GAO Make Recommendations for IRS and the Department of Labor (DOL) in Handling Prohibited Transactions

In June 2019 The U.S. Government Accountability Office (GAO) issued a report “Formalizing Labor’s and IRS’s Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions,” where they gave recommendations for the DOL and the IRS to collaborate more closely when reviewing IRA prohibited transactions, and even though solo 401k plans were not specifically mentioned, it would not be surprising if they are eventually included since the same government agencies are responsible for handling solo 401k prohibited transaction inquiries and review.

Background of DOL and IRS Involvement

The Department of Labor (DOL) has a process to grant administrative exemptions for individual retirement account (IRA) transactions that would otherwise be prohibited by law, such as an IRA buying investment property from the IRA owner.

DOL evaluates applications using statutory criteria and follows administrative procedures codified in regulations. Applications for proposed transactions that are substantially similar to certain other transactions previously granted exemptions may follow an expedited process.

Here are Some of the Findings in the GAO Report

Prohibited Transaction Exemption Applications for Individual Retirement Accounts Processed by the Department of Labor (DOL), January 1, 2006 through May 16, 2017.

Application status












Closed administratively or other






Source: GAO analysis of DOL data. | GAO-19-495

aEXPRO is the common name for a class exemption that allows DOL to authorize relief from the prohibited transactions rules on an expedited basis, generally a shorter period of time than it takes to review individual applications.

  • GAO found that roughly half (56) of the IRA prohibited transaction exemption applications it reviewed were withdrawn by the applicant before the review process was completed.
  • With regard to DOL’s application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process.
  • Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly.
  • Although DOL and the Internal Revenue Service (IRS) share some information as part of their oversight responsibility for prohibited IRA transactions, no formal mechanism exists to help guide collaboration between the agencies.
  • Of the 124 IRA applications GAO reviewed, only eight reflected DOL contact with IRS.
  • GAO found that DOL has information about requested exemptions to prohibited IRA transaction rules that could be useful to IRS in carrying out its oversight responsibilities.
  • GAO is recommending that DOL and IRS establish a formal means—such as a memorandum of understanding or other mechanism—to collaborate on oversight of prohibited IRA transaction exemptions. GAO is also recommending that DOL document policies and procedures for managing the exemptions process. DOL and IRS generally agreed with GAO’s recommendations.

Rev. Rul. 2019-19 Further Affirms the Required Federal Tax Withholding on 401k Distributions

In case there was any doubt, a recent revenue ruling (Rev. Rul. 2019-19) confirms the mandatory 20% federal tax applies to qualified plan distributions (e.g., full-time employer 401k plans as well as solo 401k plans).

Summary of the Ruling

This ruling provides that an individual receives a distribution check from a qualified plan and does not to cash the check.  The revenue ruling concludes that the individual’s failure to cash the check does not permit the individual to exclude the amount of the designated distribution from gross income under § 402(a) and does not alter the employer’s withholding obligations under § 3405 or Form 1099-R reporting obligations under § 6047(d).

The Ruling Essentially Concludes the Following

  • The check amount is taxable in the year received by the recipient, whether cashed or not.
  • Just because the distribution check is not cashed does not mean the the solo 401k trustee can skip the mandatory 20% federal tax withholding that applies at time of the solo 401k distribution.
  • If the distribution check is not cashed, the solo 401k trustee is still required to report the distribution on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (reporting is required for distributions of $10 or more).

Certain Rules Apply to Distributions From 401k Plans Including Solo 401k Plans

While distributions may be made from 401k plans including owner-only retirements plans such as solo 401k plans, triggering events (e.g. attainment of certain age and no longer employed), federal tax withholding and reporting applies. To learn about the solo 401k distribution rules including how to submit the mandatory federal taxes to the Department of the Treasury, VISIT HERE.

Using Roth IRA as Rainy Day Fund

In addition to being a savings vehicle for retirement, a Roth IRA can also be used as a rainy day/emergency savings fund because of the unique rules that apply to Roth IRAs vs other types of IRAs (e.g., Traditional IRA, SIMPLE IRA and SEP IRA).

Unique Roth IRA Rules

You always have access to your Roth IRA funds, with contributions always being tax  and penalty free when distributed.

