Prohibited Transactions Solo 401k

Self-Directed Solo 401k Prohibited Transactions Review and Illustrations


Even though you can invest your solo 401k (referred by other names such as small business 401k, self-employed 401k, owner only 401k, Solo K, etc.) in many types of alternative investments (e.g., real estate, notes, LLC, Gold, etc.), you still must be careful not to engage in prohibited transactions when investing your Solo 401k. A transaction is deemed prohibited if it benefits you, as trustee/participant of the Solo 401k plan, or other disqualified persons such as your beneficiary, spouse, son, daughter, father or mother, to name a few.

Simply stated, any transaction that does not only benefit your solo 401k, but instead you personally or someone you know who is defined as a disqualified individual by the IRS will be deemed prohibited.


Prohibited transactions are often referred to as “self-dealing.”

This means your Solo 401k/self-directed 401k is prohibited from engaging in transactions that benefit you, your direct family, or your business. The negative consequences to your Solo 401k include tax penalties and loss of tax deferred status. Simply put, prohibited transactions are investments or forms of self-dealing that would put the government at risk of losing its tax on the solo 401k. To be clear, prohibited transactions only occur when funds within your solo 401k are used improperly. You can always withdraw from your solo 401k, pay the tax (and penalty if you are under 591/2 and no exceptions apply) and spend the money any way you wish, because now the government got their tax and the money you are spending is no longer solo 401k money. They worry when you spend money within your solo 401k on certain items because they think you might just be planning to beat them out of the tax that you would have paid on a solo 401k distribution.

Prohibited transactions examples

Real estate

The rules prohibit your Solo 401k / Self-Directed 401k retirement account from holding property in which you or disqualified persons currently occupy or plan to occupy. In other words, the property must be for investment purposes only.


A lease between Solo 401k plan and daughter of Solo 401k plan trustee

Matt’s Solo 401k owns an apartment building. One of the tenants is his daughter Susan. As a party-in-interest, Susan’s leasing of the apartment is a prohibited transaction because the apartment is Solo 401k asset.

Private company

Your Solo 401k / self-directed 401k can’t purchase private shares (for example, company shares that are not traded in a public exchange such as New York Stock Exchange or NASDAQ) in your own business or of a disqualified person (e.g., your son, daughter, father and mother to name few).


The purchase of shares by Solo 401k in your own corporation

John personally owns 15% interest in a private corporation that he manages. Two years later he decides to use his Solo 401k plan to purchase Nick’s, another shareholder, 20% worth of shares. This is a prohibited transaction because John already owns and manages the corporation.

Promissory notes

You can’t loan your Solo 401k or self-directed 401k funds to a disqualified person such as your father, mother, son, or daughter for example.


promissory note to daughter

Tina loans $50,000 from her Solo 401k to her daughter charging her 10% interest per year. This is considered a prohibited transaction because Tina’s daughter is considered a disqualified person.

Roundabout transactions

A roundabout transaction occurs when the Solo 401k participant/trustee structures one or more transactions with the purpose of making a prohibited transaction.

For example, you loan money from your Solo 401k /self-directed 401k to your friend (who’s not a disqualified person), and he or she then turns around and loans the same funds to your mother. This is considered a roundabout transaction and viewed by the IRS as not only prohibited but also as an attempt to evade the tax rules because you can’t loan money from your Solo 401k to your mother, even if you first loan it to your friend (who’s not a disqualified person), who then loans it to your mother.

Disallowed investments

For the most part you can invest your Solo 401k / self-directed 401k in any investment type with the exception of the following:


A collectible includes a work of art, rug, antique, metal, gem, stamp, certain coins, alcoholic beverage, and musical instruments to name a few. The U.S. Treasury has the power to add to this list any other tangible personal property.

Click here to read our blog about the negative tax consequences of investing your Solo 401k in collectibles.

