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Prohibited Investments: What you can't invest in in with a Solo 401k

Or what am I not allowed to invest in with my Solo 401k?

Solo 401k plans offer a myriad of unique and valuable investment options, many of which offer great diversification from the average investor’s portfolio, which often includes just stocks and bonds.

Solo 401k investment options include (but are not limited to):

  • Real estate
  • Private business
  • Precious metals
  • Private equity & debt
  • Life insurance
  • And much more

However, while they’re few and far between, some investment options are off-limits. So it’s important to know before investing in a Solo 401k if your desired investment is allowed and, if it is, what rules might apply that you need to keep in mind.

What you’re not allowed to invest in with your Solo 401k

1. Collectibles

Collectibles are essentially the only asset type discouraged by the IRS with a Solo 401k (with exceptions).

This includes:

  • Any work of art
  • Rugs
  • Antiques
  • Metals
  • Gems
  • Stamps
  • Certain coins (for a detailed list, see here)
  • Alcoholic beverages
  • Musical instruments
  • Historical objects
  • Other tangible property

When you as the owner of your Solo 401k plan invest plan funds in any of the above-listed collectibles, the cost of said collectibles (listed as fair market value) is treated as a distribution for tax purposes, despite the fact that an actual distribution was not and cannot be made.

Basically, this means you’ll be taxed based on the market value of any collectible you purchase with a Solo 401k at the time of purchasing said collectible.

Collectibles exceptions

As mentioned, there are exceptions to the above-mentioned collectible rule. Particularly, with precious metal coins and bullion of a specified purity.

Precious metal coins and bullion at or above the below-listed purity are allowed investments with a Solo 401k:

  • Gold: 99.5% purity
  • Silver: 99.9% purity
  • Platinum: 99% purity
  • Palladium: 99.95% purity

2. S Corporation stock

While many are attracted to the Solo 401k for its unique investment options such as real estate (particularly, the ease of investing in real estate with a Solo 401k) and precious metals, you’re also able to invest in stocks, bonds, and virtually anything else minus the above exceptions.

However, with regards to stocks, there is one exception: S corporation stock.

As outlined in IRC Section 4975 (16), no retirement plan of any kind (401k, IRA, or otherwise) can purchase or own stock in an S corporation. This is because trusts, which includes retirement plans, aren’t permitted shareholders of an S corporation.

However, it’s worth noting that a Solo 401k plan is allowed to invest in any other type of business, including a C corporation, LLC, or partnership.

3. Solo 401k prohibited transactions

It’s also important to note that any investment done in connection with disqualified persons is considered a prohibited transaction, even if the investment itself is allowed.

A disqualified person is defined as anyone who would directly or indirectly benefit from an investment using Solo 401k funds.

Specifically, this includes:

  • Ancestors: father, mother, grandparents, etc.
  • Lineal descendants: children, grandchildren, etc.
  • And other person or entity connected to said Solo 401k plan (such as a corporation or estate that you or a family member controls a majority of)

However, keep in mind that siblings, aunts, uncles, nieces, nephews, cousins, spouse’s same indirect relatives, and stepchildren are not considered disqualified persons and are therefore allowed to be included in any investment involving said Solo 401k plan funds.

We know this can be a bit confusing, so to get a better idea as to whether or not a transaction you’re considering may be prohibited, first ask yourself this question:

Will I or any other involved disqualified persons or parties directly or indirectly benefit from the investment?

The above qualifying question can potentially help you avoid the additional taxes and penalties involved with taking part in a Solo 401k prohibited transaction.

For more information on Solo 401k prohibited transactions, click here.

Experience the flexibility and investing power of a Solo 401k

The Solo 401k is a flexible retirement plan with a wide range of unique investment options.

From a more beneficial and flexible option for investing in real estate to a simpler and more convenient way to invest in precious metals, a Solo 401k is a diverse and powerful investment vehicle.

However, while a Solo 401k plan can invest in virtually anything, it’s important to know what investments aren’t allowed to save yourself from being hit with unnecessary taxes and penalties.

Ready to set up your own Solo 401k and begin taking advantage of the plan’s diverse collection of investment options? Click here to complete our online set up (takes a matter of minutes).

Or do you have a question? Contact us here and we’ll be happy to help.  

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