One of the most appealing features of a Solo 401k is the flexibility to hold almost any type of asset. Beyond traditional options such as stocks, bonds, and ETFs, your plan can also hold alternative investments like private funds, real estate, and startups. Using a Solo 401k to invest in startups may offer unique opportunities, but it also comes with rules and restrictions you should understand before getting started.
Here’s everything you need to know about investing in private companies with your solo 401k.
The Solo 401k Handbook
Learn how self-employed professionals can contribute more, reduce taxes,* and invest with greater control– using one of the most powerful retirement plans available. Download the free guide, updated for 2025.
**Solo 401(k) eligibility and contribution limits depend on IRS rules. Tax benefits depend on your individual situation. Not all business owners or side-income earners qualify. 2025 limits ($70,000 or $77,500 with catch-up) depend on income and plan design. Plan administrators—not Carry—are responsible for compliance. Carry does not provide tax advice, consult a tax advisor.
Are You Allowed to Invest in Startups Through a Solo 401k?
Yes, it is generally possible to use a Solo 401k to invest in startups and businesses.
The key difference is that the investment must be made in the name of your Solo 401k plan, not in your personal name. In practice, while the process may feel similar to investing individually, the ownership, paperwork, and tax reporting belong to the plan.
To do this, you need a self-directed Solo 401k. These plans allow investments in alternative asset types, such as startups, real estate, and private funds. By contrast, most Solo 401k plans from large banks or brokerages are considered prototype plans, which typically limit you to traditional investments like stocks, bonds, and ETFs.
If your goal is to invest in startups, you would need a non-prototype self-directed Solo 401k from a specialized provider.
📝 Note: Not all providers offer access to alternative investments. Always review the plan features carefully before opening your account.
3 Rules for Investing in Startups With a Solo 401k
A Solo 401k can be a powerful tool to invest in startups, but the IRS sets clear rules around it. Knowing these rules ahead of time can help you avoid costly mistakes and keep your plan on track.
1. You Must Be an Accredited Investor
Many private-company offerings under Regulation D Rule 506(c) are restricted to accredited investors. Non-accredited investors may only participate through channels such as Regulation Crowdfunding, which imposes strict limits on how much can be invested.
If you qualify as an accredited investor individually, your Solo 401k is generally treated as accredited as well.
To qualify as an accredited investor, you must meet one of the following:
- Earn $200,000 or more in annual income (single) or $300,000 or more (joint) for each of the past two years, with a reasonable expectation of maintaining that income level this year
- Have a net worth above $1 million, individually or with a spouse
- Hold a Series 7, Series 65, or Series 82 license and be registered with your state or another regulatory body
📝 Note: There is no formal application process. Meeting one of these criteria automatically grants accredited status, and the same status may extend to your Solo 401k.
2. You Cannot Invest in an S Corporation
A Solo 401k can invest in almost any type of business entity, except an S corporation. That is because S corporation shareholders must be individuals, estates, certain trusts, or tax-exempt organizations. Entities such as partnerships, corporations, and retirement trusts typically do not qualify.
Since an investment through your Solo 401k is made in the name of the plan’s trust and not in your personal name, it does not meet the requirements to hold S corporation stock.
3. You Cannot Invest in a Business With Disqualified Persons
The IRS prohibits transactions between retirement plans and disqualified persons. That means your Solo 401k investment cannot personally benefit you or any related parties, either directly or indirectly.
Disqualified persons include:
- You, your spouse, ancestors, and lineal descendants
- Fiduciaries and service providers to the plan
- Any entity where you or other disqualified persons own 50% or more
📝 Note: These rules are complex. For example, if you are a fiduciary of your Solo 401k or you own at least 50% of a business, that business would be off-limits for investment. Penalties for prohibited transactions can be severe, so it may be wise to consult a tax attorney or professional before proceeding.
The Advantage of Investing in Startups With a Solo 401k
One of the biggest advantages of investing in startups through a Solo 401k is the ability to use the Roth portion to potentially avoid capital gains tax if your investment grows significantly.
