Can my solo 401k invest with a SDIRA?

Question

Is it possible to my solo 401k to co-invest with my daughter's SDIRA? I wasn't sure if this was prohibited as neither of us benefit, only the retirement accounts see a return.

I'm wanting to open an SDIRA for my child as I pay her a small wage here and there to help with admin activities (envelope stuffing, etc) but would also like to use that SDIRA as a minority holder on investments so that I can help boost her retirement account from a young age.

Any ways to make this happen without getting into trouble?

Bob Malecki · Answer

@Kristina Sparrow I recommend you invest in a book by Mat Sorensen, The Self Directed IRA Handbook, he provides a very thorough explanation on doing creative deals like this.

Bob

George Blower · Answer

@Olivia Dansereau

Yes such investment is allowed inside an LLC provided specific rules are followed. This would allow for the pooling of both IRA and solo 401k funds in the same LLC. You will want to speak with a qualified when structuring such investment.

Carl Fischer · Answer

@Olivia Dansereau

A lot of investments with retirement funds depend on how you structure the deal, it might be possible to use her SDIRA as a partner with the Solo 401(k). I would be happy to connect and discuss the situation in detail.

Thank you

Carl Fischer

Dmitriy Fomichenko · Answer

@Kristina Sparrow, good decision to follow Bob's recommendation and ordering the book, very valuable read!

@Olivia Dansereau, you can be creating when structuring the deal with disqualified person, but you must remember that if the IRS determines that you entered into a prohibited transaction you will be 100% responsible, not the person who recommended it to you. And the consequences are very severe, there are many way to invest and make money without going into a grey area, it's just not worth it.

Kristina Sparrow · Answer

@Bob Malecki Thanks, Bob. Just ordered it!

Kristina Sparrow · Answer

@Brian Eastman

I appreciate the detailed response -- you've made it easier to understand than everything else I've read online. Seems like such a transaction would be more trouble than its worth!

Brian Eastman · Answer

@Kristina Sparrow

What you are proposing will not work. Your parents, and by extension their IRA, are disqualified parties to your IRA - and visa-versa. There can be no transactions or provision of benefit between disqualified parties and an IRA.

It is, in theory, possible for your IRA (or 401(k)) and an IRA of a disqualified party such as your parents to joint venture into a deal. Such a joint venture would need to be very rigid in nature, and there could be no transactions or exchange of benefit between either party.

Both parties would need to purchase an asset jointly on day one. Neither party could come in later and obtain equity from the other party as a result.

The initial equity would be baked into the transaction for life. If you start 50/50 or 60/40 or whatever, all future expenses and income would need to be allocated on that same basis.

Neither party could ever buy the other out.

Even if you have such a rigid framework, however, there is room for the IRS to determine there is a benefit between the parties. If your Solo 401(k) were to fund 20% of a note and your parent's IRA to fund 80%, is there a possibility that your Solo 401(k) could have done that transaction on it's own? If not, then there is a benefit being provided to your Solo 401(k) simply by the ability to engage in a transaction it could not have otherwise - due to having access to the funds of a disqualified party. This is not so much of a concern when purchasing property - assuming either party {could} qualify for a non-recourse loan but chose to JV instead. Notes are a different issue, however, as you can either fund a note or not. There just is not the necessary case law for anyone in this industry to provide certainty as to whether such a transaction would be OK.

So, the bottom line is that there is at least some minimal level of catastrophic risk for your Solo 401(k) in trying to combine funds with your parents. When there are so many easy ways to make money without such risk, why go there?

Kristina Sparrow · Answer

This is the first time I've heard of "disqualified persons." Could I form a 50/50 JV with my LLC and my parent's SDIRA? Or what if I bought a note through my LLC with a private money loan from my parent's SDIRA for the interest rate arbitrage?

Hoping someone on this thread can clear things up for me. Thanks!

Carl Fischer · Answer

@Olivia Dansereau

As I said before it is possible but as mentioned above both parties should not be benefitting from the other as well as each entity should be capable of funding the deal itself. You want to have the salient points well documented before you proceed. Do not rely on SDIRA Custodians/administrators for advice. The knowledgeable SDIRA companies can give you ideas but make sure you have an attorney involved in case the IRS gets involved. A Lawyer is cheap insurance.

Christopher Blanco · Answer

I would talk to you lawyer or SDIRA custodian. There are PLENTY of legal ways for the two entities to partner together.

Can my solo 401k invest with a SDIRA?

Can my solo 401k invest with a SDIRA?

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