Establish Solo 401k in Chicago IL

Establish Solo 401k in Chicago IL | Loan Solo 401k to Brother in Chicago IL | Chicago IL Solo 401k

 

I live in Chicago IL, and Vanguard has been my Solo 401k provider for the past 6 years. However, I would like to open Solo 401k with a provider that will let me direct my own investments in something other than stocks and mutual funds. For instance, I would like to grow my Solo 401k while at the same time helping my brother to gain access to capital for purchasing rental properties in Chicago Illinois while the home prices are still low. Do you know if investing my Solo 401k in my brother’s LLC, which invests in rentals homes, would be an allowable investment with regard to the Solo 401k laws? My brother would own 95% of the LLC and my Solo 401k the remaining 5%.

The proposed investment would not be considered a prohibited transaction by your Solo 401k. Reason being, your brother is not a disqualified party for Solo 401k investing purposes because he is not your lineal descendant. However, if he is providing services to your Solo 401k, such as helping you administer the plan than he would be considered a disqualified party.   

Nonetheless, if you decide to proceed with investing your Solo 401k in Chicago IL rental properties through your brother’s LLC, make sure that the Solo 401k benefits according to percentage of ownership in the LLC. That said, if the Solo 401k owns 5% of the LLC, then 5% of the LLC profits should flow back to the Solo 401k as investment gains.

Further, be aware that the prohibited transaction rules prohibited Solo 401k from investing in an investment whose primary purpose is to benefit a party other than the Solo 401k--whether a friend, total stranger, or qualified party (e.g., your sister, brother, aunt, uncle, cousins, etc.) --rather than your Solo 401k. In other words, the primary purpose of any self-directed solo 401k investment must be intended for the growth of the Solo 401k not to help your brother purchase rentals in Chicago IL or even overseas such as Mexico.

If the IRS rules that a party other than the self-directed solo 401k received an unwarranted benefit, it could very well rule that your Solo 401k has participated in a prohibited transaction. Even though you may have good intention to help out your brother, the details of the transaction should not reflect that this was your primary objective over and above participating in a favorable investment for the self-directed solo 401k.