I've been digging through the forums and have found a lot topics on investing with retirement accounts but my situation is slightly different so I felt it called for a new post on the subject.....
My father has just retired at the age of 60. He just rolled his employer 401k into his personal Fidelity 401k. All of the money is pre-tax. I am 26 and have all of my money post tax. We want to go 50/50 but given that my money is post tax and his is pretax in a retirement account brings up a lot of questions for me. Here are some more details...
I'm currently buying a three-family property in an LLC. My father wants to put up half the money and be involved. Our concern is that if he wants to contribute, lets say 40k, that he would have to withdraw considerably more than that due to the tax hit.
- Is there a way he can do this without having to pay taxes - or at least pay very little?
- Can he / Should he invest in my LLC while keeping the money in his 401k? Could his half goes back into his retirement account tax free and my half I pay taxes on and can access?
- Should his name not be on the LLC and rather he be an investor to the llc rather than a partner of the llc?
Thanks in advance for the help everyone. Please let me know if you need more information.
You should look to see if what you are doing is a prohibited transaction. Having an individual invest directly into a family member's dealing using a retirement account may be considered a prohibited transaction.
Furthermore, he would need a self-directed account. I dont think fidelity will allow such features.
The notion of your father investing with you brings up host of complexities that may make it at least prohibitive if not prohibited.
One alternative may be for your father to take a loan from his retirement account.
In order to be able to do so you father would need to be separately self-employed (although not necessarily on a full-time basis as I know that he just retired).
Regarding taking a 401k loan:
- If your father is self-employed with no full-time employees & he could set up a Solo 401k, rollover the funds and take a 401k loan from the Solo 401k.
- He can borrow up to 50% of the balance not to exceed $50,000.
- The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
- There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
- Please note that he is obligated to pay back their 401k loan (regardless of the performance of his real estate investment with you).
Thank you everyone! I spoke with a professional and long story short he mentioned the 401k loan. Since I'm a family member there is a lot of red tape.
@Will Stahl your best tax strategy is to be working closely with a CPA who specializes in RE 😉
@Brian Gerlach You're 110% percent right! Thank you for the response.