Personal Guarantee on a Solo 401(k) Loan? Maybe.
By Jordan Sheppherd
We all know (or should know), that personally guaranteeing a loan, made to your Self-Directed IRA, IRA LLC, or Solo 401(k) is prohibited. Because of the self-dealing rules in Sec. 4975 of the tax code, extending your personal credit to back up a loan made to your retirement plan is self-dealing and would therefore be a prohibited transaction (see Peek v. Commissioner).
This creates some headaches for people, because the loan then must be a non-recourse loan, and requires a much larger downpayment. The lender can only take back the property, but can’t come after you, personally.
What if there were an exception, though?
The Dept. of Labor (DOL) is currently reviewing a proposed Prohibited Transaction Exemption (PTE) that would provide an exception to this prohibition of personally guaranteeing a loan. Sorry, but if you have an IRA, you’re out of luck; this exemption would only apply to qualified plans [read: Solo 401(k)s].
You can read through the PTE here. Richard Rosenbaum, the fellow who applied for the PTE has a Solo 401(k) through his Corporation. The Solo 401(k) owns an LLC which serves as a real estate holding entity for the plan. He wants to personally guarantee a loan to be made to that LLC, with an anticipation of guaranteeing further loans, should the PTE be approved.
I got a look at the DOL’s case file on this, and I can say that the Dept. has run him through the ringer, but our opinion is that the PTE will likely be approved. Should that happen, and should someone else submit a proposed transaction for exemption that is substantially similar, then the language of PTE 96-62 would kick in, and this particular PTE would have EXPRO status. That means that anyone who has a situation substantially similar to this published PTE would be able to obtain an individual exemption on an expedited basis.
We’re not there yet, as comments and requests were closed by the DOL on May 31st, and it’s difficult to know exactly when a decision will be made. We’re keeping an eye on it though, and as things progress, we’ll keep our community informed. Should this PTE get EXPRO status, we’ll be providing services to our clients, should they wish to obtain an expedited individual exemption.