Can my Solo 401k Trust loan my step-son money for purchase of land for his primary resident? What would the interest rate be? What would the process be? I have the cash in the 401K trust account.
ANSWER:
While stepchildren are not referenced as a disqualified party in the IRS code, any invefsment made by a solo 401k has to be made with the intent to grow the 401k.
Therefore, if a solo 401k invests in a promissory note whether to a step-son or any other qualified party, the invesment must be made for the purpose of increasing the value of the solo 401k plan.
Following are som items to consider when investing a solo 401k in a promissory note.
An interest rate based on the borrowers’s credit rating should be charged;
While the promissory note may be secured or unsecured, it is best to have the note secured by real estate in the even of loan defautl; and
Typically, the note will consist of interest payment with a final balloon payment.
More Information
Note Invesment Sample Procedure
Promissory Note Investments Do’s & Don’ts
Slides: The Do’s and Don’ts of Promissory Note Solo 401k Investing
Video: https://youtu.be/7uaQA3LIbsU
