How can we extract money from a 401K for RE investing? Can we use the money in our own LLC?

Question

My friend and I own a leasing company. He has a 401k that he would like to extract some money from for use in our company. We are new to the legalities of this. Do we need him to roll over into an IRA first? Self directed IRA's are heavily covered in other forum posts which we will access. Even if we get the money out, can we use it in our own company?

Thanks,

Mike Gennaro

Honest Leasing LLC.

@Ron Garic

Thanks,

Mike Gennaro

Honest Leasing LLC.

@Ron Garic

Jon Holdman · Answer

Is he still employed by the company that has the 401k? If so the only option is probably a loan.

If he's left that company, he can roll the 401k into an SDIRA and then use that for real estate.

However, all the prohibited transaction rules apply.  Those include any sort of interaction between the SDIRA and the owner of the IRA.  So, he cannot have the IRA lend to him or invest in his business.

Nathaniel Busch · Answer

Mike,

Keeping the money in a 401k would appear to be the easiest approach, assuming he is permitted to borrow against it. Most 401k plans allow the participant to borrow the lesser of 50% of the participant's plan value or $50K. Your friend could then sign a simultaneous promissory note with your leasing company to extend these funds to. Leasing company pays him interest so he can cover his payment back to his own 401k.

Rolling over into an IRA would allow him to borrow whatever he wants from the plan as long as he pays it back in full within 60 days of the original distribution (which is highly unrealistic for your situation I'm sure).

Nathaniel Busch, CPA

Mike Gennaro · Answer

Thank you all immensely for your knowledge. We're going to go with @Nathaniel

@Nathaniel Busch 's suggestion after checking with our CPA.

Best,

Mike Gennaro

Honest Leasing LLC.

Ed Caldwell · Answer

Another suggestion is if this 401K is rolled into self directed is to find another third party unrelated real estate investor in the same situation.  You can execute a loan agreement and loan your money to that investor.  Simultaneously, the other investor with a self directed account can loan you their money for the same terms.  Interest is a wash and it is an arms length transaction.  Interest from the notes accrues tax deferred both your and the other investors self directed accounts (somewhat pass through) and you can use the funds from the other investor in your business since the loan is from a neutral third party.

Another scenario, is that your 401K partner not be an owner or participant in the Leasing Company and he can loan directly from the self directed to the Leasing Company.  The loan can be structured as flat percentage, percentage of profits, etc.  If he needs the income, want to be involved, doesn't want to defer, this won't work.  However, you could each form separate property management companies, and he could loan to the one he is not involved with until the business is has grown to enough capital to pay off the 401K funds used to get started.  You could then merge the separate companies to become one entity.  Getting into this type of arrangement would require ALOT of trust between friends.

I would consult a local lawyer and/or CPA before pursuing this to make sure your paperwork is above board and to protect your individual interests.

Dmitriy Fomichenko · Answer

Nathaniel, I guess that you are referring to above is a 60-day rollover? Under 60-day rollover rule client take out a distributions from his 401k and as long as he deposits those funds into an IRA within 60-day window there are no tax consequences.  I agree with you that this would be very unrealistic and is BAD idea. I would not even entertain this idea!

The borrowing is not allowed with an IRA, only with 401k.

Another alternative that has not been mentioned above is self-directed Solo 401k plan (which is designed for those who are self-employed or own business w/o any full time employees). This plan would allow both: investing plan assets into real estate or any other alternative investments as well as take a participant loan from the plan up to $50K or 50% of the balance.

How can we extract money from a 401K for RE investing? Can we use the money in our own LLC?

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