by
Garrett Clark
Retirement Planning
How to Get in Trouble With Your Solo 401(k)
7 Costly Mistakes That Could Ruin Your Retirement Plan
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A Solo 401(k) is one of the most powerful retirement tools available to freelancers, small business owners, and side hustlers. It combines high contribution limits, flexible investment options, and major tax benefits, making it a top choice for self-employed individuals looking to grow their wealth.
But with that power comes responsibility.
The IRS has strict rules about what you can and cannot do with your Solo 401(k). Break those rules—even unintentionally—and you could lose your tax-deferred status, face steep penalties, or even have your entire retirement plan disqualified.
This blog covers the most common prohibited transactions and mistakes people make with their Solo 401(k)—and exactly how to avoid them.
1. Taking Early Distributions Without a Qualifying Reason
What People Do: They dip into their Solo 401(k) early to cover personal expenses—maybe a car repair, vacation, or emergency fund.
Why It’s a Problem: Unless you meet specific IRS exceptions (like reaching age 59½, disability, or certain hardships), early distributions from a Solo 401(k) are subject to a 10% penalty on top of regular income taxes. If you withdraw $20,000 early, expect to lose thousands to the IRS.
What to Do Instead:
Explore the Solo 401(k) loan option (up to $50,000 or 50% of your balance).
Avoid early distributions unless necessary and qualified.
Work with a tax advisor before pulling any money to understand the tax impact.
2. Buying Real Estate… That You Benefit From Personally
What People Do: They use their Solo 401(k) to buy a rental property, vacation home, or land and then manage it themselves, live in it part-time, or allow relatives to stay there.
Why It’s a Problem: This violates the self-dealing rule, one of the IRS’s most strictly enforced regulations. You cannot benefit—directly or indirectly—from assets your 401(k) owns. That includes personal use, discounted family rentals, or even doing repair work on the property.
Real Example: Someone bought a property with their Solo 401(k), then used personal funds to furnish it. That’s a prohibited transaction, and the IRS disqualified the entire account.
What to Do Instead:
Only purchase investment properties with no personal use.
Hire third-party property managers and contractors—don’t fix the sink yourself.
Keep strict records proving it’s an arms-length investment.
3. Mishandling Precious Metals
What People Do: They buy gold or silver with their Solo 401(k)—but store it at home or invest in collectible coins.
Why It’s a Problem:
The IRS allows precious metals, but only approved bullion held in qualified depositories.
Storing metals at home is seen as constructive receipt, which makes it a distribution, triggering taxes and penalties.
Buying rare or collectible coins violates IRS rules completely.
What to Do Instead:
Stick with IRS-approved metals like American Eagles, Gold Maple Leafs, and certain bars with 99.5% purity.
Use a custodian or depository to store your metals.
Store in a locked safe in your home
A Solo 401(k) is one of the most powerful retirement tools available to freelancers, small business owners, and side hustlers. It combines high contribution limits, flexible investment options, and major tax benefits, making it a top choice for self-employed individuals looking to grow their wealth.
But with that power comes responsibility.
The IRS has strict rules about what you can and cannot do with your Solo 401(k). Break those rules—even unintentionally—and you could lose your tax-deferred status, face steep penalties, or even have your entire retirement plan disqualified.
This blog covers the most common prohibited transactions and mistakes people make with their Solo 401(k)—and exactly how to avoid them.
1. Taking Early Distributions Without a Qualifying Reason
What People Do: They dip into their Solo 401(k) early to cover personal expenses—maybe a car repair, vacation, or emergency fund.
Why It’s a Problem: Unless you meet specific IRS exceptions (like reaching age 59½, disability, or certain hardships), early distributions from a Solo 401(k) are subject to a 10% penalty on top of regular income taxes. If you withdraw $20,000 early, expect to lose thousands to the IRS.
What to Do Instead:
Explore the Solo 401(k) loan option (up to $50,000 or 50% of your balance).
Avoid early distributions unless necessary and qualified.
Work with a tax advisor before pulling any money to understand the tax impact.
2. Buying Real Estate… That You Benefit From Personally
What People Do: They use their Solo 401(k) to buy a rental property, vacation home, or land and then manage it themselves, live in it part-time, or allow relatives to stay there.
Why It’s a Problem: This violates the self-dealing rule, one of the IRS’s most strictly enforced regulations. You cannot benefit—directly or indirectly—from assets your 401(k) owns. That includes personal use, discounted family rentals, or even doing repair work on the property.
Real Example: Someone bought a property with their Solo 401(k), then used personal funds to furnish it. That’s a prohibited transaction, and the IRS disqualified the entire account.
