What’s Not Allowed? What’s Off-Limits?
Life insurance and collectibles are the only investments prohibited to a retirement plan. The Employee Retirement Income Security Act (ERISA) prohibits life insurance and 26 USC 408(m) prohibits investments into collectibles.
26 USC 4975 identifies certain persons that are considered to be disqualified to either the Check Book IRA or the Solo 401(k), which means that none of these persons can deal with or have anything to do with the Plan. Its a pretty short list, so let’s go through who the disqualified persons are:
- Plan Owner’s Ancestors, Lineal Descendants
- Spouses of the Lineal Descendants
- Plan Owner
- Plan Owner’s Spouse
So, let’s assume we’re talking about your Check Book Retirement Plan (CBRP). The disqualified persons would be you, your spouse, and your lineal descendants and their spouses; so your parents, grandparents, children and their spouses, grandchildren and their spouses, etc…
Entities or companies that are owned or controlled by disqualified persons can also be considered prohibited. The general rule is that if any one or more disqualified persons owns 50% or more (individually or collectively) of an entity, then that entity is considered prohibited and cannot deal with the Solo 401(k).
Stay away from these entities. For more information, read my article Prohibited Transaction Rules, Part III: Disqualified Entities.
Putting it all together…
Alright, so now that we’re through the technical stuff, let’s talk about what this means in practice.
I wrote another article called Prohibited Transaction Rules, Part IV: IRA LLC Examples that puts all this together and gives a number of examples. Again, its written with the IRA LLC or Check Book IRA in mind, but these are the exact same rules that your Solo 401(k) would be subject to. That article should help you see how things fit together in the real world. This is an important subject to grasp, because while the limitations put on a 401(k) are few and far between, they are integral to ensuring your account remains in compliance.
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