Planning for your retirement while you are still young and able-bodied enough to work is a great idea. Using an individual retirement account (IRA) or 401(k) are some of the most recognized means of benchmarking funds for the day you retire. With an IRA or 401(k) plan, you are able to invest in stocks, bonds, and mutual funds. While these options can certainly generate gains, a solo 401(k) can go beyond this. At Royal Legal Solutions, we strive to provide you with the information you need to make educated investment decisions. Below, we take a look at the investment options the IRS permits and forbids to make sure your solo 401(k) abides by regulations. After all, you want your money to stay in your pockets instead of being subjected to hefty IRS penalties or fines.
Also known as a self-directed 401(k) plan, a solo 401(k) offers increased investment opportunities. This includes things like real estate, precious metals, private equity, private placements and renewable energy sources. Known as alternative assets, your investment options can appear limitless. However, there are a select few things that the Internal Revenue Service (IRS) does forbid your solo 401(k) from investing in.
The IRS allows you to invest in more than what it forbids. In fact, with the exception of the items listed below, the IRS does not define what investments you can make with your solo 401(k). This makes it even more important for you to abide by the few limitations placed on your solo 401(k) investment options.
When it comes to physical assets, collectibles are the only type the IRS does not permit a solo 401(k) to invest in. Included in this list are:
If you should use your solo 401(k) to invest in these items, the IRS will consider it a distribution. Because of this, you will be taxed based on the market value of that collectible at the time of purchase. It is important to remember that early distributions are not only subjected to taxes, but also penalties and fines.
Exceptions: Certain coins, however, are exempt from this rule. As previously stated, your solo 401(k) is allowed to invest in precious metals. Because of this, coins or bullions that are at least 99.5% pure gold, silver, platinum, or palladium are exempt from the IRS collectible regulations.
Like other types or retirement accounts, your solo 401(k) plan can still be used to invest in mutual funds, bonds and stocks. When it comes to stocks, however, there is one exception. According to the Internal Revenue Code (IRC), Section 4975 (16), retirement plans of any type are not permitted to purchase or own any type of S Corporation stock. A retirement plan is considered a type of trust. By purchasing or owning stock, a solo 401(k) would be considered a shareholder. Trusts are expressly forbidden by the IRS from being shareholders of an S Corporation.
Exceptions: As with collectibles, there are exceptions to this rule. Solo 401(k)s are allowed to invest in any other type of business entity. This includes C Corporations, limited liability companies (LLCs), sole proprietorships, and partnerships.
The IRS also prohibits transactions with disqualified persons. This is true for any type of transaction, even if it would otherwise be considered legitimate. Disqualified persons are defined by the IRS to be ancestors, lineal descendants, and individuals or entities connected to the solo 401(k) itself. Ancestors include your father, mother, and grandparents. Lineal descendants are your spouse, children, grandchildren and other such persons. A corporation or property that is owned or controlled by your or a family member is an example of a connected entity. This may seem confusing. To help keep yourself within regulations, there is one main question you should ask. Will I, or any of the individuals listed by the IRS as a disqualified person, benefit directly or indirectly from the transaction or investment? If the answer is yes, you should avoid the transaction.
Exceptions: Siblings, aunts, uncles, nieces, nephews, and cousins are not disqualified persons. The same is true of the same indirect relatives of your spouse. Stepchildren are also not considered to be disqualified persons. This means that transactions with these individuals are legally permitted by the IRS.
At Royal Legal Solutions, our experts have plenty of experience. As a reputable avenue for opening a solo 401(k), we make the process quick and easy. Our professionals are committed to each and every customer who opens an account with Royal Legal Solutions. If you have questions or concerns regarding retirement accounts, investment options, and IRS regulations – our staff have the answers. Please contact us today for more information regarding our retirement account options and how we can help you save for your golden years. We all want to avoid worrying about money when we retire. With a reputable professional at your side, your retirement plan has the potential to grow exponentially.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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