The exclusive benefit rule as it applies to self-directed solo 401(k)s

When considering the type of investments that you want and how they will be used in your self-directed solo 401(k) certain rules must be followed. One that is less commonly referenced is the Exclusive Benefit Rule.

The exclusive benefit rule stipulates that all activities of tax-sheltered retirement plans, such as 401(k)s and IRAs, must be for the exclusive benefit of the plan beneficiaries as stated in IRC section 401(a) and 408(a).

This rule should be examined in two ways:

· The plan’s investments must be held in the best interest of meeting the retirement benefit needs of the plan participant(s) and growing the savings amount.

· The investments held in the plan must grow the savings amount in the plan as oppose to providing a benefit to the plan’s beneficiaries or other disqualified persons.

To comply with the requirement to be in the best interest of the plan, the IRS recommends the following measures to determine if a plan’s policies are for the exclusive benefit of the plan participant:

· The cost of an investment must be less than or equal to its fair market value (FMV) at the time of purchase.

· A fair and customary rate of return on the investment must be provided (expected).

· The investment must be adequately liquid to allow distributions per the plan terms.

The protections and investment variety that a sensible investor would adhere to must be present.

· The protections and investment variety that a sensible investor would adhere to must be present.

If a plan acts, or is used, in a manner that delivers a benefit to the participant or an otherwise disqualified person, then a prohibited transaction has occurred.