What to Do Instead:
Only purchase investment properties with no personal use.
Hire third-party property managers and contractors—don’t fix the sink yourself.
Keep strict records proving it’s an arms-length investment.
3. Mishandling Precious Metals
What People Do: They buy gold or silver with their Solo 401(k)—but store it at home or invest in collectible coins.
Why It’s a Problem:
The IRS allows precious metals, but only approved bullion held in qualified depositories.
Storing metals at home is seen as constructive receipt, which makes it a distribution, triggering taxes and penalties.
Buying rare or collectible coins violates IRS rules completely.
What to Do Instead:
Stick with IRS-approved metals like American Eagles, Gold Maple Leafs, and certain bars with 99.5% purity.
Use a custodian or depository to store your metals.
Store in a locked safe in your home
"One wrong move with your Solo 401(k) can cost you your future—know the rules, or pay the price."
Garrett Clark
Director of Sales
4. Borrowing From the Plan… and Not Paying It Back
What People Do: They take a loan from their Solo 401(k) with the intention of paying it back, then forget, miss payments, or default altogether.
Why It’s a Problem: Solo 401(k) loans must follow strict rules:
Max loan: 50% of the account value or $50,000
Repayment within 5 years
At least quarterly payments
Market-based interest rate
If you default, the unpaid amount is treated as a taxable distribution, plus the 10% penalty if you're under 59½.
What to Do Instead:
Follow the loan repayment schedule with written documentation.
Set automatic reminders or bank drafts for your payments.
Only borrow what you’re confident you can repay within the timeline.
5. Doing Business With Disqualified Persons
What People Do: They lend money to or invest in businesses owned by their spouse, kids, or parents using Solo 401(k) funds.
Why It’s a Problem: The IRS prohibits transactions between your plan and disqualified persons, including:
You
Your spouse
Your parents and grandparents
Your children and grandchildren
Any business entities owned by the above
Doing business with these parties is a prohibited transaction and can disqualify your entire 401(k).
What to Do Instead:
Always transact at arm’s length with unrelated third parties.
Never use your plan to benefit yourself or family members directly.
When in doubt, consult a Solo 401(k) specialist or tax attorney.
6. Mixing Personal and 401(k) Funds
What People Do: They use the same bank account for personal and Solo 401(k) transactions, or swipe the wrong card for an expense.
Why It’s a Problem: This is called commingling, and it muddles the waters for recordkeeping. The IRS sees it as potential abuse and could reclassify those funds as distributed income, which is taxable.
What to Do Instead:
Set up a dedicated bank account and checkbook solely for your Solo 401(k).
Use separate payment methods to keep personal and retirement assets completely isolated.
Keep detailed records for every transaction, especially with alternative assets.
7. Failing to File IRS Form 5500-EZ
What People Do: They forget to file the required paperwork when their plan grows above $250,000 in total value.
Why It’s a Problem: The IRS requires Form 5500-EZ to be filed annually for Solo 401(k)s once total plan assets exceed $250,000. Missing it can result in penalties of $250 per day, up to $150,000.
What to Do Instead:
Monitor your plan’s value yearly (include contributions and growth).
Mark your calendar—Form 5500-EZ is due by July 31 each year.
Use a plan provider or CPA that helps with annual compliance filings.
What Counts as a “Prohibited Transaction”?
The IRS defines prohibited transactions broadly to cover any deal where you benefit from your retirement plan's assets. That includes:
Lending yourself money outside of a formal loan
Investing in a business you or your family controls
Using retirement funds for personal bills
Selling personal property (cars, land, collectibles) to your 401(k)
The penalties can be harsh: disqualification of the plan, taxes owed on the full balance, and penalties for underreporting.
Stay on the Right Side of the IRS
Solo 401(k)s are incredible tools—but they’re also tightly regulated. The flexibility to invest in real estate, precious metals, and private ventures is unique, but only if done by the book.
Here’s how to avoid common pitfalls:
Separate all personal and plan finances
Never transact with yourself or your family
Follow the loan and distribution rules strictly
Keep great records and file what’s required
When in doubt, ask a Solo 401(k) provider or tax professional who knows the landscape. A little caution now can save you thousands in taxes and penalties later.
Want expert help managing your Solo 401(k) without stepping on any tax landmines?
Visit 👉 Survival401k.com to get started with confidence.
4. Borrowing From the Plan… and Not Paying It Back
What People Do: They take a loan from their Solo 401(k) with the intention of paying it back, then forget, miss payments, or default altogether.
