Solo 401k

[Cameron Skinner]

OK question for the solo 401k experts?  I have a business partner I've worked with in the past found a deal and it's really good commercial remodel, then sell.  He will do 100% of the work for a % of any profits.  I don't have enough in my Solo 401(k) to fully fund the deal.  

1 Can I create an LLC my partner would be the managing member 20%. The remainder 40% interest me 40% solo 401k. I will do no work except keep the books.

[Brian Eastman]

@Cameron Skinner

My apologies, I misread the initial post and did not notice the funding split with you using non-qualified funds in addition to 401k funds.  That is quite a bit more problematic, though still possible.  You will definitely want to work with your plan provider and/or a qualified tax attorney on this deal.

This gets into a grey area, with a reasonably accepted interpretation in the CPA world as follows:

Your IRA may joint venture with a disqualified party such as yourself with the following considerations.

The JV is entered into by both parties on day one. You could not start with one side and then buy into the deal with the other.

The equity split established initially must be maintained throughout the life of the transaction and may not be altered.  Neither party may buy equity from the other.  So if your initial funding is 50/50, then all future expenses and income would need to be 50/50.  Same if you chose to fund 60/40 or some other ratio.

The tricky bit (i.e. subject to interpretation) is that there can be no direct or indirect benefit between a plan and a disqualified party in either direction, and enabling either party to engage in the transaction by way of the availability of the other parties funds could be construed as an indirect benefit.  If either party could do the transaction without access to the other's funds, then you should be OK.  This would include being able to purchase the property using a mortgage (non-recourse on the 401k side).  The problem would be if either party could not realistically do the transaction on its own, then there may be a benefit.  With 50/50 funding, you are probably OK, because with 50% down, you could get a non-recourse mortgage - assuming the property is in good enough condition to meet lender criteria.

With respect to the associate, he is simply a vendor and an expense of the transaction.  Allocating a percentage of the profit to him in exchange for his labor and management does not create any obvious issue.  The remaining profit then simply needs to be split between you and the plan in the same proportion as the initial funding ratio.