Disqualified persons

A “disqualified person” is defined as a fiduciary, you, a member of your family or any other entity such as a corporation, partnership, trust or estate that is 50% or more controlled by you or your family members.

For a solo 401k plan, you, the solo 401k owner, are a fiduciary. This is because you have discretion and control over the plan’s investments. In other words, you can’t blame it on the bank or solo 401k provider. If you misuse your solo 401k plan, it’s your fault.

The IRS considers the following as disqualified persons with respect to Solo 401k / self-directed 401k transactions:

  • Family members such as your father, grandmother (considered ancestors)
  • Your children, grandchildren (considered lineal descendents)

For a full list of disqualified persons visit here 

Tax Consequence of prohibited transaction

Whether you intentionally or accidentally subject your Self-Directed Solo 401k to a prohibited transaction, the tax consequences are the same—your Solo 401k will generally be subject to federal taxes, possible state taxes and penalties.

In sum, thread carefully when investing your Solo 401k, also commonly referred to as a Self-Directed Solo 401k, Self-Directed 401k, Individual 401k, Individual K, Single K, Single 401k or Self-Employed 401k, because of the many different possible ways of structuring alternative investments such as real-estate, private investments, promissory notes, etc.

Additional Information on Prohibited Transactions

The prohibited transaction rules are found both in the Internal Revenue Code (IRC) and in ERISA.

  • Click here to learn about prohibited transactions under ERISA.
  • To learn about prohibited transactions under Internal Revenue Code click here.

The following pages also cover the prohibited transactions rules:

A Primer on Prohibited Transactions

Can’t Personally Guarantee a Loan to Your Solo 401k Plan

Don’t Personally Improve Solo 401k Owned Real Estate

No Self-Dealing Allowed

No Personal Use of Solo 40k Owned Assets

Solo 401k Prohibited Transaction Analysis

Sample List of “Qualified” vs “Disqualified” Persons

Who Should Not Open a Self-Directed 401k Plan?

  • If you plan to perform sweat equity work on the property, you should not open a self-directed 401k plan.
  • If you plan to draw a salary for managing (e.g., collecting rent checks for deposit into the 401k plan, hiring contractors for performing repairs  or improvements on the 401k owned property, seeking tenants, etc.) the self-directed 401k owned property, you should not open a self-directed 401k plan.
  • You plan to use the self-directed 401k owned property for personal or business use even if you pay a fair market rent rate, you should not open a self-directed 401k.
  • You plan to have your children or parents use the self-directed 401k owned property for personal or business use even if a fair market rate rent is paid, you should not open a self-directed 401k.
  • You or your children or parents later plan to vacation in the self-directed 401k owned property.
  • You plan to sale, exchange or deposit real estate that you own personally or through your business, or your parent or children personally own or through their business into the self-directed 401k plan.

Exchange Promissory Note Investment QUESTION:

I currently have a Trust Deed Investment with a third-party borrower for $350,000 held by me in my individual name. The trust deed is paying me interest at a rate of 12%. The trust deed is a first trust deed collateralized by a property in Denver. I have held this trust deed investment since November 2015. The broker that has administered the trust deed investment with me is located in Tampa. They are my broker in this transaction. I would like my Solo 401k trust to hold this trust deed with instead of me. I just want to make sure this is OK. The Trust Deed investment note will then be in the name Solo 401k Trust and interest will be paid by the third to my solo 401k trust after the close of escrow.

Such investment would result in a prohibited transaction. You cannot assign an investment that you personally own to your own solo 401k plan.

This would be in violation of the following rule.
“Sale, exchange, or leasing of property between a plan and a disqualified person.”
 The plan is your solo 401k, and you are a disqualified party. Other disqualified parties include the following.
  • Your Spouse
  • Your natural parents and/or your adoptive parents
  • Your natural grandparents
  • Your natural children and/or your adopted children
  • The spouses of your natural children
  • Any fiduciary of your Solo 401k
  • Any people providing services to your Solo 401k–such as your stockbroker–as well as his employees and both his and his  employees’ blood relatives
  • Your Solo 401k trust document provider or administrator

Investment Type QUESTION:

Can I invest my solo 401k in exotic cars? watches?

