To the Men and Women Who Want to
Quit Working One Day: The Solo 401k Plan

What You Cannot Do

The IRS and Dept of Labor have listed two main categories of transactions plan that are prohibited in a Solo 401k plan.
1. You can not participate in a transaction that benefits you or a family member directly. 401k plan transactions must be "at arms length".These transactions are referred to as "Prohibited Transactions". (Section 4975 of the Internal Revenue Code)

2. You can not purchase collectibles for the solo 401k plan. Collectibles would include Art, Jewelry, Baseball Cards, Comics, Antiques, etc.

Let's take a look:

PROHIBITED TRANSACTIONS
Examples:

Loans to Companies in which You have an Interest:

An Owner of a public accounting firm is the trustee of the firm's 401(k) plan and is accountable for investing the plan's assets. The Owner decides that the plan can loan money to a series of companies in which the Owner owns less than 50%. The loans interest rate was 12%, and will provide an interest stream for the plan. Because the Owner does not own 50% or more of the companies to which the plan will be loaning money, the Owner figures the transactions are not prohibited transactions. 

The IRS represented the opposite opinion.

The IRS applied 4975(c)(1)(D) and (E) of the Internal Revenue Code and claimed that the Owner was involved  in prohibited transactions. The IRS claimed that the “loans were transfers of the plan's assets that benefited” the Owner under Sec. 4975(c)(1)(D) of the Code, and that the  loans were dealings with the plan's assets in the Owner's own interest under sec. 4975(c)(1)(E) of the Code.

The IRS contended that the Owner was a disqualified person with respect to the plan in two capacities: (a) A fiduciary of the Plan (sec. 4975(e)(2)(A)), and (b) the 100-percent Owner of the employer sponsoring the plan. The IRS positioned that the Owner benefited from the loans  -- the loans enabled the borrowers--all companies in which the Owner’s owned interests--"to operate without having to borrow funds at arm’s length from other sources."

The Tax Court agreed with the IRS that the loans were prohibited transactions under section 4975(c)(1)(D), 
The Tax Court’s position was :
“ The fact that the transaction would qualify as a prudent investment when judged under the highest fiduciary standards is of no consequence. Furthermore, the fact that the plan benefits from the transaction is irrelevant. Good intentions and a pure heart are no defense.”

"Prohibited Transactions"

 1. Bill sells an interest in a piece of Solo 401k property to his daughter

 2. Jane leases Solo 401k real estate to her father.

 3. Ted uses Solo 401k funds to purchase an LLC interest owned by his daughter.

 4. Keith lends his father $17,000 from his Solo 401k.

 5. Tim personally guarantees a bank loan to his Solo 401k.

 6. Tom uses Solo 401k funds to lend $30,000 to a company owned and controlled by his daughter

 7. Eric buys a piece of property with Solo 401k funds and hires his mother to manage the property.

 8. Will buys a home with his Solo 401k funds and personally fixes it up.

 9. Sarah Solo 401k owns an apartment building and hires her father to work on the property.

10. Dan has financial problems and takes $12,000 from his Solo 401k to pay his bills.

11. Steve uses his Solo 401k to purchase a rental property and hires his friend Max to manage the property. Max then transfers his income back to Steve.

12. Regina, a real estate agent, uses her Solo 401k funds to buy a home and earns a commission from the sale.

13. James wants to buy a piece of property but does not have sufficient funds. James uses 90% from in his Solo 401k and 10% of his own money to make the investment.

14. Peggy uses her Solo 401k to funds to invest in a real estate fund managed by her father.

15. Andy uses his Solo 401k funds to loan money to a company which he manages and controls .

16. Sally uses her Solo 401k to lend money to a business that she works for.

More examples of Prohibited Transactions:

