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Solo 401k Promissory Note/Loan to Siblings

10/20/2020

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QUESTION:

I have a solo 401k plan. I was considering lending money to my brother from my Solo 401(k) using a promissory note.  Would it be possible to do so without violating prohibited transaction rules?  Is there a limit on the rate of interest that I could charge him?  Does he need a business purpose to borrow that money, or can it be for any reason as long as he fulfills the terms of the loan?


ANSWER:


While it is not prohibited to invest one's solo 401k funds via a promissory note to their sibling provided that (i) the transaction is not part of a step transaction: for example, it is prohibited for the sibling to turn around and loan/invest those funds to the solo 40k owner's parents (i.e. such transaction would be deemed a roundabout/straw-man transaction which would result in a solo 401k prohibited transaction); and (ii) the funds are not otherwise used by the sibling to benefit you personally (e.g. to pay back a per-existing personal debt that the sibling has to you personally, etc.). 

Like any promissory note investment, the loan must be documented on a promissory note payable to the plan and the interest rate and other terms must be arms' length/fair market terms (i.e. the terms if the sibling were to borrow the funds from an unrelated person or entity).

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    Author


    George Blower is a principal of My Solo 401k Financial LLC and also serves as the General Counsel with responsibility for providing all legal services to the organization.  

    Prior to joining My Solo 401k Financial, he served as general counsel for a subsidiary of a Fortune 500 financial services company.  

    He received his bachelor’s degree in economics at the University of Michigan in 1998 with honors. He received his juris doctorate from Harvard Law School in 2001. He is a member of the Michigan and Ohio bar associations.

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