401k invest in LLC

[Guest ladycpa2]

I've read what I can find regarding the use of IRA to form or purchase a company. I've got a client that is proposing purchasing a business, forming an LLC in which his self-directed 401k account and him are equal owners. It just seems wrong but the TPA is saying it's fine. It smells like a PT to me. Any thoughts? Thanks!

[jpod]

Is the 401k being set up by the new LLC as the employer/plan sponsor, and the individual is rolling his IRA over to the 401k? If so, it is probably a "co-investment" prohibited transaction.

If the new employer had been a corporation, it would not have been a pt due to a statutory exemption for the purchase of employer securities (which is not available if the employer is an LLC (although the IRS might still have had problems with it under the tax-qualification rules).

[Guest ladycpa2]

Is the 401k being set up by the new LLC as the employer/plan sponsor, and the individual is rolling his IRA over to the 401k? If so, it is probably a "co-investment" prohibited transaction.

If the new employer had been a corporation, it would not have been a pt due to a statutory exemption for the purchase of employer securities (which is not available if the employer is an LLC (although the IRS might still have had problems with it under the tax-qualification rules).

[Guest ladycpa2]

Is the 401k being set up by the new LLC as the employer/plan sponsor, and the individual is rolling his IRA over to the 401k? If so, it is probably a "co-investment" prohibited transaction.

If the new employer had been a corporation, it would not have been a pt due to a statutory exemption for the purchase of employer securities (which is not available if the employer is an LLC (although the IRS might still have had problems with it under the tax-qualification rules).

No, the 401k is from his current employer, which is a law firm with self-directed brokerage accounts. He wants to direct $250,000 of his 401k money to purchase 50% of the LLC units of this carpet cleaning business, and individually he will own the other 50%. To my knowledge he has not separated from service with the law firm, so he can't roll the money from the law firm 401k into an IRA.

[QDROphile]

I am not aware of any prohibited transaction exemption. The proponent of the transaction needs to convince the plan administrator that the transaction is exempt.

[Guest ladycpa2]

I am not aware of any prohibited transaction exemption. The proponent of the transaction needs to convince the plan administrator that the transaction is exempt.

THANKS!

[Guest mjb]

See Flahertys Arden Bowl, Inc v. Comm. 115 TC 269 (2000) for PT by participant in 401k plan.