The single-participant 401k is a highly lucrative type of retirement plan. Also known as Solo 401 k, this pension plan offers a wide range of benefits and advantages for participants. It is a good move for investment especially for qualified plan owners who are self-employed or small business owners. The numerous features of the self-directed solo 401k make investment a viable profit generating source. However, it is also imperative that participants know the prohibited transactions they should avoid at all costs.
What happens when you have prohibited transactions?
Since the Individual 401k retirement plan is flexible, it is quite common for plan owners to go beyond the line. One of the upfront results of engaging in prohibited transactions is penalty charges or becoming disqualified from the tax-free or tax-deferred features of the plan. It takes comprehensive knowledge and understanding of the Individual self-directed 401k to be able to avoid some of the most common mistakes for owners.
Most Common Mistakes of Single-participant 401k Plan Owners
Here are three of the major mistakes that participants of the Self-Directed 401k must avoid:
- Prohibited Transactions – There are three subcategories for this subject matter. It is a prohibited transaction if it is self-dealing, there is a conflict of interest and that it is directly going against the rules of the Solo 401 k retirement plan.
- Recourse Loan – According to its technical definition, a recourse loan is a type of loan which the borrower acts as the guarantor to secure the loan. It is a commonly offered option used in banks or financial institutions, however, it is not allowed to use a recourse loan within a Solo 401k. Many plan owners of the Individual 401 k plan make mistakes through using a recourse loan in order to leverage their real estate purchase.
- Early Plan Withdrawal – There is an alternative to this common mistake among participants. Instead of withdrawing from the plan, it is recommended to take the loan option. Based on the provisions of the Solo 401 k, plan owners could borrow 50% of their total account value or up to $50,000. It allows up to 5 years of repayment with interest rate of Prime Rate + 1%.
The Single-Participant 401k is a highly lucrative and viable retirement plan. However, in order to maximize its full potentials and benefits, it is imperative to avoid the major mistakes aforementioned. Committing these major setbacks could rid you of your plan benefits and privileges. It pays to go by the book.
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