Investing in Businesses with a Self-Directed IRA
If you know someone with a great idea needing capital for a start-up, or a successful businessperson in your network who is looking for expansion funding, your self-directed IRA or Solo 401(K) plan might be able to participate in the opportunity.
When it comes to investing in businesses with retirement funds, there are some important things to know to ensure your transaction is within the IRS guidelines and will be tax preferred.
Keep your Distance
One of the primary rules associated with any IRA investment is keeping things at arms’ length and avoiding disqualified persons. When it comes to investing in businesses, a clear understanding of what this means is especially important.
The IRS rules prohibit any direct or indirect benefit between a plan and a disqualified person. Disqualified persons include you, your spouse, lineal family and certain financial or business relationships.
You cannot use your IRA to provide start-up capital to your son’s business, for example. That creates a direct benefit between your IRA and your son, who is a disqualified person.
It could also be problematic if your Solo 401(k) made an investment in a start-up, and your daughter was subsequently hired by that startup as an employee. The IRS could determine the opportunity for your daughter to gain employment was linked to your plan’s investment. This would be an example of an indirect benefit to a disqualified person.
This does not mean that a business venture needs to be 100% clear of family involvement. In many cases, the opportunities that present themselves may be within your family network. You just want to be sure there is no benefit being provided by the plan to a disqualified party, or the reverse.
In the second example above, it would likely not be a problem if your daughter was already working for a company in a rank-and-file role and your IRA made an investment into that company.
As long as your daughter does not control the company in any fashion via equity ownership or a director-level role, the company itself is not viewed as a disqualified person. The coincident timing of an investment by your plan and her being hired would create the potential issue of concern. But if her employment and your IRA investment were separated by a considerable period, then there is no risk of it looking like “the IRA bought her a job”.
We have worked with several clients who have been offered an opportunity to invest in the company they work for. This does not generally create a problem unless they control of the business.
The list of disqualified persons extends beyond just family. Any business investment will need careful consideration if it involves someone who is a fiduciary to your IRA, a key employee such as a vice president of a company that you or a close family member owns, or someone with whom you are a business partner.
No S Corporation Investments
An IRA may not invest into a S Corporation. This is not an IRA issue, but rather a restriction on the types of shareholders allowed for S Corporations. Only individuals who are US citizens and certain forms of trusts or estates may be S Corporation shareholders.
When UBIT Applies
Another important consideration when evaluating a potential investment into a business is whether the opportunity will create exposure to Unrelated Business Income Tax (UBIT).
This tax applies to tax-exempt entities such as retirement plans when they are engaging in a trade or business on a regular or repeated basis. The intent of UBIT is to level the playing field so that tax-exempt entities do not drive tax-paying businesses out of business.
If your IRA is investing in the stock of a C Corporation, then UBIT is not a concern. The business income will be taxed at the corporation level and income to the IRA will be in the form of dividends, which are considered passive income.
If your IRA is investing in a sole proprietorship, partnership, or LLC, then taxes are not paid at the entity level and tax liability is passed through to the owners. If the income producing activity of the business is a product or service, then the IRA will likely be subject to UBIT. If the nature of the income produced by the entity is passive, such as rent from real property, royalties, or interest, then UBIT will not apply.
So, investing in a LLC that operates a restaurant will have UBIT exposure. Investing in a partnership that owns an apartment complex for rental will not.
When UBIT Exposure is OK
The fact that an investment in a business may generate operating income that is subject to UBIT is not always a deal killer. You just need to understand the implications of UBIT and how they impact the return on investment for your IRA or Solo 401(k) dollars. In general, this depends on where the return is generated.
If the “prize” is the general operating income of the business, then UBIT will likely diminish the appeal of that investment for an IRA. The problem is that UBIT is taxed to the IRA at trust rates, which can be as high as 37%. That is generally a higher rate than you would pay personally.
Unless the ROI from the investment is significantly high to the point that the post-UBIT returns are still significantly better than any other investment you can think of for your IRA, it probably does not make sense to pursue such an opportunity.
In a more classic venture capital play, the “prize” is the eventual sale of your interest in the business at a higher price – either when the venture attracts a future funding round, is sold, or goes public. UBIT only applies to operating income, not the gain in equity value.
In many such cases, the operating income in the start-up phase is not always significant, and may even be offset by losses in the early goings or investments into R&D or other business assets. As such, UBIT will apply to the income, but the tax burden will be negligible. When the business hits the next level and you get to sell the shares your IRA purchased for $100 each at a price of $500, $1,000 or more, that gain in equity value is not taxed. In this type of scenario, investing with IRA or 401(k) funds can make a lot of sense.
View and download our full checklist to learn more about investing in businesses with a self-directed IRA.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