Unexpected Expenses

In May of 2019, the Federal Reserve release their annual survey (it is released each year since 2013), “Report of the Economic Well-Being of U.S. Households,” and found that a large number adults are not prepared to deal with modest unexpected expenses such as the following:

Healthcare Expenses

A Roth IRA can also be used to pay unexpected  medical emergency expenses. The above study also found that out-of-pocket spending for health care is a common unexpected expense that can be a substantial hardship for those without a financial cushion. As with the small financial setbacks discussed above, many adults are not financially prepared for health-related costs. During 2018, one-fifth of adults had major, unexpected medical bills to pay, with the median expense between $1,000 and $4,999. Among those with medical expenses, 4 in 10 have unpaid debt from those bills.

In addition to the financial strain of additional debt, 24 percent of adults went without some form of medical care due to an inability to pay, down from 27 percent in 2017 and well below the 32 percent reported in 2013. Dental care was the most frequently skipped treatment (17 percent), followed by visiting a doctor (12 percent) and taking prescription medicines (10 percent).

Alternative-The Solo 401k Participant Loan

If you don’t have a Roth IRA then the solo 401k plan may be your next best option to access funds to pay for unexpected expenses. Not everyone qualifies to open a solo 4o1k plan. Solo 401k Eligibility Requirements: In a nutshell you need to be performing at minimum part-time self-employment activity in order to open and continue with the Solo 401(k) plan, and it has to be active income versus passive investment income. One way to distinguish passive income versus active income is that active income is subject to Social Security taxes were as passive income is not because it’s considered capital gains income. Visit Here to learn more about the solo 401k eligibility requirements.  If you qualify for a solo 401k plan, you can then transfer your former employer retirement plan as well as IRAs (except for Roth IRAs) to a solo 401k plan and subsequently take a solo 401k participant loan.

Solo 401k Participant Loans: A solo 401(k) plan allows for participant loan. Please see the following for more information on the solo 401k loan process and rules.


Yes a Solo 401k Plan May Invest in Farmland

Just like a solo 401k plan can be invest in family homes, commercial real estate, apartment buildings and rentals, a solo 401k plan may also be invested in farmland provided you open the retirement account with a self-directed solo 401k plan provider.

We have seen an uptick in inquiries for investing solo 401k funds in farmland since 2015.  We suspect this is mostly because global demand for food keeps climbing due to the rising human population which is expected to hit 10 billion by 2050.

Unlike fixer uppers, most investors who invest in farmland (whether via their solo 401k retirement account or personal funds)  buy land and hold it for extended periods of time to get the most return and because the farm economy goes in cycles.

Taking Title

Once you search for and identify the land, perform the due diligence, and decide to invest, the land will need to be titled in the name of the solo 401k plan.

Here is an example: 

John Smith, Trustee of the Chargers Retirement Trust

Flow of the Solo 401k Funds

At time of the land purchase, the funds will need to flow from the solo 401k bank account to the seller. The funds are generally sent via wire.

As far as ongoing expenses, the payment of taxes and insurance will need to be paid using solo 401k funds since the land is owned by the solo 401k plan.  Also, the lease payments and when you sell the land, the proceeds will need to flow back to the solo 401k bank account and will grow on a taxed deferred basis until solo 401k distributions commence (usually at retirement).


SEC Adopts New Rules for Brokers & Investment Advisers & Require Form CRS

While My Solo 401k Financial does not sell investments, offer investment advise or custody funds for our self-directed solo 401k clients, many of our solo 401k clients hire brokers and investment advisers for their solo 401k plans.  As such, solo 401k participants should familiarize themselves with the new SEC rules applicable to brokers and investment advisers  as well as the new Form CRS Relationship Summary (the SEC created a list of questions for investors to ask their advisers-see list of questions below).

On June 5, 2019 The Securities and Exchange Commission voted to adopt new rules governing the conduct of broker-dealers and investment advisers. Specifically, these actions include new Regulation Best Interest (known as Reg BI), the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940.Effective dates: The rules and form are effective September 10, 2019.

What is an Investment adviser?

  • Investment advisers don’t charge a commission. Instead, they  charge a fee; provide ongoing oversight, or continuous “monitoring,” of your investments.

What is a broker-dealer adviser?

  • Brokers generally work for a broker-dealer and receive a  commission if you buy what they recommend and don’t usually monitor your investments.

Here Are Some of the New Requirements

To require registered investment advisers and registered broker-dealers  (together, “firms”) to provide a brief relationship summary to retail investors.

The relationship summary is intended to inform retail investors about: the types of client and customer
relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services.

Whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm.

