Gift Self-Directed Solo 401k Money | Loan Solo 401k to Client of My Company

Thank you for answering my previous questions even though you are not my solo 401k provider. I have two more questions.  What is the process/paperwork to:

QUESTION 1. Give a gift of self-directed solo 401k money/invest to someone not my parents/spouse/children? Perhaps a sibling or friend?

ANSWER: Pursuant to IRS solo 401k rules, the gifting of Solo 401k funds to anyone, even those not considered a Solo 401k disqualified person such as your friends and siblings  is prohibited. Doing so would result in payment of taxes, and possibly early distribution penalties if you are under age 59 ½.  Reason being, the main purpose of a Solo 401k plan is to save for retirement. Obviously, by gifting your Solo 401k funds, the Solo 401k does not benefit nor do you as the participant of the Solo 401k. Simply put, a Solo 401k is not meant to benefit anyone other than the solo 401k participant/trustee, usually at retirement, or the Solo 401k beneficiary in the event of the solo 401k trustee’s death.

You may be getting the qualified IRA charitable distribution (QCD) confused, which does not apply to qualified plans including a Solo 401k plan. In a nutshell the QCD, which was extended with the passage of The American Taxpayer Relief Act of 2012 (ATRA12), affords those IRA participants over age 72 to directly rollover the maximum amount of $100,000 from their IRA to charities and, resulting in not having to add the distribution amount to their taxable income for the year, which in turn reduces the amount of taxable income for the year.

QUESTION 2.  To loan to a 3rd party. For example loan to client of my company to pay their insurance premiums instead of them borrowing it from a third party.

ANSWER:  Loaning your Solo 401k funds to a third party is usually not prohibited if the third party is not a disqualified person (e.g., your brothers and sisters, step children, aunts and uncles); however, in your particular circumstance loaning your solo 401k, presumably in the form of a promissory note, to a client of your self-employed company or any company of which you own a 50% or more interest is considered a solo 401k prohibited transaction.

Thank you for your guidance. Thomas J

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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