I have a client interested in investing their retirement funds from a 401k. They want me to invest their money through an LLC. I will consult a lawyer, but before committing time- maybe you guys have some advice. I do not want to be liable if someone sues, so that would be out of the question.
Here's how I think it works: I make an LLC, with just myself as a member, then my clients sign a contract with your LLC -- they don't actually become members. The contract is for each specific deal, and it specifies all the terms. Once the contract is signed, they can send the LLC the money, and then you buy the property on behalf of the LLC.
Advice? Resources I can read? Not even sure what this is normally referred to?
Ok, off topic, but since it was brought up, you CAN have 401k loans on a 15 year amortization and it is simple and easy to make it against your primary residence, though it does not have to be.
As far as the payback, Scott mentioned that part was not told. First off, I will argue that we called it a loan, not a gift and thus, loans must be paid back.
The good part is that you can likely borrow for 4% or less, paying yourself back (your 401k to be exact) and then invest same funds at higher returns keeping that profit legally outside the 401k.
Richie, there are many IRS rules and guidelines involving self directed retirement accounts. Many discussions are right here on BP, I can also personally assist you with that.
As far as your client is concerned, please define what service you currently provide to your "client". Some service providers to retirement account holders are disqualified parties such as plan administrators, CPA's, etc.
Secondly, if you want to have your clients funds placed into your own projects, that is one thing. If you want to have those funds placed in projects not belonging to you, that is another.
If you can be more specific, I can better assist you.
In addition to Will's input, you probably can't do this with a 401k at all. 401k custodians rarely allow anything except a small list of mutual funds. So, the first question is whether or not you can get this money moved into a SDIRA. You usually cannot do that if you're still employed with the company with the 401k.
Assuming you're not a disqualified party w.r.t. the IRA, by far the easiest way to do this is with a loan. The IRA simply makes a loan to your LLC, secured by the property. Your LLC (which I assume owns the property), gives the IRA a deed of trust (or mortgage, depending on the state) and a promissory note that outlines the terms. Payments and payoff go to the IRA (not the holder of the IRA!)
Great point Jon. If it is in fact a 401k at a current employer and it can not be transfered out, then the ONLY option is for your client to utilize the 401k borrowing provisions which allow up to $50,000 max loan amount. The loan of course must be paid back with interest, however, usually, the 401k plan can be borrowed at 4% or less, then loaned out at a higher rate, the lender keeps the spread.
I can also teach people how to get a great tax benefit legally in this very same process.
Back up a second though. Where do you fit to gain from this transaction?
If the client's 401k is sitting with a past employer OR he/she is over 59.5, the funds won't have a problem rolling into an SDIRA. Moving the funds is definitely step 1. This process alone can take between 1-4 weeks and depends primarily on the turnaround time of the 401k provider. Spend some timing learning about the logistics so that you can get ahead of the curve.
I'm not an attorney and can't give legal advice but if you're managing an LLC for someone else, I'm pretty sure that puts you in a fiduciary role? Anyone care to comment on that?
Depending on how your deal is structured, it might be much easier for you and the client to use an SDIRA to invest directly. Instead of involving an LLC for the SDIRA, allow the SDIRA to purchase the asset directly (or partner). Doing this would certainly alleviate liability on your part. If you needed operating cash for repairs, etc. - the SDIRA could always front you a buffer of cash to get things done.
Ok, off topic, but since it was brought up, you CAN have 401k loans on a 15 year amortization and it is simple and easy to make it against your primary residence, though it does not have to be.
As far as the payback, Scott mentioned that part was not told. First off, I will argue that we called it a loan, not a gift and thus, loans must be paid back.
The good part is that you can likely borrow for 4% or less, paying yourself back (your 401k to be exact) and then invest same funds at higher returns keeping that profit legally outside the 401k.