Friend's 401k

[Valentine Serna]

Hi Everyone,

I wanted to get your opinion on something. I have a close friend that is changing jobs and has a good amount of money on his 401k saved up. He is wanting to partner with me on some deals and was asking if he could do that with his 401k. Does anyone have any experience on what is the best way we could do it? I was thinking just having him get a loan out and make monthly payments at 4.25% and I could turn around and borrow the money at 8% but didn't know what the tax implications were. Thanks for any advice!

Happy Investing!

[Brian Eastman]

@Valentine Serna

In order to take a loan from his 401k, your associate would still need to be employed with the company that holds the 401k plan. And, from a math perspective, it would be a bad deal for him.  He borrows the pre-tax money in his plan at, say 4.25%.  He is paying the loan back with post-tax dollars, so there is the hidden cost of whatever his tax rate is.

The better option would be for him to rollover all or part of that old employer 401k to a self directed IRA. That IRA could then partner with you on deals or lend you money to do deals. All of the returns would go back to the IRA tax-sheltered.

There is a lot of information here on BP about self directed IRA plans, which would serve as a good starting point before contacting some of the professionals that offer such services.