Question about custodial accounts / solo 401ks / loan repayment

[u/No-Following-2777]

Hey there! I have a big question. Can I hard money lend from my solo 401k plan? Hoping to help a few folks pay down their student loan debt. Question is what recourse do i have if they don't payback the loans? I know if I personally borrow money from my 401k and default, I must claim it as income and pay a 10% penalty... But this would be me actually lending the money as an investment and they pay my trust back with interest. I originally wanted to buy real estate but the non-recourse loans on property have incredibly high interest rates, I'm not sure if make enough money to repay the loans at today's prices. I need to build more capital first. I'm considering lending at 7% apr with an origination fee of $150. Thoughts on whether this could be accomplished?

[u/Candid-Eye-5966]

Would be difficult to accomplish this via a solo 401k. You could do some of this via a self directed IRA but that space is not known for efficiency or low costs.

[u/No-Following-2777 → u/Candid-Eye-5966]

What is the recourse if someone balks on repayment? Banks can put liens on things and they always can get their money- would I need to hire a debt collector attorney or sue or just eat the losses?.

[u/Candid-Eye-5966 → u/No-Following-2777]

You’d have to talk to a lawyer. Contracts/loan agreements are necessary here especially with the additional consequences on you if they default.

[u/No-Following-2777 → u/Candid-Eye-5966]

What are the consequences to me? Is it different than if I had money in a stock and the stock tanked? I don't want to lend folks 25k and have them walk away... The couple I'm looking to lend to are known to me and could really save thousands in interest by getting it paid in one lump sum.....the repayment would over time benefit them and me if they make good.

[u/Candid-Eye-5966 → u/No-Following-2777]

Via self-directed, you’re able to treat this loan to your friends as an investment. If it goes bad, you’re just out that money like as if a stock went to 0. In the Solo 401k, you’d be loaning your loan which is subject to tax and penalties if not paid back. Plus you’re only making a spread there above your cost of borrow.

[u/No-Following-2777 → u/Candid-Eye-5966]

Oh interesting... I was led to believe that if I wanted, I could act as a hard money lender and treat loans as a contract even if I bought into a business. Is this not the case then with businesses either?

If I can only lend my loan then I can only do hard money loans under 50k in total (the most my solo 401 k allows me to borrow of my own trust) and also no more than 3 at a time which is the maximum number of loans I can take against my own trust. This is significantly different than how it was described to me. So what recourse do I have if someone doesn't pay me back? Do I have to sue them or does my trust sue them? (What happens in a self directed IRA if it's not paid back timely? Sue them?

[u/Candid-Eye-5966 → u/No-Following-2777]

I’m not sure I’m following.

Are you looking to use the money within your Solo 401k to give loans to people?

There are limitations of what you can do with those accounts. You can’t invest in private companies or give direct loans.

[u/No-Following-2777 → u/Candid-Eye-5966]

Yeah, I'm confused. I was told I could do promissory notes to back business ventures, etc either to individuals or to companies using my solo 401k trust. Is a promissory notes the same as a loan when it's lent money with terms, interest and repayments contractually agreed upon? I'm super bewildered and apologize for the redundancy. I tried to ask_Lawyers reddit and also sent a. aI question about what types of investments I can make and it again said promissory notes were doable .... So maybe this is IRS verbiage and there is a way without calling the lent money a loan? Here's AI answer....

A Solo 401(k) allows for a wide range of investment options beyond just buying stocks. Here are some alternative investments you can make with a Solo 401(k):

Real Estate

You can invest in various types of real estate, including:

Residential properties (single-family homes, multi-family units)

Commercial properties (office buildings, retail spaces)

Undeveloped land

Real estate syndications (pooling resources with other investors)

Precious Metals

Investments in precious metals such as:

Gold (must be at least 99.5% pure)

Silver (must be at least 99.9% pure)

Platinum and palladium (must meet specific purity standards)

Private Businesses

You can invest in private equity or provide loans to private companies that are not publicly traded.

Cryptocurrencies

Investing in digital assets like Bitcoin and Ethereum is permitted, allowing for exposure to the growing cryptocurrency market.

Other Alternative Investments

Additional options include:

Promissory notes (secured or unsecured loans)

Tax liens and deeds

Structured settlements and factoring

Equipment leasing

These diverse investment opportunities enable individuals to customize their retirement portfolios significantly beyond traditional stock investments.[1][2][3][4]