Self-Directed 401K as a Funding Source from Friends & Family

March 08, 2018

by a searcher from University of Pennsylvania - The Wharton School in Laguna Hills, CA, USA

All-

Any self-funded searchers raise equity capital from individuals (friends and family) through a self-directed 401k platform like Directed Equity (link below)?

http://directedequity.com

My understanding is it allows you to lever up tax-deferred retirement assets as a equity funding source towards a business acquisition. I’m a fan of this concept and curious if anyone has any experience with this medium to pool equity capital.

Any insights are appreciated!

Abdulla Mirpur

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Reply by a searcher
from Harvard University in Chicago, IL, USA

Abdulla: I am not savvy about all of the technical details, and the "ins and outs" could have also changed with the recent US tax law changes, but my basic understanding is that using self-directed retirement funds (IRA and 401k) can only be used within a c-corp structure and can not be used to accommodate any type of pass-thru structure such as LLCs or s-corps. Assuming that is true, it doesn't mean these mediums are not a good option (especially if they are your only option!), but it does lead to some long-term thinking about structure in which you may have to decide between the access to the capital on one hand vs the long-term tax math and higher-up front cost to set up a c-corp. I hope this helps...

Reply by a lender
from University of Missouri in St. Louis, MO, USA

The ROBS program has been used by several of my customers over the last couple of years. However, the SBA recently came out as (potentially) having an issue with this program. Essentially the company isn't owned by an individual but more like being owned by a 401k. As you might suspect with the SBA being a government program, the guidelines have been vague and will likely change. This would only be an impact on an SBA loan backed acquisition, but for self funded searchers this will be something to pay attention to. We hope there will be some guidance in the new SOP next year. However, I would be cautious relying on this as your sole means of equity until those guidelines come out

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