Using a self-directed retirement account to invest in a business

Possible, and one of the easiest places to cause serious damage without realizing it.

What these accounts can do

A self-directed IRA or solo 401(k) can hold alternative assets — real estate, private company interests, and others — rather than only publicly traded securities.

The rule that catches people

Prohibited transaction rules restrict dealings between the account and certain related people, called disqualified persons. That includes you, your spouse, your ascendants and descendants, and entities you control.

The restriction is broad. It isn't limited to obvious self-dealing.

Examples of what can go wrong

Your account buys a property and you do the repairs yourself. Your account invests in a business you also work for. Your account lends to an entity you control. You personally guarantee a loan the account takes. Your account buys property from a family member.

Why the consequences are severe

A prohibited transaction can disqualify the entire account, not just the offending transaction. The whole balance can become distributed and taxable, potentially with penalties, as of the date of the violation.

That's not a fine. That's the account.

Where it gets particularly dangerous

Structures layering an entity between the account and the investment — sometimes called checkbook control — are sold as offering flexibility. They also make it far easier to cross a line without noticing, because the account holder is now making transaction decisions daily.

Anything involving a trust as a beneficiary or an intermediary needs careful examination rather than a promoter's assurance.

What to do

If you're considering using retirement funds to invest in something you'll be involved in, get the prohibited transaction analysis before the money moves.

And be skeptical of anyone selling a structure who describes these rules as a technicality. The rules are broad, the penalty is the account, and there's no partial credit.

This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.