Self-Directed 401(k) Plan to Invest in Private Stock

A self-directed 401(k) plan is not available to an S-corporation or an LLC.

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If you have retirement funds, you may be able to create a self-directed 401(k) plan to invest in private stock to build your own company. This type of plan, called a Rollover Business Startup, or ROBS, is also known as an Entrepreneur Rollover Stock Ownership Plan, or ERSOP. Setting up a self-directed 401(k) plan can be costly, but it may cost less than taking an early distribution from your retirement plan.

Setting Up Corporation

To use a self-directed 401(k) plan, you must first set up a C-corporation. This type of corporation will allow for an unlimited number of shareholders and gives those shareholders limited liability, in that they can only lose the amount of money they put into the company. Setting up a C-corporation can be complicated, so hiring an attorney with corporation experience in your state can help you avoid potential problems. Once the corporation is in place, it should hire you as an employee so you can invest in the company stock.

Setting Up Self-Directed 401(k)

The corporation should set up a 401(k) plan with an investment management firm that will allow the company's employees to use their retirement funds for purchase of individual stock. When completed, the corporation can issue private stock that will be available only for employee purchase, either directly or through the 401(k) retirement plan.

Rolling Over

With new corporate stock available, you, as an employee of the company, can roll over your existing retirement savings from another 401(k) or individual retirement account into the newly-formed corporation's retirement account. Because this transaction was a rollover from another retirement account, you will not be assessed an early distribution penalty on your taxes, which can be as much as 10 percent of the distribution.

Buying Stock in Corporation

Once your funds have been rolled over into the self-directed 401(k), use those funds to buy the company stock that the new corporation issued. The corporation can then use the proceeds of this stock sale to fund the expenses of the new corporation, buy an existing business or create a sub company that operates under the umbrella of the corporation. By using your retirement funds to invest in your private stock, you will have effectively funded your own business using your retirement funds without an early distribution penalty.