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)