Self-Directed Solo 401 k – Prohibited Transactions and Disqualified Persons

Self-Directed Solo 401 k
Self-Directed Solo 401 k

The Self-Directed Solo 401 k plan offers flexible investment opportunities for plan owners. Nonetheless, in some cases, it is due to this flexibility that most participants commit common mistakes that may incur penalty charges. ERISA or the Employee Retirement Income Security Act along with the IRC or Internal Revenue Code released a list of prohibited transactions for guidelines. Moreover, there is a provision of those who fall under the “disqualified persons” category to avoid exploitation of tax benefits and other features of the Solo 401k.

Who are Disqualified Persons?

According to Section 4975 (e)(2), disqualified persons are basically participants of the Individual self-directed 401 k. This category also includes lineal descendants or ancestors of the plan owner and entitles or companies where the plan holder holds a management interest or control. Other definitions of a disqualified person according to the Internal Revenue Code are the following:

  • Trustee or custodian or any person offering services to a Self-Directed 401k.
  • Any employee organization with members covered in the single-participant 401k pension plan.
  • Employer of members of the Individual 401 k.
  • Family member of plan participant, trustee, and employer of the plan owner.
  • A corporation, partnership, estate or trust where the Solo 401k plan owner controls more than 50% of the stocks or interest.

About Self-directed Solo 401 k Prohibited Transactions

The Self-directed Individual 401k retirement plan does not allow the following types of prohibited transactions:

  • Self-Dealing – This type of transaction is where a fiduciary (plan owner, family member or descendant) deals with the assets or income of the self-directed 401 k to leverage his own interest or for his own personal account.
  • Conflict of Interest – Prohibited transactions uses the Solo 401k with conflicting goals or interests. For instance, a disqualified person receives any interests from any party through dealing the assets or income of the Individual 401 k plan.
  • Direct – Transactions under this category involve the direct or indirect trade, renting or sale of property between the disqualified person and the Solo self-directed 401 k plan. For instance, the plan owner utilizes the single-participant 401 k plan to fund and purchase an LLC interest which is a direct ownership of his children or lineal descendant.

In order to avoid penalty charges, it is imperative to follow and comply with the Self-directed Solo 401 k rules. Although flexible, the Individual 401 k retirement plan is susceptible to these strict regulations.

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