As the trustee of the account, you can buy and sell assets by simply signing a check in the name of the Solo 401k. If that is your definition of managing a property owned by your solo 401k, the answer is “Yes.” You can also perform tasks like contacting plumbers for estimates to install a new hot water heater. However, you cannot pick up a new hot water tank at Home Depot and install it yourself.
3 Rules for Self-directed Retirement Accounts
The basics are pretty simple. There are only three restrictions on how you invest and manage your Solo 401k.
- Don’t buy collectibles (gems, antiques, rare wines, most coins, etc.).
- No life insurance contracts (but there are exceptions).
- No prohibited transactions with yourself and disqualified people.
The first two rules are less restrictive than you might first think. Other than a few collectibles, you can invest in almost anything else including fishing rights in Alaska, a rental home in New Zealand, or a natural gas business in Texas. There are also specific ways the IRS allows your Solo 401k to pay the premiums on life insurance (blog: How Can the Solo 401k Invest in Life Insurance?). This leaves the third rule about prohibited transactions. And this is the one we need to be most concerned about when it comes to a trustee managing property owned by his or her Solo 401k.
Solo 401k Prohibited Transactions
Prohibited transaction guidelines are found in Section 4975 of the Internal Revenue Code. In addition to the definition of a prohibited transaction, you need to understand “who” is not allowed to transact with the Solo 401k. These are the people and entities defined as a “disqualified person.” The list of disqualified people goes beyond just you as the Solo 401k account owner and trustee to include:
- Your spouse.
- Your lineal ascendants (parents, grandparents) or descendants (children, grandchildren, etc.), and spouses of your lineal descendants (son-in-law, daughter-in-law, etc.).
- Any fiduciary of the retirement plan (a person who makes investment decisions for the plan).
- Companies that provide services to the 401k plan itself.
- A corporation (or other entity) that is 50% or more owned (directly or indirectly) by yourself, your spouse, or any of your lineal ascendants or descendants.
- An officer, director, 10% or more owner, or highly compensated employee of the corporation named above.
- A 10% or more (in capital or profits) partner or joint venturer of the corporation above.
Manage Your Own Property in the Solo 401k
Don’t let that list make it sound like you and your family doesn’t have any control over your Solo 401k. It’s interesting to note that the list does not exclude your Solo 401K from doing business with siblings, aunts, uncles, and cousins. Also, prohibited transactions do not say you and other disqualified people cannot have a management role in your Solo 401k. Rather, the primary intent is preventing you and direct family members from personally benefiting from the account.
Specific prohibited transactions involving disqualified people that you want to be most concerned about are:
- Avoid buying/selling property to disqualified persons.
- You may not receive any compensation for managing a property owned by your Solo 401k.
- Do not use the Solo 401k as security for a loan (does not include non-recourse loans secured by a specific property).
- Do not purchase property for personal use (present or future).
What Managing Property Does and Doesn’t Mean to the IRS
The overarching rule to follow is that only the Solo 401k may benefit from any transaction. You as trustee/participant, nor any other disqualified person may benefit. None of these people may receive a personal benefit as a result of a transaction performed under the Solo 401k plan. This includes “Furnishing of goods, services, or facilities between a plan and a party in interest is prohibited” (29 U.S. Code § 1106. Prohibited transactions).
However, you can perform many management roles similar to what a business executive does.
In a broad sense, you can manage the effectiveness and efficiency of unrelated parties providing goods and services to your Solo 401k owned property or other assets. For instance, although you cannot personally rip out the old carpet and install a new carpet, you can request quotes and select the contractor for the job (as long as the contractor is not a disqualified person). Likewise, you can interview and approve tenants. But you cannot use personal funds to pay for any goods or services. In short, ministerial duties are acceptable. “Blue collar” duties to the property are not allowed.
Self Dealing Mistakes You Must Avoid
Although there really aren’t many rules, if you violate them, the consequences can be severe. If the IRS finds you violated a prohibited transaction, a possible consequence is declaring your Solo 401k fully distributed. Fortunately, this isn’t the only possible outcome because the IRS has resolution programs that can correct errors made with a Solo 401k to preserve it.
What follows is certainly not all-inclusive but these are a few common examples of prohibited transactions you should be watchful for as the manager of your Solo 401k.
No Sweat Equity
Sweat equity is the big one that is probably most tempting to violate and has already been briefly covered. Performing physical labor on your own property (whether paid for or not) for any repairs or improvements to any asset in your retirement account is a prohibited transaction. Neither you nor any other disqualified person can do so much as paint a room or sweep a sidewalk.
Other Transactions to Avoid
- Having your Solo 401k purchase real estate that you presently own.
- Your Solo 401k purchasing real estate owned by a family member of lineal descent, such as your father.
- Issuing a mortgage on a residence purchased by a family member who is a disqualified person.
- Buying, transferring, or exchanging assets (for example stocks or real estate) between your Solo 401k and any disqualified person.
Again, you can manage a property owned by your Solo 401k within the limits of the IRS code. The overarching rule is that you, your business, or disqualified persons cannot benefit from your Solo 401K assets.