We share the Solo 401k rules and guidelines to keep your plan IRS compliant. Rules and guidelines include the prohibited transactions (assets you cannot purchase with your retirement funds), disqualified persons (people who cannot engage with your plan) and other guidelines set forth by the IRS.
What Are the Solo 401k Prohibited Transaction Rules?
The Solo 401k prohibited transaction rules are transactions you can’t make with a 401(k) Plan. Your Solo 401k plan gives you great flexibility in how you can make investments with your retirement funds. The US government created this Plan so individuals can save a substantial amount of money for retirement. However, it’s the job of the IRS to make sure that you don’t take advantage of the tax benefits you’re given.
They keep an eye out to determine if the investments you make are strictly benefitting the savings within your retirement account. What they want is to see an accumulation of your retirement funds. If you do something with your assets that the government doesn’t think aids in said accumulation, you will have to pay tax on that money. And, if you’re under the age of 59 ½, you also pay a penalty.
What You Can Invest In – What You Can’t Invest In
The IRS (and the Department of Labor) doesn’t state what you can invest in or how best you should use your assets. It only tells you what you can’t invest in. This is the same with a Self-Directed IRA LLC. There are limits and restrictions, or “prohibited transactions” – in this case, Solo 401k Prohibited Transaction Rules – which are very important, regardless of how puzzling they may be.
Understand and follow these prohibited transaction rules so the work you do can establish and grow your Solo 401k assets to the fullest.
Solo 401k Prohibited Transactions
To reiterate, prohibited transaction rules are set in place to benefit the retirement account and not exactly the retirement account owner. The IRS also has it in place to, essentially, protect its revenue-generating distribution rules. You would want to protect your revenue too, right?
It’s important to clarify, if you want to use your retirement funds for personal use and you’re not at retirement age, that’s fine. If you know that you will be taxed on that money and you will have to pay a penalty.
Typically, if a transaction with your Solo 401k Plan is restricted, it’s likely because it pertains to a disqualified person.
The IRS considers the Solo 401k account holder as a disqualified person. Yes, that’s you. Also, your immediate family, lineal descendants/ancestors and business entities that hold management interest in your Solo 401k Plan.
In The Solo 401k In A Nutshell (Second Edition), it clearly explains who/what the IRS states as a disqualified person. Let’s have a look at that:
- A trustee (or custodian)
- Owner of the business who establishes the Plan (you, most likely)
- Employee organization covered by the Plan
- 50% owner the business or employee organization
- Family member (excluding brothers, sisters, aunts, uncles, cousins, step-siblings and friends)
- Partnership, corporation, trust or estate more than 50% owned by you, a trustee/custodian, employee organization, and 50% owner of the business that establishes the 401(k) or the employee organization whose members are covered by this retirement plan
- 10% owner, officer, director or highly compensated employee of the business, employee organization, 50% owner of the business or employee organization, or the partnership, corp., trust or estate
Direct or Indirect Prohibited Transactions
There are two types of prohibited transactions: direct and indirect.
A direct prohibited transaction is the easiest to uncover. For example, you take funds out of your Solo 401k to pay for your credit card bill. This is a transaction that directly benefits you and doesn’t profit your retirement account at all.
Whereas an indirect prohibited transaction may not appear to benefit you upfront. For example, you take money from you Solo 401k to make an investment in a company that you own 15% of. Although it doesn’t directly benefit you, as a disqualified person, this is an indirect prohibited transaction.
Other Prohibited Assets
You can find Solo 401k Prohibited Transaction Rules under IRC Section 4975. However, these aren’t the only rules that the IRS prohibits. There are a few other investments that are not permitted, which fall under IRC Section 408. You cannot use the funds in your retirement account to invest in the following collectibles:
- Works of art
- Metal or gems
- Alcoholic beverages
- Rugs and antiques
- Most coins
You can invest in:
- 99% pure gold, silver or platinum bullion
- American Eagle coins
- State-minted coins
We get it; as a self-employed individual, it’s challenging to pick the right retirement plan for your needs. Our IRA specialists will help you set up your account and help you with the ins and outs of the Solo 401k Prohibited Transaction Rules and disqualified persons. Call or email today to get started.
Did you know?
The trustee and plan administrator of the Solo 401(k) Plan can be the same person.