QUESTIONS: Let’s say my solo 401(k) Trust is funding a company ABC for a property which they will buy and rehab. So in this case the property is owned by company ABC but my 401(k) may or may not have the lien on the property. Now if the ABC company needs $100,000 but the cash available in my 401(k) is only $70,000, can I as the business owner give loan to my 401(k) for $30,000 from my personal bank account? If so, then:
1. What documentation I need to reflect this transaction?
2. Does my 401(k) needs to give any ROI (or interest) for the loan it took from me or just the principal amount back?
3. Are there any other strings or caveats?
ANSWER: Good questions. However, this proposed transaction would fall under the 401k prohibited transaction umbrella because the solo 401k owner may not loan money to a company in which his or her solo 401k invests in. Specifically, the solo 401k owner is deemed a disqualified person. What is more, the solo 401k owner cannot loan money to his own solo 401k as it is not allowed. Such a loan would be construed as an excess solo 401k contribution. On another note, the solo 401k may only obtain a non-recourse loan from an outside party if the borrowed funds are used for the purchase of the real-estate property directly by the solo 401k.
Additional Resources
Solo 401k Prohibited Transactions
Solo 401k Debt Financing
Solo 401k Do’s and Don’ts
