Loaning money to your IRA/401(k)

Do you have an IRA/401k-owned investment property that has a mortgage and negative cash flow?

Something I’ve been running into lately is Self Directed plan investors who speculatively bought a house or condo in previously hot markets (think Vegas, Florida, Phoenix, etc). Some of these areas have experienced declining values and declining rental income for short term rental properties.

If your plan (IRA or 401k) bought a house & obtained a non-recourse mortgage loan qualified based on short term rental income that has declined, you probably have negative cash flow. How can you avoid foreclosure? Loan money to your IRA/401k.

Loaning money to your IRA or 401k

A little known Prohibited Transaction Exemption has been issued by the Department of Labor. The authority and responsibility to deal with prohibited transaction interpretations and exemptions was passed from the IRS to DOL in 1978. PTE 8026 says that an accountholder/participant can make an interest free loan to their plan without triggering a prohibited transaction if:

  • No interest or fee is charged to the plan;
  • The loan proceeds are only used to pay for ordinary operating expenses of the plan ( i.e. mortgage loan debt service payments); and
  • The loan is unsecured

This could be very useful for a person who has a plan owned property whose negative cash flow cannot be offset by annual contributions.

Reader Interactions

Comments

  1. Three questions on this:

    1) Would property tax and insurance be considered an “ordinary operating expense” for a rental property?

    2) Since the loan is to the plan I assume that this loan can’t be direct to an IRA held LLC and instead the trustee must be involved? Would it work something like this or can it go to the LLC???

    a. The manager of the LLC would send its member (the trustee) a request for funds to pay the ordinary expense,

    b. The IRA account holder would send funds to the trustee and direct the IRA trustee to execute the loan for the IRA account and pay the received funds to the LLC.

    Is this about right?

    And 3) On payback the LLC would distribute some LLC cash back to its member the IRA account for the purpose of paying back the account holder and the IRA trustee would repay the loan to the IRA account holder without interest.

  2. Paul,

    As a valued client, please use the customer support area of http://www.nabers.com for your questions. I’ve pasted these questions in a support message board post. In the future, feel free to post to that message board directly for support issues, and keep in mind it will be visible to all of our clients. For private and sensitive issues, just call us at 877-903-2220.

    Thanks! 🙂

    Jeff

  3. Jeff,

    I have a self directed IRA which owns 3 properties. One of the properties has a non-recourse loan against it. I would like to loan money (interest free) to my IRA to pay off the bank loan and keep my IRA from paying interest. My IRA would pay me monthly payments to pay off the loan. Would this be a prohibited transaction?

    Thanks,
    Jeff

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