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Solo 401(k) – Common Prohibited Transactions

Solo 401(k) Prohibited Transactions

Categories of Prohibited Transactions

In general, the type of transactions that could fall under the Solo 401(k) Prohibited Transactions rules pursuant to Code Section 4975 can be viewed in the context of three unofficial categories:

Direct Prohibited Transactions

4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between a Solo 401(k) Plan and a “disqualified person”

  • Victor leases an interest in a piece of property owned by his Solo 401(k) Plan IRA to his son
  • Tracy sells real estate owned by her Solo 401(k) Plan to her father
  • Ben sells real estate he owns personally to his Solo 401(k) Plan
  • Jason transfers property he owns personally to his Solo 401(k) Plan
  • Katy Purchases real estate with her Solo 401(k) Plan funds and leases it to her son
  • David uses his Solo 401(k) Plan funds to purchase an interest in an entity owned by his father
  • Ted Transfers property he owns personally subject to a mortgage to his Solo 401(k) Plan .
  • Sally uses personal funds to pay expenses related to her Solo 401(k) Plan real estate investment
  • Jane uses personal funds to pay taxes and expenses related to her Solo 401(k) Plan real estate investment

4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between a Solo 401(k) Plan and a “disqualified person”

  • Ken lends his son $4,000 from his Solo 401(k) Plan
  • Rick Uses the assets of his Solo 401(k) Plan as security for a loan
  • Tina personally guarantees a bank loan to her Solo 401(k) Plan
  • Brandon uses his personal assets as security for an Solo 401(k) Plan investment
  • Chuck uses Solo 401(k) Plan funds to lend an entity owned and controlled by his father $45,000
  • Eric acquires a credit card for his Solo 401(k) Plan bank account

4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between a Solo 401k Plan and a “disqualified person”

  • Howard purchases real estate with his Solo 401(k) Plan funds and personally makes repairs on the property
  • Billy purchases a condo with his Solo 401(k) Plan funds and paints the walls without receiving a fee
  • Henry buys a piece of property with his Solo 401(k) Plan funds and hires his son to work on the property
  • Mary buys a home with her Solo 401(k) Plan funds and her son makes repairs for free
  • Beth owns an office building with her Solo 401(k) Plan and hires her son to manage the property for a fee
  • Jackie owns an apartment building with her Solo 401(k) Plan funds and has her father manage the property for free
  • Doug receives compensation from his Solo 401(k) Plan for investment advice
  • Matt acts as the real estate agent for his Solo 401(k) Plan

4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of a Solo Solo 401(k) Plan

  • Jim uses a house owned by his Solo 401(k) Plan for personal uses
  • Seth deposits Solo 401(k) Plan funds in to his personal bank account
  • Bobby is in a financial jam and takes $4,000 from his Solo 401(k) Plan to pay a personal debt
  • Spencer buys precious metals using his Solo 401(k) Plan funds and uses them for personal gain
  • Bryan purchases a vacation home with his Solo 401(k) Plan funds and stays in the home on occasion
  • Elliot buys a cottage with her Solo 401(k) Plan funds on the lake and rents it out to her daughter and son-in-law
  • Allison purchases a condo using her Solo 401(k) Plan on the beach and lets her son use it for free
  • Brad uses his Solo 401(k) Plan to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Brad and transfers those funds back to Brad
  • Kelly invests her Solo 401(k) Plan funds in an investment fund and then receives a salary for managing the fund.
  • Larry uses his Solo 401(k) Plan funds to purchase real estate and earns a commission as the real estate agent on the sale
  • Steve uses his Solo 401(k) Plan funds to lend money to a company he owns and controls
  • Gordon invests his Solo 401(k) Plan funds into a business he owns 75% of and manages

Self-Dealing Prohibited Transactions

4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the Solo 401(k) Plan in his/her own interest or for his/her own account

  • Karen makes an investment using her Solo 401(k) Plan funds into a company she controls which will benefit her personally
  • Brett uses his Solo 401(k) Plan funds to invest in a partnership with himself personally in which he and his family will own greater than 50% of the partnership
  • Pam uses her Solo 401(k) Plan funds to invest in a business she and her husband own and operates and her and her husband earns compensation from the business
  • Rick uses his Solo 401(k) Plan funds to lend money to a business in which he controls and manages
  • Lance invests his Solo 401(k) Plan funds in a trust in which Lance and his wife would gain a personal benefit
  • Helen uses her Solo 401(k) Plan funds to invest in a real estate fund managed by her Son. Helen’s son receives a bonus for securing her investment.
  • Stanley invests his Solo 401(k) Plan funds into a real estate project that his development company will be involved in order to secure the contract
  • Warren uses his Solo 401(k) Plan funds to invest in his son’s business that is in financial trouble
  • Alex uses his Solo 401(k) Plan funds to buy a note on a piece of property for which he is the debtor personally

Conflict of Interest Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:

4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the Solo 401(k) Plan in connection with a transaction involving income or assets of the Solo 401(k) Plan

  • Allan invests his Solo 401(k) Plan funds into a corporation in which he manages and controls but owns a small interest in
  • Patty uses her Solo 401(k) Plan funds to loan money to a company she owns a small interest in but manages and controls the daily operations of the company
  • Debra uses her Solo 401(k) Plan to lend money to a business that she works for in order to secure a promotion
  • Richard uses his Solo 401(k) Plan funds to invest in a real estate fund that he manages and where his management fee is based on the total value of the fund’s assets.
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