Three legitimate approaches exist when you've identified a deal before your plan is established or funded.
Option A: Third-party contract assignment
A trusted third party who is not a disqualified person to your plan locks up the contract with the right to assign it to another buyer. Once your plan entity is established, the plan purchases the assignment rights and completes the transaction.
Requirements:
- The third party must have no disqualifying relationship to your plan. Siblings, neighbors, fellow investors, or your real estate agent are common candidates. Your spouse, parents, children, and grandchildren are excluded.
- The third party uses their own funds for any deposit or earnest money, not funds you have provided or lent to them.
- The assignment must be an arm's-length transaction. The plan can pay a reasonable assignment fee.
- Your plan entity name must be confirmed before the assignment is executed.
Timing consideration:
With a Solo 401(k), the plan name is confirmed promptly, typically within one business day from application. With an IRA LLC, the entity name is confirmed once the state accepts the filing; most states respond within two to five business days, though some can take two to four weeks. Neither plan will be funded for several weeks, long enough to be a constraint in a competitive transaction.
Option B: Third-party loan to the plan
If your plan entity name can be established quickly, a non-disqualified person can make a short-term non-recourse loan to the plan to cover pre-closing costs, such as earnest money, inspections, and appraisals, while the plan funding transfer is in process.
Requirements:
- The lender must not be a disqualified person. The same criteria as Option A apply.
- The loan must be made to the plan entity directly, not to you personally for onward transfer to the plan.
- The loan must be non-recourse. No personal guarantee from you is permitted.
- The offer and all contracts must be written in the plan entity name from the outset.
- The lender can be repaid at closing or when plan funding arrives. A flat fee or modest interest charge for a short-term bridge loan is acceptable and must be paid from plan funds.
Important:
You cannot lend money to a third party and have them lend it to your plan. That arrangement would still be viewed as an indirect extension of credit from you to the plan.
Option C: Minimal initial funding
Establish your plan and fund it with a modest initial amount sufficient to cover pre-closing costs, such as earnest money, inspections, and an appraisal if non-recourse financing is involved. This might be as little as $2,000–$10,000 depending on the price range of the property.
Once a contract is executed in the plan entity's name, the balance of funds can be transferred from an existing IRA or 401(k). Allow two to three weeks for an additional transfer or rollover to arrive.
Requirements:
- The plan must be established and at least partially funded before any offer is made or deposit paid.
- Pre-closing costs must be paid from the plan account, not personally.
- The remaining funding transfer must be expected to arrive before closing.
Best for:
Investors who are actively searching for a property and want a plan in place and minimally capitalized to act quickly when the right opportunity appears.
The best approach
In most cases, patience is the right answer. Establishing a fully funded plan before pursuing transactions eliminates prohibited transaction risk and puts your plan in the strongest negotiating position; a fully funded cash buyer can close quickly and may negotiate better terms than a buyer still assembling funding.
If you choose to proceed under one of the options above, seek guidance from qualified legal counsel before acting.