Common Questions About Self-Directed Solo 401(k) Plan Prohibited Transactions

Engaging in a prohibited transaction can be devastating to your self-directed solo 401(k).

The IRS explains these prohibited transaction rules, but they may not always be very clear. In order to best understand the rules and restrictions, some real-world examples are helpful review.

A prohibited transaction occurs when there is any direct or indirect:

Lending of money or other extension of credit between a plan and a disqualified person

• Your plan/account may not loan you or a disqualified person money.

• You or a disqualified party may not loan money to your plan/account.

• You or a disqualified person may not pledge a personal guarantee on a debt. instrument obtained by the plan/account such as a mortgage, credit card, or commercial trade account.

• You may not pledge your plan/account assets as security for any personal debt held by you or a disqualified party.

Furnishing of goods, services, or facilities between a plan and a disqualified person

• You or a disqualified person may not use personal belongings to furnish a plan/account owned rental property.

• You or a disqualified person may not work on a plan/account owned rental property.

• You or a disqualified party should not act as a general contractor in the sense of obtaining permits or utilizing any personal licensing or insurance on behalf of your plan/account.

• You or a disqualified person cannot store personally owned items in a plan/account held property, such as parking your RV on land owned by your solo 401(k).

• If a licensed realtor, you or a disqualified person should not act as realtor for the purchase and sales transactions of your plan/account (they cannot earn a commission on the transaction).

Sale or exchange, or leasing, of any property between a plan and a disqualified person

• Your plan/account cannot trade an asset it owns for an asset that you or a disqualified person owns.

• You or a disqualified person may not purchase an asset from the plan/account.

• Your plan/account may not purchase property you or lineal family currently own or have owned in the past.

• Your plan/account cannot rent a property it owns to a disqualified person, or a business owned or controlled by a disqualified person.

• You or a disqualified person may not sell property to an unrelated 3rd party and then have the plan/account purchase it from that 3rd party. This would be an indirect transaction, and that 3rd party would be looked at by the IRS as a “straw man” in the transaction.

Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan

• Cash held by a plan/account may not be transferred to you or a disqualified person or held in a personal account.

• You or a disqualified person may not use a vacation property owned by your plan/account, even if fair market rent is paid.

Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

• You or a disqualified person may not earn a commission associated with a plan/account transaction.

• Your plan/account should not invest in a company, if such investment insures you a job, contract, or promotion with that company.

• You or a disqualified person may not be paid from the plan/account.

Act by a disqualified person who is a fiduciary that deals with the income or assets of a plan in his own interest or for his own account

• Your plan/account should not lend money to a plan fiduciary such as its financial advisor or CPA.

Common Questions Related to Prohibited Transactions

These are some commonly asked that would, unfortunately, result in a prohibited transaction. The answer to all of them is NO.

• Can my solo 401(k) purchase a property for my child to live in while they are at college?

• Can my solo 401(k) obtain a credit card?

• Can my plan/account lend money to a business that I own?

• Can I use my solo 401(k) to help my child purchase a home?

• Can I use my solo 401(k) to purchase a home to live in?

• Can I use my solo 401(k) to pay off the mortgage on my personal property?

• Can my solo 401(k) purchase a property for my use as a 2nd or vacation home?

• Can I act as the realtor for my solo 401(k) plan/account?

• Can I act as a contractor and perform work on my solo 401(k) owned property?

Source: Retirement Topics - Prohibited Transactions | Internal Revenue Service (irs.gov)

Publication 560 (2020), Retirement Plans for Small Business | Internal Revenue Service (irs.gov)