Purchasing a LLC interest.

[Guest mab]

I got the dreaded call from a physician client who wants to purchase a 5% interest in a LLC out of his 401(k) plan account balance.

Now that you are done laughing (and yes I tried to talk him out of it), does anyone see a PT problem with this? I don't think there is a PT issue here. The LLC is a separate business which is going to publish a monthly newsletter for professionals. His ownership is limited to the 5% purchase and he derives no other benefit or involvement in the LLC.

The 401(k) plan is set up for wide open self directed accounts so no problem there.

I do realize that there are possible valuation and UBTI issues.

Any comments would be appreciated. Tx.

Mark.

[mbozek]

There is no prohibition on investing in an odd asset such as a LLC which is not PT. However there is a requirement that the investment be valued annually and a representative of the LLC will be required to submit a valuation to the plan. Is the client aware that there is no capital loss for tax purposes if the LLC is sold and the only result is that his account balance will be decreased? You may want to check with the plans record keeper to see if there are any problems in filing the 5500.

[QDROphile]

Don't forget UBTI.

[Guest mab]

Tx. for the input.

Yes, the client is aware of the tax implications (capital loss treatment) and that is one of the points I used to try to get him to stay away from the deal.

The valuation issue will be a problem as will UBTI, provided the venture ever generates income.

IMO, it would be so much cleaner (and easier) if he coughed up cash outside of the plan or even took a loan from the plan in the amount of the investment (the plan allows for loans).