The relationship summary will also reference, a page on the Commission’s investor education website,, which offers educational information to investors about investment advisers, broker-dealers, and individual financial professionals and other materials.

Retail investors will receive a relationship summary at the beginning of a relationship with a firm, communications of updated information following a material change to the relationship summary, and an updated relationship summary upon certain events. The relationship summary is subject to Commission filing and record keeping requirements.

List of SEC Questions Required to be Included in Form CRS Relationship Summary

If you hire an investment adviser or broker for your solo 401k or IRA investments, you need to get answers to the following questions which will need to be provided by investment advisers starting June 30, 2020.

Given my financial situation, should I choose a brokerage service? Why or why not?

 Given my financial situation, should I choose an investment advisory service?

Why or why not?

Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?

What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?

Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?

How might your conflicts of interest affect me, and how will you address them?

As a financial professional, do you have any disciplinary history? For what type of conduct?

Participation in Retirement Plans Including Solo 401k continues to Increase

Since 2009 when My Solo 401k was first established, we have seen the number of new solo 4o1k plan clients increase by over 20% each year, so it is not surprising that on August 5, 2019 the Investment Company Institute (ICI) released  a study  where they found nearly two-thirds of workers between ages 26 and 64 participate in an employer plan, either directly or through a spouse.

Here are Some Findings From the Study

  • When you don’t take into account younger an lower-income workers, the participation rate rises to more than three quarters (78%).
  • Younger workers and lower-income workers delay saving for retirement for the following reasons:
  1. Younger workers are typically focused on saving for goals other than retirement, such as saving to buy a house, pay for education, or start a family. They may rationally choose to delay saving for retirement until they’re older, when earnings are typically higher and they have taken care of other priorities.
  2. Workers who remain low income throughout their careers may rationally choose not to save for retirement at any age, as it would reduce the resources available to address more immediate financial needs, and Social Security benefits alone will replace a high percentage of their earnings.
  • However, as the workers get older participation in employer plans increases. Thu study shows that 55 percent of workers between the ages of 26 to 34 either participated in an employer plan or had a spouse who participated. This rate increases to 69 percent for workers who were 45 to 64 years old.

How Much You Make Drives Participation

Not surprisingly, the study finds  that higher-earning workers are more likely to participate in an employer plan. Among workers between 26 and 64 years old in 2016,  participation wen up based on the following:

  • 22 percent for those who earned less than $20,000
  • 67 percent for those who earned $40,000 to $50,000
  • 85 percent for those who earned $100,000 or more

Defined Benefit Plan Participation Down to 11 Percent

It is not surprising that the adoption of defined benefit plans (DBP) has dwindled to 11 percent as of 2017 according to a study (Tracking the Shift in Private-Sector, Employment-Based Retirement Plan Participation From Defined Benefit to Defined Contribution Plans, 1979-2017) performed by the Employee Benefit Research Institute (EBRI).

What is a Defined Benefit Plan?

Defined Benefit Plan, also known as a traditional pension plan, promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as the participant’s salary, age and the number of years he or she worked for the employer. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service.

More Findings From the EBRI Study

  • Participation in defined benefit (DB) plans has decreased from 38 percent in 1979 to 11 percent in 2017
  • Instead, more workers are participating in defined contribution (DC) plans which drastically increased from 17 percent to 46 percent.

Solo 401k Plans Fall Under the DC Umbrella

We are not surprised to find that participation in defined benefit plans has gone down. Many of our solo 401k clients have been transferring their former employer defined benefit plans to their solo 401k plans, which falls under the DC category, over the past 10 years.

Which Money Managers Manage Most Defined Contribution Plans

Recently, Pension & Investments released the 2018 top 10 defined contribution money managers and it was not surprising to see the usual suspects being that we have helped a lot of clients transfer former employer 401k plans to the self-employed solo 401k plan. Whiled other retirement plans such as 403b, defined benefit plan, 457b as well as IRAs are do not technically fall under the defined contribution plan category, the top 10 money managers also custody such accounts and they can also be transferred to a solo 401k plan provided the individual meets  the solo 401k eligibility requirements outlined here.

Here are some of the top 10 defined contribution money managers of 2018:

Fidelity Investments



T Rowe Price

For a full list, visit here.

Closing Comments

It is not surprising to not see any self-directed  solo 401k 401k companies listed on this list being that less than less than 3% of retirement funds are invested in alternative investments such as real estate, tax liens, metals, private equity, to name few. However, many of our self-directed solo 401k clients do use Fidelity Investments to hold their funds which can then be invested in equities as well as real estate.


