The IRS does not define what you’re allowed to invest in through your solo 401k. Anything goes with a few exceptions. A solo 401k account is not allowed to invest in collectibles, S corporation stock, and life insurance investments.
The solo 401k comes with total investment freedom. Unlike something like a traditional 401k, you’re not limited in what types of investments you’re allowed to make through your plan.
The IRS does not define specific assets that a solo 401k is allowed to invest in.
However, the they do list a few things that you’re not allowed to invest in.
This guide outlines each prohibited investment type as defined by the IRS. It clarifies what you can and can’t invest in through your solo 401k. You’ll also find a list of some of the most common investments that people make through their plans.
Things you CANNOT invest in with a solo 401k
Since you’re allowed to invest in almost any asset, it might be easier to just show you what you CAN’T invest in first.
The IRS does not allow solo 401k plans to invest in collectibles. If you do invest in any collectibles through your account, they’ll be treated as a distribution.
Put another way, it doesn’t get counted an an investment (asset), the amount you spent on it gets counted as you making a withdrawal and purchasing it.
As outlined in IRC section 408(m)(2), the following are considered as collectibles:
- Any piece of art
- Rugs and antique items
- Metals and gems
- Stamps and coins
- Any other tangible personal property specified by the secretary of the treasury.
S corporation stock
You’re allowed to invest in almost any company’s stock through your solo 401k. They don’t need to be public companies either. You can own a percentage of a sole proprietorship, partnership, LLC, or C corporation.
The only exception is that you cannot purchase or own any S corporation stock.
The reason is: Any retirement account acts as a trust. Any entity that purchases or owns S corporation stock is considered as a shareholder. Trusts are not allowed to be shareholders, as per IRC section 4975 (16).
Life insurance investments
Some life insurance plans, known as cash value life insurance, act as permanent policies and are built to accumulate in value over time. As a result, they’re considered as investments, and some people even treat it as a retirement account.
The solo 401k is prohibited from investing in life insurance contracts, as per IRC section 408(a)(3).
You can still get life insurance, as long as it’s purpose is just to act as insurance. They cannot be investments.
Things you CAN invest in with a solo 401k
Aside from items in the prohibited list above, the solo 401k has total investment freedom. As mentioned earlier, the IRS doesn’t have a specific list of allowable investments. As long as they’re not prohibited, you’re probably allowed to invest in it.
Here’s a full list of common investments made through a solo 401k:
- Individual stocks of companies
- Mutual funds
- Certificates of deposit
- Foreign currencies
- Private equity
- Crowd funding deals
- Precious metals
- Tax liens and deeds
- Residential and commercial real estate
- REITS, flipping houses, foreclosures
Pick and choose investments for your Roth and traditional solo 401k
A solo 401k has both a traditional (pre-tax) and a Roth (after-tax) account. Not only do you get full freedom over what you can invest in, you get to choose which investments are made through a Roth account, and which ones are made through a traditional account.
If you don’t know the specific differences between the two account, you can read this guide.
The short breakdown is that with the traditional account, you contribute with pre-tax dollars and pay taxes when you withdraw. With the Roth account, you contribute with after-tax dollars, but you pay no taxes when you withdraw.
Because one gets tax-free withdrawals and one doesn’t, you can choose to separate your investments by potential expected returns at the age of withdrawal.
What you can and can’t invest in with a solo 401k is fairly straightforward (unlike prohibited transactions). In fact, the IRS doesn’t even provide an official list of allowable investments since most assets are allowed.
There aren’t many things that you can’t invest in, either. Besides collectibles, S corporation stock, and insurance (as investments), you’re free to invest in whatever you like. Whether you’re investing in crypto, stocks of companies you like, precious metals, or writing a check into your friend’s new startup, you have full freedom.
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