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Use 401k to Finance Real-Estate Business
QUESTION: I currently own my own real-estate management business which sponsors a Solo 401k; however, I now want to invest my Solo 401k funds in the same real estate management business, which is registered as a C-Corporation. Do you know if this is allowed?
ANSWER: Good question, but a solo 401k may not be invested in one's own real-estate management business if the investor is the owner of the Solo 401k. Doing so would be deemed a prohibited transaction, whether the solo 401k plan loaned funds or purchased shares in the C-Corporation. Solo 401k plans are for making passive investments not active investments--investing in one's own business. Passive investments include real estate, promissory notes, precious metals, equities, tax liens, private company shares in which the Solo 401k owner is not an employee.
However, you may be interested in using a business funding 401k, referred by the IRS as ROBS (rollover as business start-up) and others in the industry as , to invest in your existing real-estate management business. It is estimated by industry professionals that over 10,000 businesses have been funded since 2005 through ROBS arrangement. The transaction entails rolling your existing IRA or 401k, including, in your case, a to a new 401k that allows for the use of rollover funds to purchase stock shares in an existing C-Corporation or new C-Corporation owned by the 401k trustee, all the while avoiding distribution penalties because you are investing the 401k funds in your own real- estate management business or any other business considered an operating business.
Lastly, the ROBS or 401k small business financing plan investment in employer securities is regulated by ERISA Section 408(e). This section lists language allowing for the purchase of employer securities (i.e. employer stock), provided the following is met:
- The acquisition or sale is for adequate consideration,
- No commission is charged, and
- The plan is an eligible individual account plan as defined in ERISA Section 407(d)(3).
To learn more about how to finance a business using retirement funds click here.
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