"The direct or indirect Sale, exchange, or leasing of property between a Solo 401k Plan and a "disqualified person""
  • Victor leases an interest in some property owned by his Solo 401k Plan to his son.
  • Tracy sells real estate property owned by her Solo 401k Plan to her father.
  • Ben sells real estate he owns personally to his Solo 401k Plan.
  • Jason transfers property he owns personally to his Solo 401k Plan.
  • Katy purchases real estate with her Solo 401k Plan funds and leases it to her son.
  • David uses his Solo 401k Plan funds to purchase an interest in an entity owned by his father.
  • Ted transfers property, subject to a mortgage, he owns personally to his Solo 401k Plan.
  • Sally uses personal funds to pay expenses related to her Solo 401k Plan real estate investment
"The direct or indirect lending of money or other extension of credit between a Solo 401k Plan and a "disqualified person""
  • Ken lends his son $22,000 from his Solo 401k Plan.
  • Rick uses the assets of his Solo 401k Plan as security for a loan
  • Tina personally guarantees a bank loan to her Self-Directed Roth Solo 401k.
  • Brandon uses his personal assets as security for a Solo 401k Plan investment
  • Chuck uses Solo 401k Plan funds to lend an entity owned and controlled by his father $145,000.
  • Eric acquires a credit card for his Solo 401k Plan bank account.
"The direct or indirect furnishing of goods, services, or facilities between a Solo 401k Plan and a "disqualified person ""
  • Howard purchases real estate with his Solo 401k Plan funds and personally makes repairs on the property.
  • Billy purchases a condo with his Solo 401k Plan funds and paints the walls without receiving a fee.
  • Henry buys a piece of property with his Solo 401k Plan funds and hires his son to work on the property.
  • Mary buys a home with her Solo 401k Plan funds and her son makes repairs for free.
  • Beth owns an office building with her Solo 401k Plan and hires her son to manage the property for a fee.
  • Jackie owns an apartment building with her Solo 401k Plan funds and has her father manage the property for free.
  • Doug receives compensation from his Solo 401k Plan for investment advice
  • Matt acts as the real estate agent for his Solo 401k Plan.
"The direct or indirect transfer to a "disqualified person" of income or assets of a Solo 401k Plan"
  • Jim uses a house owned by his Solo 401k Plan for personal uses.
  • Seth deposits Solo 401k Plan funds into his personal bank account.
  • Bobby is in a financial jam and takes $14,000 from his Solo 401k Plan to pay a personal debt.
  • Spencer buys precious metals using his Solo 401k Plan funds and uses them for personal gain.
  • Bryan purchases a vacation home with his Solo 401k Plan funds and stays in the home on occasion.
  • Elliot buys a cottage with his Solo 401k Plan funds on the lake and rents it out to his daughter and son-in-law.
  • Allison purchases a condo using her Solo 401k Plan on the beach and lets her son use it for free.
  • Kelly invests her Solo 401k Plan funds in an investment fund and then receives a salary for managing the fund.
  • Larry uses his Solo 401k Plan funds to purchase real estate and earns a commission as the real estate agent on the sale
  • Steve uses his Solo 401k Plan funds to lend money to a company he owns and controls
  • Gordon invests his Solo 401k Plan funds into a business he owns 75% of and manages
"The direct or indirect act by a "Disqualified Person" who is a fiduciary dealing with income or assets of the Solo 401k Plan in their own interest or own account."
  • Karen makes an investment using her Solo 401k Plan funds into a company she controls which will benefit her personally
  • Brett uses his Solo 401k Plan funds to invest in a partnership with himself personally in which he and his family will own greater than 50% of the partnership.
  • Pam uses her Solo 401k Plan funds to invest in a business she and her husband own and operates and they earn compensation from the business.
  • Rick uses his Solo 401k Plan funds to lend money to a business which he controls and manages.
  • Lance invests his Solo 401k Plan funds in a trust in which Lance and his wife would gain a personal benefit.
  • Helen uses her Solo 401k Plan funds to invest in a real estate fund managed by her son. Helen's son receives a bonus for securing her investment.
  • Stanley invests his Solo 401k Plan funds into a real estate project that his development company will be involved in order to secure the contract
  • Warren uses his Solo 401k Plan funds to invest in his son's business that is in financial trouble.
  • Alex uses his Solo 401k Plan funds to buy a note on a piece of property for which he is the debtor personally.
"Receipt of any consideration by a "Disqualified Person" who is a fiduciary for his/her own account from any party dealing with the Solo 401k Plan in connection with a transaction involving income or assets of the Solo 401k Plan"
  • Allan invests his Solo 401k Plan funds into a corporation in which he manages and controls but owns an interest in.
  • Patty uses her Solo 401k Plan funds to loan money to a company she owns a small interest in but manages and controls the daily operations of the company
  • Debra uses her Solo 401k Plan to lend money to a business that she works for in order to secure a promotion
  • Richard uses his Solo 401k Plan funds to invest in a real estate fund that he manages and where his management fee is based on the value of the fund's assets.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Information contained herein is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


  Click to Get Started Now

 

                                             

                     Or  Call   866-915-4015 TO GET STARTED