Why It’s a Problem: Solo 401(k) loans must follow strict rules:
Max loan: 50% of the account value or $50,000
Repayment within 5 years
At least quarterly payments
Market-based interest rate
If you default, the unpaid amount is treated as a taxable distribution, plus the 10% penalty if you're under 59½.
What to Do Instead:
Follow the loan repayment schedule with written documentation.
Set automatic reminders or bank drafts for your payments.
Only borrow what you’re confident you can repay within the timeline.
5. Doing Business With Disqualified Persons
What People Do: They lend money to or invest in businesses owned by their spouse, kids, or parents using Solo 401(k) funds.
Why It’s a Problem: The IRS prohibits transactions between your plan and disqualified persons, including:
You
Your spouse
Your parents and grandparents
Your children and grandchildren
Any business entities owned by the above
Doing business with these parties is a prohibited transaction and can disqualify your entire 401(k).
What to Do Instead:
Always transact at arm’s length with unrelated third parties.
Never use your plan to benefit yourself or family members directly.
When in doubt, consult a Solo 401(k) specialist or tax attorney.
6. Mixing Personal and 401(k) Funds
What People Do: They use the same bank account for personal and Solo 401(k) transactions, or swipe the wrong card for an expense.
Why It’s a Problem: This is called commingling, and it muddles the waters for recordkeeping. The IRS sees it as potential abuse and could reclassify those funds as distributed income, which is taxable.
What to Do Instead:
Set up a dedicated bank account and checkbook solely for your Solo 401(k).
Use separate payment methods to keep personal and retirement assets completely isolated.
Keep detailed records for every transaction, especially with alternative assets.
7. Failing to File IRS Form 5500-EZ
What People Do: They forget to file the required paperwork when their plan grows above $250,000 in total value.
Why It’s a Problem: The IRS requires Form 5500-EZ to be filed annually for Solo 401(k)s once total plan assets exceed $250,000. Missing it can result in penalties of $250 per day, up to $150,000.
What to Do Instead:
Monitor your plan’s value yearly (include contributions and growth).
Mark your calendar—Form 5500-EZ is due by July 31 each year.
Use a plan provider or CPA that helps with annual compliance filings.
What Counts as a “Prohibited Transaction”?
The IRS defines prohibited transactions broadly to cover any deal where you benefit from your retirement plan's assets. That includes:
Lending yourself money outside of a formal loan
Investing in a business you or your family controls
Using retirement funds for personal bills
Selling personal property (cars, land, collectibles) to your 401(k)
The penalties can be harsh: disqualification of the plan, taxes owed on the full balance, and penalties for underreporting.
Stay on the Right Side of the IRS
Solo 401(k)s are incredible tools—but they’re also tightly regulated. The flexibility to invest in real estate, precious metals, and private ventures is unique, but only if done by the book.
Here’s how to avoid common pitfalls:
Separate all personal and plan finances
Never transact with yourself or your family
Follow the loan and distribution rules strictly
Keep great records and file what’s required
When in doubt, ask a Solo 401(k) provider or tax professional who knows the landscape. A little caution now can save you thousands in taxes and penalties later.
Want expert help managing your Solo 401(k) without stepping on any tax landmines?
Visit 👉 Survival401k.com to get started with confidence.
A Solo 401(k) is one of the most powerful retirement tools available to freelancers, small business owners, and side hustlers. It combines high contribution limits, flexible investment options, and major tax benefits, making it a top choice for self-employed individuals looking to grow their wealth.
But with that power comes responsibility.
The IRS has strict rules about what you can and cannot do with your Solo 401(k). Break those rules—even unintentionally—and you could lose your tax-deferred status, face steep penalties, or even have your entire retirement plan disqualified.
This blog covers the most common prohibited transactions and mistakes people make with their Solo 401(k)—and exactly how to avoid them.
1. Taking Early Distributions Without a Qualifying Reason
What People Do: They dip into their Solo 401(k) early to cover personal expenses—maybe a car repair, vacation, or emergency fund.
Why It’s a Problem: Unless you meet specific IRS exceptions (like reaching age 59½, disability, or certain hardships), early distributions from a Solo 401(k) are subject to a 10% penalty on top of regular income taxes. If you withdraw $20,000 early, expect to lose thousands to the IRS.
What to Do Instead:
Explore the Solo 401(k) loan option (up to $50,000 or 50% of your balance).
Avoid early distributions unless necessary and qualified.
Work with a tax advisor before pulling any money to understand the tax impact.
2. Buying Real Estate… That You Benefit From Personally
What People Do: They use their Solo 401(k) to buy a rental property, vacation home, or land and then manage it themselves, live in it part-time, or allow relatives to stay there.
