Loaning money to a friend from my IRA LLC

My wife and I are members/managers in our IRA LLC with a 70%/30% split. It is currently funded with $100,000. We have some personal debt that I would like to take care of by using the funds in the IRA LLC. I have a friend who I am willing to loan at prime + 2%, $20,000 for 5 years from my IRA LLC. Once he signs the note and I send him the funds, he will turn around and loan out the money to me personally so that I can take care of my personal debt. I would pay him prime + 2 on a monthly basis and then he would pay back my IRA LLC. My IRA LLC is loaning money to my friend who in turn is loaning it out personally to me. I am paying him back and is then paying back the LLC. Does this fall under the Prohibited Transaction? I would say no because once my friend receives the funds, he can do whatever he wants with it as long as he is paying back my LLC on a monthly basis. Interested in the comments and responses. Thanks!

What you have just described is a prohibited transaction.

Prohibited transactions explicitly include:

  • any act of a fiduciary by which plan income or assets are used for his or her own interest;

  • the receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets;

that pretty well covers it.

No matter “how you get there” you are personally benefiting from the transaction. Absent this method, you would not be able to receive this benefit.

Thanks for the information. Now, removing that my friend turns around an loans me the money and he uses it to payoff his own debt and I charge him 2 points above prime rate. That would not be a prohibited transaction correct. My LLC is acting as a private lender at that point to my friend. My LLC is profiting from the interest in the loan.

That is correct.

However, if you plan to then have him loan you $20k of “his” money in a “completely unrelated transaction,” then you are creating what is termed a structured transaction, which would still be a violation.