There are many benefits to being self-employed but there are also a few drawbacks. One of these is the lack of employer-backed benefits like a 401k plan. Thankfully, the United States Internal Revenue Code provides for business owners in this regard.
This is in the form of a one-participant plan called the solo 401k. This plan is designed to cater to self-employed people so that they can save or invest towards retirement. The solo plan mimics the features of the employer-backed plan but without the need for working for someone.
What is a 401k and a Solo Plan?
The 401k plan is a savings and investing retirement plan. It is typically offered by the employers and gives employees a tax-advantaged way of contributing money towards their retirement. Contributions to the plan are automatically deducted from the employee’s wages.
You can check out this article as you read on. This fund is then invested in the employee’s chosen type of investment. This can be mutual funds or any other type of investment. Also, the employer may match part or all of the amount the employee is contributing.
The 401k plan has a yearly contribution limit. Forthose under 50 years of age as of 2024, they should not exceed the limit of $19,500. Contributors who are 50 or older can contribute up to $26,000. The plan is so named because of the section of the Internal Tax Code it is from. It is written in subsection 401k.
An individual or solo 401k is much like the regular one but it is designed for those business owners who do not have employees. The plan covers business owners and their spouses alone. They cannot contribute if they have full-time employees. There are no age or income limitations to contribute to a 401k plan. However, contributors may only contribute up to a limit of $17,500.
Those who are aged 50 or older can contribute up to a limit of $23,000. This is considered an “employee” contribution. You can make additional contributions up to a limit of 58,000 as of 2024. This additional contribution is regarded as your “employer” contribution.
In essence, as a business owner, you can see yourself as an employer and an employee and make different contributions in this regard. People who are 50 and older can make a catch-up contribution of up to about $6,500.
Solo 401k and Gold
There are several investment options that funds from your solo plan be invested in. One of these is in precious metals such as gold and silver. A lot of self-directed investors are turning to precious metals.
This is because they are more stable and profitable in the long term. They also act as a hedge against inflation. Paper currencies and paper-denominated investments have continued to lose their value over the years. This has also led to a reduction in purchasing power.
Thankfully, precious metals can be used as a form of insulation against these market dynamics. They have remained a solid long-term investment option over the years. Given this, your solo 401k funds can be invested in gold as long as the IRS requirements guiding this are met. You can go to Metal-res to see why investing in gold is a good idea for your retirement plan.
Requirements for a Gold Solo 401k
The IRC section 408(m)(3) outlines the type and quality of precious metals that can be invested with a solo plan. All other metals asides from those that meet the requirements are considered to be collectibles.
The requirements also stipulate how the precious metals must be stored. Below are explanations about the two requirements.
Fineness
Approved precious metals are divided into two categories. The first category are coins that are specially approved like American Gold. The second is bullion in form of coins or bars. This category of precious metals must meet certain purity criteria. For gold, the minimum fineness required is 99.5%.
There are manygold bullion bars and coins that are available worldwide can easily satisfy this requirement. Also, the gold must be NYMEX or COMEX-approved. Both NYMEX and COMEX are responsible for facilitating the trade of precious metals. You can therefore buy your gold from an approved refiner.
Storage
Your gold or other precious metals should be stored with an approved or licensed depository. That is, it must be held by a “trustee”. These can include a credit union, bank, or any other qualified depository institution.
Coins may however be stored in a personal vault at home or a safety box in a bank. It may also be stored in a third-party depository. Your choice of storage will depend on how much security and access you require.
Please, note that if you purchase precious metals that do not meet the requirements, they will be deemed as collectibles. According to section 408(m) 1-2, these are not permitted in the solo 401k account.
Collectibles purchased with funds from the retirement account may be subjected to taxable distribution. You can read more about the requirements here https://sdirahandbook.com/self-directed-ira-investing/precious-metals-rules-solo-401k/.
How Do You Begin?
As a business owner, you can apply for a solo 401k at trustee using your Employer Identification Number. Once you have the account ready, you can set up your contributions to fund your account.
From here you will have access to the variety of investment options available through your brokers. To buy gold, you need to choose it as your preferred investment option.
Conclusion
Precious metals like gold remain one of the best ways to invest towards your retirement. There are several ways to do this. For business owners, having a solo 401k provides them with an opportunity to invest in gold towards their retirement.
