The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.
The categories of transactions that are not permitted to be purchased using a Solo 401(k) Plan can be found in Internal Revenue Code Sections 408 & 4975.
Does IRC 408 and 4975 Apply to Solo 401(k) Plans?
The Department of Labor (“DOL”) regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA.
The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans. Hence, for plans that only cover owners, there is no need for ERISA since there are no non-owner employees to protect. Accordingly, most plan documents state that the rules set forth under Internal Revenue Code Section 408 will apply to Solo 401(k) Plan investments.
When it comes to coins or metals, Internal Revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Solo 401(k) Plan pursuant to Internal Revenue Code Section 408.
Internal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state.
Internal Revenue Code Section 408(m):
(3) Exception for certain coins and bullion
For purposes of this subsection, the term “collectible” shall not include —
(A) any coin which is —
(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code,
(ii) a silver coin described in section 5112 (e) of title 31, United States Code,
(iii) a platinum coin described in section 5112 (k) of title 31, United States Code, or
(iv) a coin issued under the laws of any State, or
(B) 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 7 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.
Subsection (a) states:
(a) Individual retirement account
For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:
(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).
(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
(3) No part of the trust funds will be invested in life insurance contracts.
(4) The interest of an individual in the balance in his account is non-forfeitable.
(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.
Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.
31 U.S.C. 5112 refers to Denominations, specifications and design of coins.
(a) The Secretary of the Treasury may mint and issue only the following coins:
(1) a dollar coin that is 1.043 inches in diameter.
(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.
(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.
(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.
(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.
(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.
(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.
(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.
(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.
(10) and contains one-tenth troy ounce of fine gold.
(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —
(1) are 40.6 millimeters in diameter and weigh 31.103 grams;
(2) contain .999 fine silver;
(3) have a design —
(A) symbolic of Liberty on the obverse side; and
(B) of an eagle on the reverse side;
(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
How do I hold IRS Approved Coins with a Solo 401(k) Plan?
Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next question becomes how can the coins be held without violating IRS rules?
Unlike precious metals, the Internal revenue Code and the legislative history does not include a requirement that IRS approved coins be held in the “physical possession of a U.S. trustee.” If so, the requirement would have been so stated in the tax code. Accordingly, it appears that IRS approved coins can be purchased by a Solo 401(k) Plan and not be held at a depository or U.S. Bank. However, based on conversations between IRA Financial Group tax counsel and representatives of the IRS and Department of Labor, we suggest that our clients try to hold IRS approved coins at a bank safe deposit box, depository, or some sort of third-party vault in the name of the Solo 401(k) Plan. The reason for this is that it is another level of separation between the Solo 401(k) Plan participant – a disqualified person – and the Solo 401(K) Plan’s assets (the coins), which the IRS plan asset rules will attribute to the Solo 401(k) Plan even though the coins will be owned by the Solo 401(k) Plan. Irrespective of the fact that it appears that IRS approved coins are not required to be held in the “physical possession of a U.S. trustee”, holding the coins in the physical possession of a disqualified person puts the onus on the IRS holder, as the disqualified person, to prove that no self-dealing or conflict of interest event occurred in the case of an IRS inquiry. For IRA Financial Group client that wish to hold IRS approved coins in their physical possession, our retirement tax professionals suggest that an affidavit be drafted stating that the IRS approved coins are being held solely for the benefit of the Solo 401(k) Plan and not for any personal or other benefit. We also suggest that the affidavit be signed and notarized.
In summary, the “physical possession” threshold seems to only apply to IRS approved precious metals under Internal Revenue Code Section 408(m), although the tax code does not state anywhere that the coins could be held in the possession of a disqualified person. For this reason, the retirement tax professionals at the IRA Financial Group suggest that individuals seeking to hold IRS approved coins hold the coins at a bank safe deposit box in the name of the Solo 401(k) Plan or some sort of vault or depository. However, holding the coins personally does not appear to violate Internal Revenue Code Section 408. That being said, for all individuals wishing to hold IRS approved coins personally, the retirement tax professionals at the IRA Financial Group suggest having some sort of affidavit stating that the coins will not be held for any personal benefit and will, thus, not violate any of the Internal Revenue Code Section 4975 self-dealing or prohibited transaction rules.
To learn more about purchasing and holding coins with a Solo 401(k) Plan please contact one our tax professionals at 800-472-0646.