Partnering with a 401k

9 Replies

Good Morning

Im looking for the best way to partner my llc with my sisters 401k.

We are thinking of buying the property in the 401k and when the property sells the 401k pay my llc any thoughts on this Thanks David Jennings

If this a company-provided 401k? If so, you only have two options. One is she takes out a loan from the 401k. The other is a withdrawal, which will incur taxes and penalties, assuming she's under 57.

Do you perhaps mean an IRA rather than a 401k?

Not sure I understand why the entity would pay your LLC after the property sells. What is your LLC's involvement in this deal?

@Jon Holdman

Does the loan from the 401k come with cash penalties to the 401k provider? Or is it just the interest rate that has to be paid back?

I.e. do you lose anything additional by take a loan from a 401k?

Does all of this depend on the 401k provider?

I dont no much about her 401k so ill ask her to reply Thanks Dave

Loans from a 401k don't have any penalties. The payments you make go back into the IRA. You're typically limited to 50% of the account balance or $50,000, whichever is less. The details are determined by the plan and not all plans allow loans. The biggest downside is that with most plans if you leave the company then you have to pay back the loan within a short time after you end your employment or else the outstanding balance is considered a distribution and subject to taxes and penalties.

@David Jennings

If your sister's 401k is with the current employer, then the only option for her to use some of her retirement funds would be taking loan from her 401k, just like @Jon Holdman explained above, and it would be subject to those limitations. If this is the case, then your LLC will not be able to have any kind of partnership with her 401k, but with your sister instead. You decide how you wish to split the profits, but she must pay back principal in interest on the loan back to her 401k.

If the 401k is with the past employer, she can transfer/rollover to self directed IRA or better yet into truly self-directed Solo 401k. Then she would have the ability to invest into a property directly using her retirement account. She can't receive any personal gains or benefits from the investment because she would be considered "Disqualified Person" to the retirement plan.

You never explained what would be your contribution in this partnership. Would your sister be the cash partner and you the one who find the property and do the rehab... ???

Here are two of the options my sister and I have beed discussing. I copied and pasted it from one of our emails. This is her explaining it to me. Any feed back on both of these options and any others are appreciated Thanks Dave

Private mortgages aren't reported to credit bureau so it won't build credit to my knowledge. Although if it can build it - that's a real good reason to do it. The benefits to the first is equity ownership is clearly defined at the deed level. However the draw back is there are fees to file the deed and the mortgage. Plus need to draw up multiple different documents. The other drawback is that if you pull out there is a legal process and foreclosure fees that will need to be paid. Although we could write the mortgage where the deed is held in escrow to maybe avoid some of these.

The second option benefit is that there is no legal process or foreclosure fees. No mortgage recording fees etc. The drawback for you is ownership is defined as whole ownership by 401k. There is a Contractor agreement to perform services for 1/2 of the equity. So the Contractor, (you) could put a lien on the property to ensure your payment at time of sale. An additional benefit would be that the 401k could pay you for your services in the amount of 1/2 the equity and keep the property as a rental. Basicly scenario one - is giving JenDen 1/2 ownership before work is performed by using a mortgage against the property to protect 401k interest in the JenDen 1/2. Scenario two gives ownership to 401k with ownership by JenDen earned as work is completed and secured via the option to place a lien.

You've still not answered the question if this is a 401k from her employer. If so, neither of these is an option. Taking out a loan is the only real option, if the plan allows and she can do it.

If this is a Solo 401k with a company she owns, they might be.

The hold a deed in escrow against foreclosure isn't valid. Presumably you would not for a second even consider forcing your sister to foreclose on you. If you truly can't pay back the money you would hand over the house with a deed in lieu of foreclosure. Making a loan from her 401k to you is, IMHO, the better option.

You're discounting the need for paperwork with the second option. If you form a partnership you MUST spend serious time working through a multitude of issues. You MUST write an operating agreement. You MUST address serious issues like needing more money, death, divorce and ANYTHING that might affect the deal. You will need to spend hours doing this and write pages and pages. I've done this. This is hard. But if you think its hard up front try doing it when the problems occur.

Looks like most everything has been covered here. One thing I haven't seemed mentioned is an "in-service" distribution. If the 401k is with an existing employer, it's possible there is a provision within the plan documents that allow for a pre-mature distribution prior to retirement age or employment termination. Just another angle to check out if you haven't already done so.

My sister is currenty on vacation I wish she was here to answer your questions. she is self employed and she told me can borrow or have access up to 95 so it must be a solo 401 K Thanks Dave

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