Alternative Investments in Your Solo 401k

A Solo 401k isn't limited to the stock market. There is no IRS list of approved investments for retirement plans^[1], so what your plan can hold depends on its plan document and on the tax rules below.

The catch: the free brokerage plans we review (E*TRADE, Fidelity, Schwab, and Ascensus) only hold what's on their own platforms. To hold alternative assets you need a self-directed Solo 401k from a specialist provider, which charges setup and ongoing fees.

A Solo 401k's assets are held in a trust that must be used only for the benefit of the plan's participants^[5]. Checkbook control is the industry name for a setup where you serve as that trustee and the plan has its own bank account, so you can write a check or send a wire for a deal without a custodian approving each transaction^[3][2].

That speed is why real estate and private-deal investors look for it. The trade-off is responsibility: as trustee you're a fiduciary, which makes you a disqualified person, and keeping every transaction within the rules is up to you^[6].

A Solo 401k can’t sell, lease, lend to, buy services from or otherwise deal with a disqualified person: you as trustee, your business, and your spouse, ancestors, lineal descendants and their spouses, among others. A disqualified person who takes part owes an excise tax of 15% of the amount involved for each year, rising to 100% if the transaction isn’t corrected.^[6][1]

The Code prohibits these dealings between the plan and a disqualified person^[6]:

• Selling, exchanging or leasing any property
• Lending money or extending credit
• Furnishing goods, services or facilities
• Transferring plan income or assets to, or using them for, a disqualified person
• A fiduciary dealing with plan assets in their own interest
• A fiduciary taking payment from anyone dealing with the plan in a plan transaction

Disqualified persons include any fiduciary (you, as trustee), your business, a 50% or greater owner, and members of their families: a spouse, ancestors, lineal descendants and the spouses of lineal descendants^[6]. So buying a property you already own, renting a plan property to your child, or paying yourself to fix it up are all prohibited.

The penalty is an excise tax on the disqualified person. That differs from an IRA, which stops being an IRA altogether when its owner engages in a prohibited transaction^[4].

A 401(a) trust, including a Solo 401k's, owes unrelated business income tax (UBIT) on income from a trade or business it regularly carries on that isn't substantially related to its exempt purpose^[7]. Owning an operating business directly or through a partnership is the usual way a plan runs into it. A specific deduction of $1,000 applies, and the plan must file Form 990-T if its gross unrelated business income is $1,000 or more^[7].

Rent from real property is normally excluded from UBIT, but income from debt-financed property is pulled back in, in proportion to the debt^[7][8].

Real estate exception for 401k plans. Debt that a qualified trust under section 401 takes on to buy or improve real property generally isn't treated as acquisition debt, so it doesn't create debt-financed income^[8][7]. IRAs aren't on the list of organizations that get this exception. It doesn't apply if, among other conditions^[8]:

• The price isn't a fixed amount set at purchase
• The debt or its payments depend on the property's income or profits
• The property is leased back to the seller or a party related to the seller
• The plan buys the property from, or leases it to, the employer or certain other disqualified persons, or one of them finances the purchase
• The property is held through a partnership that doesn't meet extra tests

The right provider depends on which assets you care about most. Two self-directed specialists, in their own words:

• Rocket Dollar — checkbook control to write checks or wire funds as plan trustee, with unlimited transactions included, and real estate from rentals to syndications^[3].
• Nabers Group — checkbook control built into the plan with no separate LLC, “invest in virtually anything,” and no transaction fees^[2].

Want the full picture, including the free brokerage options? See our Solo 401k provider comparison.