Solo 401k - Self Dealing after 59 1/2 yrs

8 Replies

I am considering buying property using an LLC (which has my solo 401k as a 25% member) and keep it as a rental. I would keep the expenses split 75/25% subject to the rules of the solo 401k. However, when I reach 60, can I sell the property to another LLC that I own and live in the property?

I appreciate this would be a prohibitive transaction prior to 59 1/2 yrs, but wasn't sure of the rules afterwards?

Thanks Jackie

@Jacke Draper

Regardless of your age, you may not transact with your plan in any direct or indirect fashion.  To do so would break the tax-sheltered status of the plan - which does not end at age 59 12/.

You could potentially distribute the 25% interest held by the plan to yourself. It would be messy and expensive. The whole transaction starting with a JV between the plan and yourself is far from clean or safe.

Check with an independent ERISA tax attorney before you start on this project, and do not simply take the word of the internet or a plan provider that a 75-25 JV deal is OK. It {may} be if structured properly, but most likely would not be.

Ok, thanks. 

I did speak with my RE Lawyer who drew up the LLC and Operating Agreement and my CPA and both seemed to be comfortable with the approach e.g Solo 401k Trust Account owns 25% of the LLC. I am the custodian of the Solo 401k with checkbook control. It was stressed that no services can be provided and/or self dealing transactions. The new LLC will purchase the house and all costs and profit will be divided based on the % split and kept separate.

I own another LLC which is the 75% owner.

It still seems that there is a lot of grey areas in doing this!

Nice. You can blow up your whole 401k with the blessing of a lawyer and your CPA. Does it just become instantly 100% taxable like a withdrawal or is it worse? (Penalties and such.)

@Jacke Draper

@Bill Brandt

The penalties for a prohibited transaction vary depending on whether it occurred within a self-directed IRA or a Solo 401k. IRAs are "blown up" in that they are considered distributed if a PT occurs. Solo 401k plans have penalties for PTs starting at 15% of the violating transaction.

With either structure, it's generally recommended that you do not commingle retirement and non-retirement assets. Because of the prohibited transaction rules, doing so could be a violation of the rules, or at the very least, would limit your flexibility with the investment and increase the chances of a prohibited transaction occurring after the investment is made.

Here are some alternatives to commingling your assets:

  • using the Solo participant loan feature to do the deal outside of retirement funds
  • using non-recourse financing from a lender or private source in combination with retirement funds as the down payment
  • using your 401k or IRA and partnering with non-disqualified persons

Thanks for the input! Interesting that both the Lawyer and CPA said it was ok. I've decided to convert the LLC back to just me being the sole member and to keep the Solo 401k separate. It's a shame, but this area is a minefield with the IRS!

Back to plan A to purchase a property independently using solo 401k funds and a non-recourse loan!