Over the last several months, inflation has emerged as a primary concern for investors. Supply chain issues caused by COVID-10, lock-downs in China, coupled with the war in Ukraine, inflation is at a 40-year high. Prices for consumer staples such as food and gas have increased significantly putting many Americans into financial strain.
Historically, precious metals, such as gold, is believed to protect purchasing power in the long run against more than just the price of goods and services. In following money supply, gold can help investors protect against potentially excessive asset price inflation and currency debasement. The price of gold has remained relatively flat in 2022 compared to double digit losses for most equity markets and even the crypto markets.
- IRS-approved metals and coins can be held in a Solo 401(k) plan
- Metals and coins should NOT be held personally
- You must have self-employment income to start your own Solo 401(k)
This article will explore the rules for purchasing precious metals in a Solo 401(k) plan. It will also cover the eligibility rules for establishing the plan, which makes it easier to invest in alternative assets.
The IRS Rules
In general, the IRS does not describe what a Solo 401(k) plan can invest in, only what it cannot invest in. Internal Revenue Code (IRC) Sections 408 & 4975 prohibits disqualified persons from engaging in certain type of transactions – also known as the IRS prohibited transaction rules. IRC Section 408 precludes a retirement plan from investing in collectibles, such as art, antiques, gems, coins, or alcoholic beverages. However, they can invest in certain precious metals, but only if they meet specific requirements (IRC Section 408(m)). Whereas, IRC 4975 deals with prohibited transactions involving disqualified persons.
Section 408 describes the types of precious metals that are not deemed collectibles and are, thus, permitted to be purchased using a Solo 401(k) plan. The following is the language from 408(m):
any coin which is—
any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 5 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section.
The Technical and Miscellaneous Revenue Act of 1998 allowed retirement account owners to invest their retirement account assets in certain platinum coins as well as certain gold, silver, platinum, or palladium bullion provided the precious metals are held in the physical possession of the financial organization or depository. With respect to state minted coins, the coins must be held in the possession of a third-party other than the I holder. The Technical and Miscellaneous Revenue Act of 1998 does not state that the third-party holding the state minted coins must be a bank, but the holder must not be the retirement account holder.
In sum, when using a Solo 401(k) plan to invest in precious metals, one must confirm that the metals or coins satisfy the definition of 408(m). In addition, it is very important that the metals or coins be held in the physical possession of a U.S. depository and not held in the personal possession of the plan participant.
Can I Hold Precious Metals in a Solo 401(k) at Home?
The quick answer is no. A Solo 401(k) plan participant is not able to hold IRS-approved precious metals or coins at home. Over the last several years there has been a number of online companies advertising that you can hold precious metals and/or coins owned by your retirement plan at your home or in your personal possession. However, the recent Tax Court case, McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021) made it clear that an IRA owner or Solo 401(k) plan participant cannot take personal possession of any IRS-approved metal, including gold bars or coins.
Who Can Set-up a Solo 401(k) Plan?
The Solo 401(k) plan is unique and so popular because it is designed explicitly for sole proprietors or owner-only businesses. It is also known as an Individual 401(k) or Self-Employed 401(k).
With respect to the Solo 401(k) plan rules, one must satisfy two general requirements to set up the plan:
(i) The presence of self employment activity.
(ii) The absence of full-time employees (over 1000 hours).
Self-employment activity includes ownership and operation of a sole proprietorship, Limited Liability Company (LLC), C Corporation, S Corporation, and Limited Partnership where the business intends to generate revenue for profit and make significant contributions to the plan.
Unlike a regular 401(k) plan, a Solo 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees and are not employed by any business owned by them or their spouse (an exception applies if your full-time employee is your spouse).
Not all Solo 401(k) Plans are the Same
A Solo 401(k) plan offered by a traditional financial institution will not allow you to buy precious metals or other alternative asset investments. Therefore, you will need to make sure that the Solo 401(k) plan your business adopts is a self-directed plan that allows for alternative asset investments, such as precious metals. There are a number of companies, such as IRA Financial, that offer true self-directed Solo 401(k) plans.
Advantages of Using a Solo 401(k) Plan to Buy Precious Metals
- Gain “Checkbook Control” over your retirement funds
- Serve as the trustee of the plan
- As Trustee, you no longer have to get each investment approved by a custodian
- Invest in precious metals and more without tax.
- Gains from the sale of the precious metals will go back to the plan without tax.
- Maximize Savings
- Make high annual contributions
- Make pretax (tax deductible) or Roth (after-tax) contributions
- Roth Conversion Feature
- Borrow up to $50,000 – Use for any purpose
Below are several key recommendations for using a Solo 401(k) to purchase precious metals or coins:
- Make sure the metals or coins you purchase are IRS-approved pursuant to IRC 408(m)
- Do NOT hold the metals or coins at home or in your personal possession (McNulty case)
- Only use a U.S. bank or depository
- Do not hold precious metals at a foreign bank or depository
- All expenses and related costs associated with the purchase of the IRS-approved metals or coins should be paid with plan funds
- All income, gains or losses from the investment should be allocated to the plan
- Make sure you perform adequate diligence on the precious metals dealer you select
- Understand the fees and commissions involved when purchasing precious metals or coins from a dealer.
The ability to use a Solo 401(k) plan to invest in precious metals can offer a plan participant the ability to better protect their retirement assets from inflation as well a source of investment diversification.