The 401k single-participant retirement plan is one of the most productive retirement accounts today. It offers countless benefits to plan owners especially those who abide by the rules. Unfortunately for those who do not follow the regulations, penalties and sanctions are applied. According to the Qualified Plan 401k rules under IRC Sections 408 and 4975, there are “disqualified persons” who must never participate in the so-called prohibited transactions.
List of Prohibited 401k single-participant retirement plan
Transactions
Self-Dealing Transactions
Based on 4975(c)(1)(E) of the Internal Revenue Code, a disqualified person who directly or indirectly deals with assets or incomes of the Individual k plan and uses them for his own account commits a prohibited transaction. For instance, if the account owner uses funds from his retirement plan to invest on a property and get a sales commission, the transaction is prohibited. This also applies on using the Solo 401 k funds as addition to your personal funds in order to purchase or finance a property.
Conflict of Interest
According to IRC 4975(c)(i)(F), a transaction is prohibited under this circumstance when the disqualified person receives any consideration from any person or entity in dealing with the retirement plan. This transaction must be in connection with the assets or incomes derived from the Plan. For example, when a plan owner uses his self-directed retirement plan 401k funds to loan to a business he manages or controls with small ownership interest, he is committing a prohibited transaction.
Direct
As stated in IRC 4975(c)(1)(A), a 401k single-participant retirement plan transaction is generally and directly prohibited if the disqualified person directly or indirectly sells, rents, or trades a property involving the Solo k funds. In this case, a transaction is prohibited if the account owner or disqualified person uses the retirement money to purchase an LLC business or interest, sells an interest belonging to the 401k Solo retirement account or rents a rental property to others that belongs to the Solo k plan.
Moreover, IRC 4975(c)(1)(B) also states that the direct or indirect credit or loaning of money that involves the Individual k retirement funds is prohibited. The rules are likewise applicable on other circumstances such as the furnishing of goods, facilities or services and transfer of the retirement plan income and asset to the disqualified person.
If the 401k single-participant retirement plan transaction is qualified as prohibited according to the Department of Labor and IRS, those who are liable to such transactions are subject to penalty and tax obligations.
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