Good question. The IRS considers investing in cars and watches as disallowed investments. For a list of disallowed solo 401k investments, VISIT HERE.

Investment Real Estate Swap QUESTION:

I have a younger brother who is interested in learning more about solo 401k accounts. We are each interested in buying real estate as our asset within our solo 401k accounts. My brother owns investment property. Can my Solo 401k Trust buy his personal investment property? If so, can my Solo 401k Trust hire my brother's property management company to manage the property after my solo 401k trust purchases it? I also personally own investment property. After my brother sets up his own solo 401k trust, can his solo 401k buy my investment property? We are not buying each others' personal residence...we are buying investment properties from each other. Is that compliant with the rules?

Good question. However, such transaction would run afoul with the prohibited transaction rules. While it is true that siblings are not disqualified parties on the surface, what would make such transaction prohibited is that the siblings would be using their respective solo 401k plans to swap their personal investment properties.

Buying or Distributing Solo 401k Real Estate QUESTION:

A few years ago, my Solo 401K Trust bought a condo. It has been rented since acquisition and has proven to be a good investment.
Do I understand correctly that if we wanted to convert this to a personally owned condo in 2018, we would be liable for paying tax on the full fair-market value of the condo at the time? The condo is worth somewhere around $300K, so if that's the case, the tax impact would be significant.
Are there alternatives? Would there be any way to spread the tax due over a course of time?
Finally, would buying it from the trust be an option? Or would that be a prohibited transaction?

Excellent and popular questions. First, no you cannot buy property such as a condo from your own solo 401k plan as that would result in violation of the following prohibited transaction rule.

“Sale, exchange, or leasing of property between a plan (e.g., Solo 401k plan) and a party in interest (the solo 401k trustee).

However, it would not be prohibited if you take an in-kind solo 401k distribution of the property (the condo) since the rules allow for distributions in the form of an asset instead of cash. You can also spread the tax liability by taking partial in-kind distributions of the property. You will need to get the property appraised each time you process a partial distribution, however.

Roundabout Prohibited Transaction QUESTION:

If I lend my brother money from my solo 401k for 3 years with 12% interest, can my brother then turn around and loan those funds to me personally?

While the solo 401k investment rules allow for promissory note investments, this transaction would result in a “roundabout” prohibited transaction because the rules do not allow for a transaction that is prohibited to be done indirectly. In other words, while your brother is not a disqualified party from a solo 401k investment perspective, if he were to turn around and loan those borrowed funds or other funds to you, the IRS would view as you essentially processing a promissory note from your own solo 401k which is prohibited. Don’t confuse this rule with the solo 401k participant loan rules, though. To learn more about the difference between a “promissory note investment” and a solo 401k participant loan” CLICK HERE.

Note Investment with Sister-in-law QUESTION:

Am I able to make a personal loan to an individual from my solo 401k? she is a sister-in-law, whom I don’t believe is a disqualified individual. Just wanted to check to see if this was allowed?

Correct that a sister-in-law is not a disqualified party from a solo 401k investment perspective. To learn more about the promissory note rules, CLICK HERE.

Guarantor on Loan to Solo 401k Trust QUESTION:

The solo 401k trust has purchased a piece of real property using cash from the trust, titled in the name of the solo 401k trust.
Can the solo 401k trust obtain a mortgage secured by the property ?
The lender wants me to sign as a personal guarantor on the loan. Can I do that?



Good question and the answer is no that can not be done.
Reason being, you are a disqualified person since it is your solo 401K plan.
What is more, any loan to the solo 401k must be non-recourse and the proceeds have to be used towards the purchase of real estate by the plan.

