Loaning money to a friend from my IRA LLC

[martnez14]

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!

[mcwagner]

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. 

[martnez14]

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.

[mcwagner]

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.