While it’s true that a Solo 401k can invest in virtually any investment such as equities, real estate (e.g., rental homes, apartment buildings, fixer-uppers and condos, foreign real estate, etc.), precious metals (e.g., gold, silver and bullion), tax liens, trust deeds and private shares, there are certain investment types and transaction types, both discussed in this article, that are disallowed and prohibited under the Solo 401k rules.
Disallowed Solo 401k Investments
The Solo 401k investment types restricted by federal law which are listed under Internal Revenue Code 408(m) are known as collectibles and include the following:
Works of art;
Stamps;
Certain coins;
Alcoholic beverages; and
Antiques.
With respect to coins, not all coins are considered disallowed investments in a Solo 401k plan, provided they meet a standard quality, defined as fineness–refers to the purity of a bullion coin. For example, acceptable coins include American Eagle coins produced by the united states. Examples of unacceptable coins include Chilean Peso, Swiss Franc, German Mark, Austrian Corona and Ducat, to name a few.
Solo 401k Investments Considered Prohibited
A Solo 401k cannot invest in any investment deemed a prohibited transaction as outlined in Internal Revenue Code 4975. For example, the sale of a house owned by the Solo 401k trustee/participant to his Solo 401k would fall under prohibited Solo 401k transaction category. Similarly, the sale of a piece of real estate owned by the Solo 401k trustee/participant to his or her Solo 401k plan would also be deemed prohibited. Further, using Solo 401k assets to purchase a house for your personal use is prohibited. In sum, Solo 401k can invest in real estate, just not real estate that the Solo 401k trustee owns or plans to use for his or her personal benefit.
Identifying if you are engaging in a Solo 401k Prohibited Transaction
To identity a prohibited transaction, first identify all the players involved in the Solo 401k plan. First, there is Solo 401, which will put up the funds, then there is you, the Solo 401k trustee/participant, and by definition a disqualified party.
Will any other disqualified persons benefit in any with the outcome of this Solo 401k investment?
Will you be receiving a personal benefit from your Solo 401k plan’s transaction? To clarify, consider the following example:
Suppose you are a real estate agent and decide to sell a house to your son’s Solo 401k and collect a commission for doing so. Will your collection of a commission from the sale of the house result in a prohibited transaction? Of course, because under the prohibited transaction rules the mother of a Solo 401k participant is deemed a disqualified party and thus cannot receive a personal benefit (commission payment) from her son’s Solo 401k.
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