Why It’s a Problem: This violates the self-dealing rule, one of the IRS’s most strictly enforced regulations. You cannot benefit—directly or indirectly—from assets your 401(k) owns. That includes personal use, discounted family rentals, or even doing repair work on the property.
Real Example: Someone bought a property with their Solo 401(k), then used personal funds to furnish it. That’s a prohibited transaction, and the IRS disqualified the entire account.
What to Do Instead:
Only purchase investment properties with no personal use.
Hire third-party property managers and contractors—don’t fix the sink yourself.
Keep strict records proving it’s an arms-length investment.
3. Mishandling Precious Metals
What People Do: They buy gold or silver with their Solo 401(k)—but store it at home or invest in collectible coins.
Why It’s a Problem:
The IRS allows precious metals, but only approved bullion held in qualified depositories.
Storing metals at home is seen as constructive receipt, which makes it a distribution, triggering taxes and penalties.
Buying rare or collectible coins violates IRS rules completely.
What to Do Instead:
Stick with IRS-approved metals like American Eagles, Gold Maple Leafs, and certain bars with 99.5% purity.
Use a custodian or depository to store your metals.
Store in a locked safe in your home
"One wrong move with your Solo 401(k) can cost you your future—know the rules, or pay the price."
Garrett Clark
Director of Sales
4. Borrowing From the Plan… and Not Paying It Back
What People Do: They take a loan from their Solo 401(k) with the intention of paying it back, then forget, miss payments, or default altogether.
Why It’s a Problem: Solo 401(k) loans must follow strict rules:
Max loan: 50% of the account value or $50,000
Repayment within 5 years
At least quarterly payments
Market-based interest rate
If you default, the unpaid amount is treated as a taxable distribution, plus the 10% penalty if you're under 59½.
What to Do Instead:
Follow the loan repayment schedule with written documentation.
Set automatic reminders or bank drafts for your payments.
Only borrow what you’re confident you can repay within the timeline.
5. Doing Business With Disqualified Persons
What People Do: They lend money to or invest in businesses owned by their spouse, kids, or parents using Solo 401(k) funds.
Why It’s a Problem: The IRS prohibits transactions between your plan and disqualified persons, including:
You
Your spouse
Your parents and grandparents
Your children and grandchildren
Any business entities owned by the above
Doing business with these parties is a prohibited transaction and can disqualify your entire 401(k).
What to Do Instead:
Always transact at arm’s length with unrelated third parties.
Never use your plan to benefit yourself or family members directly.
When in doubt, consult a Solo 401(k) specialist or tax attorney.
6. Mixing Personal and 401(k) Funds
What People Do: They use the same bank account for personal and Solo 401(k) transactions, or swipe the wrong card for an expense.
Why It’s a Problem: This is called commingling, and it muddles the waters for recordkeeping. The IRS sees it as potential abuse and could reclassify those funds as distributed income, which is taxable.
What to Do Instead:
Set up a dedicated bank account and checkbook solely for your Solo 401(k).
Use separate payment methods to keep personal and retirement assets completely isolated.
Keep detailed records for every transaction, especially with alternative assets.
7. Failing to File IRS Form 5500-EZ
What People Do: They forget to file the required paperwork when their plan grows above $250,000 in total value.
Why It’s a Problem: The IRS requires Form 5500-EZ to be filed annually for Solo 401(k)s once total plan assets exceed $250,000. Missing it can result in penalties of $250 per day, up to $150,000.
What to Do Instead:
Monitor your plan’s value yearly (include contributions and growth).
Mark your calendar—Form 5500-EZ is due by July 31 each year.
Use a plan provider or CPA that helps with annual compliance filings.
What Counts as a “Prohibited Transaction”?
The IRS defines prohibited transactions broadly to cover any deal where you benefit from your retirement plan's assets. That includes:
Lending yourself money outside of a formal loan
Investing in a business you or your family controls
Using retirement funds for personal bills
Selling personal property (cars, land, collectibles) to your 401(k)
The penalties can be harsh: disqualification of the plan, taxes owed on the full balance, and penalties for underreporting.
Stay on the Right Side of the IRS
Solo 401(k)s are incredible tools—but they’re also tightly regulated. The flexibility to invest in real estate, precious metals, and private ventures is unique, but only if done by the book.
Here’s how to avoid common pitfalls:
Separate all personal and plan finances
Never transact with yourself or your family
Follow the loan and distribution rules strictly
Keep great records and file what’s required
When in doubt, ask a Solo 401(k) provider or tax professional who knows the landscape. A little caution now can save you thousands in taxes and penalties later.
Want expert help managing your Solo 401(k) without stepping on any tax landmines?
Visit 👉 Survival401k.com to get started with confidence.