Startups are generally higher-risk investments but may offer the potential for greater returns. Roth retirement accounts are funded with after-tax income, and qualified withdrawals in retirement are typically tax-free, no matter how large the gains.
Key benefits of using a Roth Solo 401k for startups:
✅ Tax-free growth: Any earnings from your investments may generally be withdrawn without paying capital gains tax.
✅ Higher contribution limits: Solo 401k plans allow you to contribute more than a Roth IRA, giving you more capital to deploy in startups.
✅ Flexibility: You can invest in almost any asset type, including private companies, through a self-directed plan.
✏️ Real Example:
Peter Thiel turned $1,700 into $5 billion by investing in startups through his Roth IRA. In 1999, he used his Roth IRA to purchase 1.7 million shares of PayPal at $0.001 per share. Three years later, PayPal went public and was acquired by eBay, turning his initial $1,700 investment into $28.5 million. Instead of withdrawing the funds, he reinvested into other startups, including Facebook and Palantir. By 2019, his Roth IRA had grown to over $5 billion. Because it was held in a Roth account, he owed zero capital gains tax and could take out the full amount tax-free.
📝 Note: This example is for illustration only. Results vary, and past performance does not guarantee future outcomes. Roth Solo 401k accounts operate similarly, allowing potential tax-free growth if investments perform well.
Roth Solo 401k Has Bigger Limits
A Solo 401k offers much higher contribution limits than a Roth IRA, allowing you to invest far more capital into startups.
Contribution limits for 2025:
- Roth IRA: $7,000 if under age 50, $8,000 if 50 or older
- Roth Solo 401k: $23,500 if under age 50, $31,000 if 50 or older
- Mega Backdoor Roth Solo 401k: Up to $70,000, providing even more capital for startup investments
📝 Note: Contribution limits depend on factors such as net income, net adjusted income, and gross income after self-employment deductions. The Mega Backdoor Roth Solo 401k allows additional after-tax contributions, increasing the amount you could potentially invest.
✏️ Hypothetical Example:
If you contribute $30,000 to a Roth Solo 401k and invest in a promising startup, your investment could grow tax-free. Even moderate growth could result in meaningful retirement savings, while larger growth could significantly increase your tax-free retirement balance.
Can I Invest in My Own Startup With a Solo 401k?
No. Investing your Solo 401k directly into your own business is generally considered a prohibited transaction by the IRS. This means the plan cannot own shares in a company you control, as it would create a conflict of interest and could trigger significant penalties.
Alternative: Solo 401k Loan
Instead of investing directly, you may use a Solo 401k loan to fund your startup. Key points about these loans include:
- You can borrow up to 50% of your account value, capped at $50,000
- Loan terms typically allow up to 5 years for repayment
- Interest rates are usually the prime rate plus 1–2%
- No credit checks or formal application process are required, since you are borrowing from your own account
📝 Note: A Solo 401k loan reduces the funds available for retirement investments. While it offers quick access to capital, it may impact the long-term growth of your account. Consider all funding options before deciding to take a loan.
✏️ Hypothetical Example:
If your Solo 401k has $80,000 and you borrow $40,000 to fund your startup, those funds are temporarily removed from your account and will not be earning returns. You’ll need to repay the loan with interest over five years to avoid penalties and ensure your retirement savings remain on track.
In Summary
A Solo 401k can give you the opportunity to invest in startups and potentially grow your retirement savings tax-free through the Roth portion of the plan. Self-directed accounts allow you to invest in private companies and other alternative assets. The higher contribution limits let you put more money to work than a Roth IRA.
Key rules still apply: you cannot invest in S corporations, your own business, or companies involving disqualified persons. Startup investing is inherently risky and gains are never guaranteed, so it is important to always review IRS rules and consult professionals before moving forward.
📌 Looking to invest in alternative assets with a Carry Solo 401k? Here’s a guide to getting started.
Disclaimer:
The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.
The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
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