"Strangers on a Train" buy and holds with solo 401k or IRAs?

8 Replies

I came across the term "peer to peer" investing and jumped to the wrong conclusion as to what it meant...but that mistaken idea is stuck in my head.  Got no search results, so I'll ask the forums.

We're are building a rental portfolio, and are nearing retirement.  We have lots of resources in our solo 401k, but are limited to $50k loans, or investments in properties that we can't actively manage, which doesn't suit our model.  However, we could make loans to a non-disqualified person who is also buying rental properties.

So I got to thinking about a criss-cross arrangement...could two unrelated people building rental portfolios who also have substantial funds in their 401k or self-directed IRA invest in with each other?

Is anyone doing or interested in doing something like this? 

@Katherine S.

If you are talking about an arrangement in which you use your retirement funds to invest with another party and that party uses their retirement funds to invest with you, it would be prohibited. Schemes designed to circumvent the prohibited transaction rules and violate the spirit of the law are unlikely to hold up to any regulatory scrutiny.

@Katherine S.

While your IRA/401k can certainly invest in a deal associated with an unrelated 3rd party, you do not want to create any kind of quid pro quo arrangement where you essentially provide capital to them so they can in return provide capital to you. The IRS would potentially (and likely) see this as an attempt to use that 3rd party as a conduit to your own IRA funds.

@Justin Windham @Brian Eastman @Dmitriy Fomichenko

Well, you guys are the experts, but this prohibition doesn't make a lot of sense to me.  The whole point of these accounts is to grow a retirement account.  I don't mean that the investments would be at no charge...I was thinking market rates would apply.

Is the problem that there are just two people involved?  Would three be OK?   I mean, given a community like BP, it would not be impossible to link people in a circle this way.

@Katherine S.

You're right that the whole point is to grow the retirement account. In order to avoid (or reduce) the likelihood of someone using the funds in their interest instead of growing the account, the rules prohibit you from investing with or benefiting certain "disqualified persons." This would include indirectly benefiting yourself by creating an arrangement as described. 

The rules are not a perfect way to ensure that your investments are solely for the benefit of the 401k, but in the minds of the regulators, they cut out a lot of the potential for conflicts of interest.

You can certainly leverage the BP community to find good contacts to network and invest with. It's just not advisable to have your 401k investment be the first transaction in a string of transactions that eventually finds it way back to you or any other disqualified person.

@Justin Windham

I'm not trying to quibble, but isn't growing my 401k account ultimately in my interest and for my benefit?

I mean, what's really the difference if I invest in your project, and say Dimitri invests in mine?  It's still the same transaction, just different parties.  

This rule seems arbitrary to me.  But then, we are talking about government rules, so forget I just said that.  

@Katherine S.

I understand what you're getting at, and I agree about government rules.

One distinction that might help is that you are able to grow your retirement account which is for your benefit later on. If you want to benefit now, you need to take a (likely taxable) distribution.

If you were to invest your retirement funds in a project of mine, and Dmitriy was to invest his retirement funds in yours, that is probably fine. What you don't want to do is invest in mine with the understanding that I will then invest my retirement funds in yours.