setting up your Solo 401k account.

This is important because you need the name of the Solo 401k plan and the EIN for any purchase-related documents. If you don’t have it, you can’t complete any associated paperwork.

2. Fund your Solo 401k bank account

Next, fund your new Solo 401k bank account. This can be done with one of several methods, including:

  • A contribution
  • Rollover (via a Roth or pre-tax IRA)
  • Or a transfer from another qualified plan such as a 401k

If you don’t yet know the exact amount you’ll be investing, you can always do an initial contribution now and go back to make another once the documents are complete and you’re ready to write a check.

3. Register investment documents

Next, now that your Solo 401k is ready to go, it’s time to turn your attention to prepare everything necessary to investing in SmartVR (or whatever business you’re investing in).

Each case will be different, but here’s a list of documents that may need to be completed in association with the investment business:

  • Subscription Agreement or Stock Purchase Agreement (depending on how you’re investing in the business)
  • Depending on the investment entity type, either: Company by-laws (C Corporation), Operating agreement (LLC), or a Partnership agreement (Limited Partnership)
  • Private Placement (or Offering) Memorandum
  • Articles of Organization
  • Accredited Investor Representations
  • Investor Questionnaire
  • Certificate from Secretary of State

Also, make sure each document is filled in correctly, most notably that:

  • You’ve properly registered the Solo 401k as the owner, not under your personal name (for example, John Smith’s Solo 401k trust)
  • You’ve listed the Solo 401k’s EIN
  • And you’ve signed as trustee of the Solo 401k plan (for example, John Smith: trustee of John Smith’s Solo 401k trust)

5. Funding Investment

Now that all investment documents have been completed, the only thing left to do is to write a check from your Solo 401k bank account which is payable to SmartVR (as the investment entity) to make you investment.

Also, keep in mind that any expenses related with the investment also need to be paid with the Solo 401k bank account moving forward.  

Diversify your portfolio by investing in private business with a Maverick 401k

Investing in private business with a Maverick Solo 401k offers benefits that other retirement accounts can’t match.

Opening a Solo 401k plan was once cumbersome and time-consuming, but now, with Maverick, your end of the setup process has been simplified and can even be completed entirely online (we take care of the rest).

So, if you’re ready to further diversify your portfolio by investing in private business with your own Solo 401k, click here to set up an account.

Alternatively, you can contact us here with any questions you may have and we’ll be more than happy to help.

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