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What are the Solo 401(k) Rules?

Solo 401(k) Rules

What Are the Solo 401(k) Prohibited Transaction Rules?

The Solo 401(k) Prohibited Transaction Rules are transactions you can’t make with a 401(k) Plan. Your Solo 401(k) 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, so you must adhere to all Solo 401(k) rules.

They keep an eye out to determine if the investments you make are strictly benefiting 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

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 401(k) 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 401(k) assets to the fullest.

Solo 401(k) Prohibited Transaction Rules

Solo 401(k) 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. But you will be taxed on that money and you will have to pay a penalty. Disqualified Persons

Disqualified Persons

Typically, if a transaction with your Solo 401(k) Plan is restricted, it’s likely because it pertains to a disqualified person.

The IRS considers the Solo 401(k) 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 401(k) Plan.

In The Solo 401(k) In A Nutshell (Second Edition), it clearly explains who/what the IRS states as a disqualified person. Let’s have a look at that:

Solo 401(k) Prohibited Transaction Rules

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 401(k) 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 401(k) 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.

You can learn more about these types of prohibited transactions from President of IRA Financial, Adam Bergman, in his YouTube Videos:

Other Prohibited Assets

You can find Solo 401(k) 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
  • Stamps
  • Most coins

You can invest in:

  • 99% pure gold, silver or platinum bullion
  • American Eagle coins
  • State-minted coins

Solo 401(k) Rules – Stay IRS Compliant

In order to receive the maximum benefits of your plan, you must adhere to all Solo 401(k) rules the IRS has laid out. Failure to do so will lead to your plan being disqualified. All assets in the plan must then be distributed and taxes paid. You will also lose out on the tax-deferred growth of the plan, or tax-free growth in the case of a Roth Solo 401(k).

Give us a call at 800.472.1043 if you have any questions regarding the Solo 401(k) rules. We will help ensure your plan stays compliant and in good standing with the IRS.


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