Using An IRA/401(k) To Invest Outside The Stock Market

Owner of Quest Education, teaching business owners about funding, paying off debt, and investing in alternative assets.

Many Americans are concerned about their IRA and 401(k) retirement accounts with rising interest rates, inflation and other events impacting their money. As of June 17, the stock market wiped out $3 trillion in retirement savings so far in 2022.

When stocks and mutual funds lose their value, they tend to bring down most people’s IRA and 401(k) balances. When IRAs and 401(k) plans are losing value, people tend to consider other options on where to invest their money besides having it in the stock market. One option for having an IRA or 401(k) invested elsewhere besides the stock market is utilizing a Self Directed Solo 401(k).

The Solo 401(k) became popular around 2002, with the enactment of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA). Solo 401(k) plans can invest in places such as precious metals, private businesses and real estate. On the real estate side, a Solo 401(k) can participate in private lending and syndication deals, own a rental property or flip a house. These transactions can be done without triggering a taxable event when the Solo 401(k) is set up through a self-directed custodian that can administer these types of assets.

A Solo 401(k) is a retirement plan for entrepreneurs and their spouses who don’t have any W2 employees. Here are two ways money can leave a Solo 401(k) and invest into an alternative asset without triggering a taxable event.


Let’s use the example of the Solo 401(k) investing in real estate. The Solo 401(k) can lend money to a third-party entity that funds the real estate project. There would be terms between the borrower and the lender (the Solo 401(k) will be the terms) on when or how the lender would get paid back and what kind of return the owner of the Solo 401(k) is to receive.

Whatever money comes back from the real estate deal must flow back into the Solo 401(k) to avoid a taxable event. Another way to use a Self Directed Solo 401(k) to invest in an alternative investment is by using the loan feature. The IRS states that one can take out 50% of the Solo 401(k) value or $50,000, whichever number is less. The money is treated as a loan, so one must pay back their Solo 401(k) within five years and make payments at least quarterly.

An interest rate associated with this loan is calculated with a premium of 1% to 2%. The interest gets paid into the Solo 401(k). One benefit of this strategy is that the money accessed via the Solo 401(k) loan isn’t an IRS-prohibited transaction since the activity is happening outside the retirement. One can use the cash from the loan to fund their own business, pay off high-interest personal credit card debt or pay rehab expenses for their house flip.

A con with this strategy is that any gains from investing using the loan feature create a taxable event. When using a Self Directed Solo 401(k) to purchase a property with the end goal of flipping it or renting it out, one must either have enough cash inside the Solo 401(k) to buy the property outright with no financing needed or go through a non-recourse lender to finance the property. The loan must be non-recourse.

If the Solo 401(k) owns the property, the Solo 401(k) must pay the mortgage payments and property expenses. Rental income and proceeds from a sale must flow back into the Solo 401(k). Prohibited transactions are important to understand when using a Self Directed Solo 401(k) to purchase a property. One can’t live in the property or rent the property out to a lineal descendant, among other restrictions considered prohibited transactions.

A Self Directed Solo 401(k) can also hold an asset that is a business that the owner of the Solo 401(k) owns. Remember that the tax code restricts a retirement account from transacting with the account owner personally or with lineal descendants (see IRC 4975 and IRS Pub 590A). The Self Directed Solo 401(k) can invest directly into the business as long as the owner of the Solo 401(k) has less than 50% ownership and control of the company.

This matter is very nuanced, so discussing it with a CPA or attorney familiar with this area of tax law is a good idea. As mentioned above, one can use the loan feature of the Solo 401(k) to access the funds to invest in their business. The IRS prohibited transactions won’t apply since the Solo 401(k) isn’t directly investing in the company and the business activity is happening outside of the Solo 401(k).

In conclusion, a Self Directed Solo 401(k) can provide many other options to invest one’s money besides stock market assets. Investing carries risk, and due to the complex nature of self-directed retirement plans and the possibilities of incurring penalties due to violating IRS prohibited transactions, finding a qualified financial adviser is a good idea when exploring self-directed retirement accounts.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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