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).
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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