401k

[Matt Horton]

Hello Iam trying to figure out away for my mother to use her 401k to invest into my llc to flip houses. Does anyone have any ideas? Thanks

[Account Closed]

Interesting info. Section C. cut off.

[Mark Nolan]

Matt Horton Question: Hello Iam trying to figure out away for my mother to use her 401k to invest into my llc to flip houses. Does anyone have any ideas? Thanks

ANSWER: The Rollover as Business Startup (ROBS) 401k plan may be a good fit, but your mother would also have to work for the business at least on a part-time basis. [Solicitation Removed]

[Adam Hershman]

Originally posted by @Matt Horton:

She can fund my business being a family member with solo 401k

 Hey Matt,

No she can not. You will be a disqualified person to your mother regardless of what kind of self-directed retirement vehicle she decides to use. The idea of her lending money to a 3rd party and the 3rd party lending it to you is a fine idea, but you realize you will then end up paying more in interest than you would with more traditional lending, because if your mother loans money to a 3rd party at a rate lower than what the market dictates for the express purpose of them providing a loan to you for a lower than market rate, that will also be a prohibited transaction. Simply put it is really not worth the effort you're talking about to take advantage of 100% of her retirement funds. 

Your 2 best options, and by that I mean you accomplish your goal of your mothers retirement lending you money without putting her in a terrible situation, are to take advantage of her 401k loan if its allowed by her 401k administrator (it almost always is) or have her convert her 401k to roth funds and then take distributions to loan you funds because she is over 59 1/2. Hopefully you pay back with interest and she then uses those funds to replace her retirement funds. 

Hope that helps.

[Chris Weiler]

Originally posted by @Adam Hershman:

Originally posted by @Matt Horton:

.....The idea of her lending money to a 3rd party and the 3rd party lending it to you is a fine idea,.... 

To be clear this is not a fine idea. If your are audited, the IRS considers this "tit for tat" and is prohibited. You will likely not get caught, but is it worth risking your retirement savings over?

[Adam Hershman]

Originally posted by @Chris Weiler:

Originally posted by @Adam Hershman:

Originally posted by @Matt Horton:

.....The idea of her lending money to a 3rd party and the 3rd party lending it to you is a fine idea,.... 

To be clear this is not a fine idea. If your are audited, the IRS considers this "tit for tat" and is prohibited. You will likely not get caught, but is it worth risking your retirement savings over?

 Perhaps a full quote

"The idea of her lending money to a 3rd party and the 3rd party lending it to you is a fine idea, but you realize you will then end up paying more in interest than you would with more traditional lending, because if your mother loans money to a 3rd party at a rate lower than what the market dictates for the express purpose of them providing a loan to you for a lower than market rate, that will also be a prohibited transaction."

Where i clearly explain why it would still be a prohibited transaction would have alleviated your concern that I was in some way advocating this idea. 

Thanks for reiterating my point that it would not be wise. 

[Dmitriy Fomichenko]

The idea of her lending money to a 3rd party and the 3rd party lending it to you is not a "fine idea", but rather Indirect Prohibited Transaction. Indirect Prohibited Transaction IS A PROHIBITED TRANSACTION and would disqualify the IRA being a qualified plan.

[Adam Hershman]

Originally posted by @Dmitriy Fomichenko:

The idea of her lending money to a 3rd party and the 3rd party lending it to you is not a "fine idea", but rather Indirect Prohibited Transaction. Indirect Prohibited Transaction IS A PROHIBITED TRANSACTION and would disqualify the IRA being a qualified plan.

 Perhaps it's me saying its a fine idea that's causing everyone so much confusion. I mean it's a fine idea like communism is a fine idea, it doesn't work because it's not practical but in theory it would be nice if everyone worked together towards a more equally prosperous nation. 

Like I said in my original post, this is still a prohibited transaction and is not the best way to approach using the funds for RE investment. Really not sure why everyone seems to think I'm advocating for this.

[Mark Nolan]

Roundabout Transactions

A roundabout transaction occurs when the Solo 401k participant/trustee structures a deal with the purpose of entering into a prohibited transaction.

For example, the solo 401k owner lends money form her Solo 401k /self-directed 401k to her friend (who’s not a disqualified person), and she or he then turns around and loans the same funds to the solo 401k owner's son. This is considered a roundabout transaction and viewed by the IRS as not only prohibited but also as an attempt to evade the tax rules because the solo 401k owner can’t loan her Solo 401k funds to her son (or any other disqualified party), even if the solo 401k owner first lends funds to her friend (who’s not a disqualified person).

Resources

http://www.irs.gov/irm/part4/irm_04-072-011.html

http://www.dol.gov/ebsa/publications/401kplans.html

[Tj Noye]

You can use the SOLO K to invest in a private company as long as it's an arms length transaction. The LLC would need to have all the proper docs to accept the investment ie PPM and subscription agreement, operating agreement. I personally like this route.

[Mark Nolan]

Generally any type of self-employed entity can establish a solo 401k. To learn more about the various self-employed entities visit the following IRS website. 

https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

[Jerry Miller]

I have been examining SD401k's and have a scenario. 

My wife is a less than 50% partner in LLC for REI. Other partners are not prohibited persons. The SD401k would be investing, directing funds and would placing any profits/income earnings back into the SD401k.

Do I have that correct?

[William Preston]

Best way to invest using funds in your 401k is to roll it over into a self directed IRA...If you are doing it yourself, then you should open up an account at a self directed IRA custodian, then contact your old 401k plan administrator to get your funds rolled into the new account. Once you have the funds in the self directed IRA custodian, you can determine how to invest your funds.