I have an LLC out of which I do some consulting, and I set up a solo 401k using the income from that business, from which I would like to do some real estate investing.
I recently bid successfully on some items in a tax auction. I put as the title holder the trust that holds the 401k assets. However, I did not have funds available in that trust account at the time of the auction, so the deposit went on the LLC credit card.
With me so far? Anyhow, I know there are some restrictions on lending money back and forth between the 401k and myself as an individual. For example I don't think I could buy something on my personal credit card, even an investment asset (eg Bitcoin) and then have the 401k trust pay me back and take possession of that asset. Is it the same between the trust and the LLC? If so, how do I treat the funds that were already spent by the LLC on behalf of the 401k trust?
Hopefully that makes sense. Any info is appreciated.
What you have done is considered self-dealing and a prohibited transaction. I suggest you speak with your 401k provider or CPA.
What I have done to this point is spend LLC funds on behalf of the 401k trust. Now of course directly depositing funds from the LLC to the trust is ok, in fact that is what is supposed to happen.
Are you sure that spending LLCs funds to purchase an asset for the trust is self-dealing? I would think perhaps it is just considered a deposit to the trust.
I will of course work with a professional to deal with this, I did want to get some BP opinions on the matter though.
@Yonasan Schwartz How do you like the solo k? I've been curious about those for a while.
Haha well so far I like it but if I accidentally screwed it up with my transaction above I'm going to like it a lot less.
Generally though it's a bit of a hassle to set up but once it's set up it's basically a bank account with funds you can invest in whatever (non-prohibited) investments you want, including real estate.
based on what you described you committed prohibited transaction (according to the IRS defenition of it):
You or any entity you own (your LLC) along with certain family members are considered to be a "Disqualified person" to your 401k. As you said you just "spent LLC funds on behalf of the 401k" which is prohibited. You must make an effort to understand the rules and ask questions of a qualified experienced professional (should be your 401k plan provider) before you enter into a transaction, not after the fact.
Truly self-directed Solo 401k is an excellent investment vehicle which can be used to build wealth quickly, but understanding and following the rules is a crucial component to be successful with it. It gives you a lot of freedom and flexibility but with freedom comes responsibility.
Setting up a Solo 401k plan can be pretty simple. With most plan providers, it's a matter of filling out an application form, receiving your documents, signing your signature pages, and opening your desired checking and/or investment accounts for the trust. If you have transfers or rollovers to do, these can be requested after receiving the plan documents as well. With some providers, this can all be done in a day or two.
Understanding the prohibited transaction rules is an important part of having a self-directed account, however. This is true whether you have a Solo 401k or IRA LLC with checkbook control or a retirement structure held with a self-directed custodian.
Clearly everyone here is more knowledgeable than I am. But I am trying to understand here - the various descriptions of prohibited transactions all anticipate the movement of funds OUT of the 401k, or the expenditure of funds jointly between the 401k and a prohibited individual for the benefit of the individual, NOT the benefit of the 401k. For example, if the 401k and the LLC both pay 50% of the price for a property that is titled in the name of the LLC.
But what happened here is that money went INTO the 401k, or alternatively money was spent of behalf of the 401k, for the benefit OF THE 401k. Can someone point me to a source that describes that as a prohibited transaction?
And how would one correct this transaction (which is an IRS requirement)? Have the 401k pay the LLC back? But wouldn't that in and of itself render the original expenditure a loan, which itself is a prohibited transaction?
In summary, prohibited transactions seem to always be defined as using 401k assets for the advantage of the individual. Here I used individual assets for the benefit of the 401k. Again, think of simply depositing money - from the LLC into the 401k is ok, from the 401k into the LLC is prohibited.
please carefully review the IRS link I provided in my previous post. It states that lending money or extending credit to a qualified plan by disqualified person is prohibited. That is what you did.
Please work with your plan provider or experienced CPA or attorney on the resolution.
Have you discussed this with your Solo 401k plan provider?
How did I lend money to the 401k?
I spent money on behalf on the 401k. 'Lending money or extending credit' implies that the 401k will be paying me back, which is not the case.
I can only comment based on the information you provided. You explained that your 401k took title of the asset, but you used your personal LLC funds to pay for it...
Like I said you should work with qualified professional to help you get this straight.
I'm not sure what you are trying to say. Is that transaction a loan or not? You seem to be saying it is, to which I responded that a loan implies there will be repayment, while in this case there will not be.
So I am saying it is not a loan and therefore not prohibited. Do you disagree, and if so, why?
as you said the property belongs to the 401k but you personally paid for it... What it is then if not a loan?
All transactions involving your 401k must be "arms length", which means that 'disqualified person' can not be involved in the transaction. That is not the case in your situation.
All I'm saying that based on your description it appears to be a 'prohibited transaction'. Talk to your 401k provider or an attorney to confirm weather it is or not, and if it is take appropriate steps to correct it.
I would say it is not a loan but a contribution.
Contributions from the LLC to the 401k are of course not prohibited, but rather encouraged.
This is an academic discussion - I have spoken to my 401k provider and they referred me to their attorney. I will follow his advice. I also spoke to the auction house to see if I could get the LLC credit charge reversed and charge the deposit instead to the trust account, but they were unwilling to do that.
Be that as it may, the distinction here seems to be between loans and contributions, and I would say things that are paid back are loans, and things that are not paid back are contributions. Why do you think this is a loan? If I buy you lunch is that a loan?
Yonasan, I'm glad to hear that you engaged your 401k provider and attorney to get this straighten out! There should be a way to get this fixed... whether it would be to count that amount as a contribution or undoing the transaction or something else I don't know without having all of the details... Few things to keep in mind:
1. Contributions are typically deposited to the 401k account directly with appropriate paperwork to accompany this transaction for record-keeping and tax reporting.
2. Contributions can only be made from the business earnings and are subject to certain limits.
3. Elective deferrals for the corporations must be made through the payroll.
There are other considerations as well, that is why it is important to use the guidance of a professional who established the plan for you to ensure this is done correctly.
I think it is prohibited. @Dmitriy Fomichenko and @Brian Eastman are fairly knowledgeable and accurately explained how the IRS would look at it. You would argue your points in front of a judge so Is it worth the fight- do you think you can win -ask an attorney.
Contribution went to the 3rd party via LLC credit card and the trust got the benefit. Contribution did not go into the trust. You may be able to say you made a contribution of the property/contract to the 401k and make sure your paperwork shows it that way. Get a professional to help you as you are past BP help at this point. You may also unwind it and possibly redo it correctly.
In the future, please ask "before" you do something not "after" you have a paper trail.
Correct, the contribution of the contract to the trust is how my 401k provider was looking at it but they did not want to provide legal advice, I will be speaking to the attorney tomorrow.
It's great to have the opportunity to speak with knowledgeable people, whether before or after the fact.
Agreed it is good to have the BP forum. Just thinking it is easier, less risk to ask before but you also make a good point afterwards to know how to get out of jam.
The attorney may also suggest you get an opinion letter fromDOL/IRS which is time consuming and costly. Good luck.
The following IRS website pages contain good information regarding the prohibited transaction rules.
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