Running a business owned by my 401k

Can I use my Solo 401k plan to acquire a business? Can I run it myself?

Answer:

This is a two part question so I will provide a two part answer.

First, all retirement plans, according to the IRS rules, are to be invested passively. When you use your 401k to invest in an active business, the income from this business activity will be subject to Unrelated Business Income Tax of 40% inside of your retirement account. Your 401k (not you personally) must file a special tax form to report this income and pay the taxes. Then, when you take a distribution, you will be paying income tax as well. Be sure to consult with a qualified tax professional to fully understand all tax consequences if you are considering this direction.

Second, if you invest in a business with the 401k, you will not be allowed to run it yourself.  Doing so would violate the prohibited transaction rules and would incur severe penalties.