Why fair market value doesn't make it legal
This is one of the most common misconceptions in self-directed investing. You might assume that selling an asset to your IRA or Solo 401(k) at a fair, documented price keeps the transaction clean. It does not.
The prohibition is categorical. IRC Section 4975 does not allow for a "reasonable price" exception. The transaction itself is the violation, not the pricing.
What counts as a prohibited sale
The rule applies in both directions. You cannot sell assets to your plan, and your plan cannot sell assets to you. It also applies to any other disqualified person, including your spouse, lineal family members, and entities they control.
Specific examples that trigger the rule:
- Selling a rental property you own to your IRA LLC or IRA Trust
- Having your Solo 401(k) purchase a vehicle or equipment from your business
- Trading an asset you personally own for one held by your plan
- Routing a sale through an unrelated third party as an intermediary (the IRS treats this as an indirect prohibited transaction)
Frequently Asked Questions
Does it matter if the asset has gone up in value since I bought it?
No. Value and pricing are irrelevant to whether the transaction is prohibited. The identity of the parties is what matters. If you are a disqualified person, the sale cannot occur.
Can my sibling sell an asset to my plan?
Yes. Siblings are not disqualified persons under IRC Section 4975(e)(2). Transactions between a plan and a sibling are not automatically prohibited, though you should still ensure no indirect benefit flows to a disqualified person such as the estate of a lineal family member.