Director QUESTION:

I am looking to invest in a Berlin based startup using my Solo 401k Acct.  Are there any issues with that and/or special reporting criteria?

Equity stake // only 0.0017 of company ie less than a percent
Not an employee but considering being on board of directors
Company is in medical tourism business


1. You cannot be and officer, director, or 10 percent or more shareholder, or highly compensated employee as this would run afoul with the prohibited transaction rules.
2. When a solo 401k invests via an equity investment into a business that offers good or services, this will trigger UBIT.

Reimburse QUESTION:

I bought a buy and hold property this year and wanted to set up the solo 401k to reimburse myself for the purchase and use the funds to fund the renovations.
Is that possible?


What you described below is not possible as it would constitute a prohibited transaction. The best you could do is take a loan from your solo 401(k) (up to 50% of the balance not to exceed $50,000) and then use the proceeds to “pay yourself back”. However, you cannot transfer this property to the solo 401(k) under any scenario.

Invest in Cars QUESTION:

I know from reading your website, that collectibles (watches, collectible coins) are not a valid use of 401k. Can investment-grade vehicles be purchased and refurbished for investment?  Does the fact that a vehicle has a TITLE (like real estate) make it a legitimate solo 401k investment?


A Solo 401k may passively invest in permissible investments but can’t own & operate a business, including buying & refurbishing motor vehicles.  You could borrow through a solo 401k participant loan up to 50% of the balance of your account (not to exceed $50K) and then use those funds however you wish including buying & refurbishing motor vehicles.

Transactions Between Two Companies QUESTION:

Quick question: are transactions between:

1) a company (A) that’s 100% owned by my solo 401(k) and;

2) a company (B) that’s 100% owned by me


So for instance, if company A sold products to company B, would that be a prohibited transaction?


A Solo 401k may passively invest in a business that you and any other related persons have no other relationship with (i.e. you are not owners, employees, directors, lenders, vendors, etc.).  This means that a Solo 401k can’t operate a business and thus cannot own 100% of a business.  It also means that you (or a business that you control) can’t transact with a business that is owned by your Solo 401k.

Purchase Car for Business Use QUESTION:

Is it possible to purchase a car through my Solo401k and then lease it to my real estate LLC? I’ll be replacing my business car this year and am considering options.


Good question. One, the regulations do not allow for investing retirement funds including solo 401(k) plans and IRAs in physical cars. Second, the rules do not allow  the solo 401(k) participant nor his or her self-employed business to use an asset of the solo 401k plan.


I’m thinking about adding an art investment to my solo 401k (a new purchase with existing 401k funds).  What rules do I need to follow and records keep to make sure the investment is made properly and compliant with Solo 401k rules?


The regulations do not allow for investing solo 401(k) or IRA funds in works of art. The IRS considers this type of investment as a disallowed investment (collectible).  If a solo 401k invests in works of art, it will result in a taxable distribution.Here are some examples of collectibles:

  • Artwork,
  • Rugs,
  • Antiques,
  • Metals – with exceptions for certain kinds of bullion,
  • Gems,
  • Stamps,
  • Coins – (but there are exceptions for certain coins),
  • Alcoholic beverages, and
  • Certain other tangible personal property.

Purchase Land from Solo 401k QUESTION:

I am looking to build a duplex outside of tax accounts, but am thinking about buying the land initially with my 401K assets until a later date when enough money is had to fund the project.
Can I buy the land with my solo 401K and then at a later date buy it off of myself with assets from an unrelated LLC?  The cash I paid for the land would then be returned to my 401K and the property will be owned by a LLC unrelated to my 401K Trust.


No. The sale of an asset by your 401(k) to an entity that you own or control would constitute a prohibited transaction. Theoretically, you could take the land as an in-kind distribution in which case you would have to pay taxes and penalties on the value of the land at the time the distribution and transfer the title from the solo 401(k) into your name personally. In that case, you would certainly want a robust valuation to be able to demonstrate the fair market value of the property.
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