Loan My Self-Directed Solo 401k to my brother

I recently opened a Self-Directed Solo 401k with your company and have a question about a possible investment. Would it be permissible under the rules of Self-Directed Solo 401k to make an unsecured or secured loan to my brother? Based on my research, I believe it is, if so, what guidelines does the IRS impose relative to interest rate, payment schedule and term of the loan?  What are my responsibilities for reporting this type of loan to the IRS? If you could recommend a website for further information it would much appreciated. Thanks for your help.

T. Burns

Yes a loan investment (a/k/a promissory note), whether secured or unsecured, by your Self-Directed Solo 401k to your brother is permissible under the IRS regulations as a brother or for that matter a sister is not a disqualified party.

You can learn more regarding prohibited transactions by visiting following links.

http://www.irs.gov/irm/part4/irm_04-072-011.html

http://www.mysolo401k.net/Self-Directed-401k-Prohibited-Transaction-Under-4975.html

http://www.mysolo401k.net/Self-Directed-Solo-401k-Self-Directed-401k-SoloK.html

http://mysolo401k.blogspot.com/2012/06/who-is-disqualified-from-making.html

Regarding the process of documenting the promissory note investment, it should be documented through a formal promissory note document to list the loan terms. For example, list the borrower, the lender (obviously the Self-Directed Solo 401k), if note is secured or unsecured, payment amount (e.g., interest payments with final balloon payment due at maturity, or principal and interest payments, etc), length of loan, etc.

You can learn more about promissory note investments by visiting following blogs:

http://www.mysolo401k.net/Secured-Notes.html

http://mysolo401k.net/Blog-for-MySolo401k.html?entry=investing-buying-promissory-notes-trust

Investments made by a Self-Directed Solo 401k such as a promissory note is not directly reportable to the IRS.  Generally, the only reporting required for a Self-Directed Solo 401k comes into play once the the account value exceeds $250,000--that is, you are required to report the total value of the Self-Directed Solo 401k, not the value of each individual investment. This reporting is processed using Form 5500-EZ and for calendar year plan requires filing by July 31 of each year.

You can learn more about Form 5500-EZ by visiting following link.

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=form-5500-ez-annual-return