Required Minimum Distributions After Solo 401k Plan Participant Dies

After the solo 401k owner/participant dies, required minimum distributions must continue.  If not done, the beneficiary could face penalties and taxes.

Understanding the Required Beginning Date

Because a solo 401k plan is considered an  employer-sponsored retirement plan, the solo 401k  participant is required to start taking  annual distributions—required minimum distributions (RMDs)—in the year that he or she turns age 70½. An RMD is the minimum amount that an account owner must receive from a retirement plan such as a solo 401k plan each year. If you have multiple 401k plans (e.g., a solo 401k plan and a 401k with a current or former employer), the IRS rules require separate RMDs calculated and distributed from each plan NOT  just one plan. Also,  the IRS rules IRS requires that RMDs calculated separately from each IRA and solo 401k plan as well as distributed from each account.

Prior: When the solo 401k owner/participant dies before age 70 1/2 (the required beginning date for RMDs), a year of death distribution DOES NOT apply so the beneficiary is not required to make a distribution from the solo 401k plan in the year of death.

After: However, If the solo 401k owner/participant reached age 70 1/2 prior to her death and did not take the RMD before her death, the solo 401k beneficiary will be required to take the RMD  by December 31 of the year of death.

Multiple Beneficiaries

In some cases the solo 41k owner/participant may have named multiple beneficiaries, which means each beneficiary is required to take part of the RMD amount. The beneficiary election form will need to be reviewed to determine each beneficiaries share. Even if willing, the rules do not permit one beneficiary to take the full RMD amount.

Form 1099-R Reporting

The RMD is reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., as a death distribution under each beneficiary’s name and Social Security number, entering code 4, Death, in Box 7.

50 Percent Penalty for Missed RMDs

As previously stated, the solo 401k beneficiary(ries) takes on the onus for timely taking the yer of death RMD. If not processed timely,  a 50 percent excess accumulation penalty tax applies to the amount that should have been taken by December 31 in the year of death. The IRS may waive the 50 percent penalty if the RMD was missed for a valid reason. Such waiver can be applied for by filing Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and an explanation letter must be attached.


Solo 401k for a Part-Time Pilot


I have been considering opening a solo 401K as a real estate investment vehicle and funding it via a previous employer 401K.

I am currently employed full-time as a pilot but have the opportunity to do part-time contract work (1099) as a pilot with two separate companies; most likely under my own name / sole proprietor.

Would that 1099 contract employment qualify me for a solo 401K?


The activity you described would certainly qualify for a solo 401(k) provided that you don’t have any full-time W-2 employees working for you.  A solo 401k can be adopted even if the individual works for a full-time W-2 employer provided the individual also performs at minimum part-time self-employment activity under their own own-only business . Participating and contributing to multiple retirement plans such as a full-time employer 401k plan and an owner only 401k (solo 401k) is a good way to super charge your retirement savings which is attractive to those who got started late in saving for retirement.

Yes 1099 contract work qualifies as self-employment income which would need to be reported on Form Schedule C.  A solo 401k can be sponsored by a sole proprietor, LLC, partnership, S-corp and C-corporation as long as the business owner is performing earned income activity.

Generally, the term “earned income” is defined to mean the individual’s net earnings from self-employment activities in a trade or business. (IRC 402(a)). In addition, the earned income must arise from the individual’s personal services and the personal services must be a material income-producing factor. (IRC. 401(c)(2)(A)(I); Reg. §1.401-10(c)(1). Income from the disposition of certain types of property is also deemed earned income. The purpose of the earned income rules from self-employment is to provide a solo 401k plan for the self-employed so that they can save for retirement, and to exclude inactive owners whose income is derived only from investments as investment income is not considered “earned income.”

Lastly, yes a previous employer 401k may be transferred to a solo 401k plan. In some cases some of the funds in an existing employer 401k plan can be also be transferred to a solo 401k plan.

All of the following types of tax-qualified retirement savings can be rolled or transferred into a Solo 401k plan.

  • Traditional IRAs
  • SEP IRAs
  • Rollover or Conduit IRAs
  • SIMPLE 401(k) Plans
  • 401(k) Plans
  • Profit Sharing Plans
  • Money Purchase Pension Plans
  • Defined Benefit Plans
  • Government 457(b) Plans
  • 403(b) Plans
  • Thrift Savings Plans (TSP)
  • About MySolo401k

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