QUESTION:
If I lend my brother money from my solo 401k for 3 years with 12% interest, can my brother then turn around and loan those funds to me personally?
ANSWER:
While the solo 401k investment rules allow for promissory note investments, this transaction would result in a “roundabout” prohibited transaction because the rules do not allow for a transaction that is prohibited to be done indirectly. In other words, while your brother is not a disqualified party from a solo 401k investment perspective, if he were to turn around and loan those borrowed funds or other funds to you, the IRS would view as you essentially processing a promissory note from your own solo 401k which is prohibited. Don’t confuse this rule with the solo 401k participant loan rules, though. To learn more about the difference between a “promissory note investment” and a solo 401k participant loan” CLICK HERE.
A roundabout transaction occurs when the Solo 401k participant/trustee structures one or more transactions with the purpose of making a prohibited transaction. A disqualified person may not indirectly do what cannot be done directly.
If a transaction directly violates the prohibited transaction rules, changing the transaction to remove the disqualified person from direct involvement would still deem the transaction prohibited. Put differently, merely insulating that person from the transaction and enlisting a third party does not make a prohibited transaction allowable.
