Invest in a Company the Peter Thiel Way with a Self-Directed Roth IRA
In June 2021, ProPublica released an article focusing on how Peter Thiel was able to amass a $5 billion Roth IRA over the years. The article was based on leaked IRS documentation that were released unlawfully. It was immediately cited by various Democratic members of Congress and the Senate to attack abuses involving the Self-Directed Roth IRA.
I have written extensively in the past on the Peter Thiel Roth IRA story but wanted to write an article that discussed how a new business owner or entrepreneur could potentially use his model to develop a tax advantage exit strategy for their business holding.
- Peter Thiel amassed a $5 billion Roth IRA investing in start-ups/li>
- The Roth IRA is a tax-advantaged retirement account that allows for tax-free withdrawals
- Anyone can use Thiel's blueprint to invest in a business
Before I get into the Peter Thiel story, I just wanted to provide a quick overview of the Roth IRA.
Roth IRA
The Relief Act of 1997 introduced the Roth IRA. The Roth IRA is an is a type of IRA which allows any US person with earned income under a set income threshold (Under $144,000 if single and $214,000 if married and file jointly for 2022) to make after-tax contributions. For 2022, you may contribute $6,000, plus an additional $1,000 "catch-up" if you are at least age 50.
So long as any Roth IRA you own has been opened for at least five years and you are over the age of 59 1/2, all Roth IRA distributions would be tax free! Also, with a Roth IRA there are no required minimum distributions, like a traditional, pretax plan. In other words, if you made an investment into any capital asset, such as stocks, real estate, and even cryptos, all gains would be tax free. All qualified distributions would not be subject to tax ever. This makes it one of the most desirable retirement accounts around.
The Peter Thiel PayPal Story
Peter Thiel, a Stanford law graduate, ran a small hedge fund in the late 1900s. In 1999, single taxpayers were only allowed to contribute to a Roth if they made less than $110,000. Like many startups, PayPal offered its top executives low initial salaries and large stock grants.
Thiel’s income that year was $73,263, the IRS records show. While SEC filings describing that time don’t mention Thiel’s Roth, they show that he bought his first slice of the company in January 1999. Thiel paid $0.001 per share for 1.7 million shares. At that price, he was able to buy a large stake for just $1,700.
PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. According to the ProPublica article, the filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”
However, the record revealed that all employees got that same price, which is what the IRS acknowledged when they audited Thiel back in 2012. Soon after the company sold him the shares, investors invested millions of dollars into the company.
About a month after, PayPal opened up the company to more investors. In the summer, "$4.5 million poured in from the venture fund arm of telecom giant Nokia and other investors," those records show.
All in all, in just one year, Thiel's Roth jumped from $1,664 to $3.8 million! In '02, eBay purchased PayPal. Later in the year, Peter Thiel sold his shares. Let us remind you that those shares were still held inside his Roth IRA. Because of that, all the gains from the sale of the company were tax free. By the end of the year, tax records show that his Roth IRA was worth approximately $28.5 million.
Thiel and colleagues in 2003 founded Palantir, a data analytics company, helped by an early investment from a CIA-backed venture fund. Again, Thiel used his Roth IRA to buy shares in the company. It was still private and well before its IPO.
Then, in 2004, Thiel met Mark Zuckerberg, a Harvard undergraduate who was developing the king of social media, Facebook. Thiel invested half a million dollars in the venture with his Roth. By the end of 2008, the Roth was worth $870 million.
Ironically, the IRS and many of Thiel’s opponents spent time focusing on his Papal investment. However, it was his Palantir and Facebook investments that generated the largest returns for his Roth IRA.
Watch this: How to Invest in Startups with a Roth IRA
Following the Thiel PayPal Playbook
Most of us not entrenched in the Silicon Valley social network will ever have the ability to be a seed investor in a multi-billion dollar company, such as Facebook. However, many of us will have the opportunity to invest in a start-up that has the potential to be successful, and quite valuable.
The following are the two keys to safely replicating Peter Thiel and structuring an investment into a start-up using a Roth IRA.
The IRS prohibited Transaction Rules
In general, one may use an IRA or Roth IRA to invest in a private business, including a start-up business. Internal Revenue Code (“IRC”) section 408 and Section 4975 do not state what a retirement plan can invest in – only what it cannot. In general, an IRA cannot invest in life insurance, collectibles, such as antiques, and any transaction involving the retirement plan and a “disqualified person" as outlined under IRC Section 4975.
A business owner should not use a Roth IRA to invest in a start-up if the Roth IRA owner or any disqualified persons own 50% of the business interests. In the case of Peter Thiel & PayPal, Thiel owned less than 50% of the entity and thus, the entity was not deemed a disqualified person.
However, there are instances in where an investment into an entity where the retirement account owner owns less than 50% can still trigger a prohibited transaction. In Rollins v. Commissioner, Mr. Rollins caused his 401(k) to lend funds to three companies, and in each of which he was the largest (9% to 33%), but not controlling, stockholder.
The IRS argued the loans violated the prohibited transaction rules under IRC 4975. The Court agreed with the IRS and concluded that the loan benefited Rollins as an owner of the entities since the entities were able to borrow money without having to go through independent lenders.
The court essentially concluded that because the loan benefited Mr. Rollins and the exclusive benefit from the loan transaction did not benefit the 401(k), the loan transaction were prohibited even though Rollins owned less than 50% of the entity.
Examining the Thiel PayPal transaction considering Rollins, it would have been difficult for the IRS to argue that Thiel personally benefited from the IRA transaction since the amount invested by the Roth IRA was so minimal.
The lower the investment by the Roth IRA the harder it will be for the IRS to argue that an IRA investment would violate IRC 4975 if the ownership level is under 50%
Valuation, Valuation, Valuation
IRA custodians, such as IRA Financial Trust, are responsible for ensuring that all IRA assets are valued annually at their fair market value and are required to report the account’s fair market value at year-end to IRS. In general, an IRA’s fair market value includes any contributions, rollovers into the IRA, investment earnings, and any adjustment to the market value of IRA assets. According to the IRS, non-publicly traded assets do not have easily determined fair market valuations.
The following excerpt from the October 2014 GAO report on IRAs illustrates the difficulty the IRS has in showing a value paid by an IRA for a privately held stock is not its true fair market value:
It is often difficult for IRS to pursue cases of potential abuse based on inappropriately valued assets. First, in response to a congressional inquiry, IRS said it generally requires individuals to assess the FMV of assets in IRAs rather than use a liquidation value or other valuation method.
However, IRS guidance implies that individuals can use the liquidation value of a profits interest for certain tax purposes. One industry stakeholder also noted that individuals can use case law to support very low valuations of nonpublicly traded shares and profits interests.
Second, according to IRS officials, valuation can be subjective and IRS may expend resources and ultimately conclude that the taxpayer’s valuation is reasonable. Third, the statute of limitations for IRS to pursue cases is generally only 3 years, which poses certain obstacles to pursuing noncompliant activity that spans years of IRA investment.
Therefore, before investing Roth IRA funds into a private start-up, make sure the IRA is paying the same price for the respective shares as all other investors. Investing in a start-up with no assets or business history can more easily support a low share price value.
The IRS is focused on the value of IRA assets, specifically privately held investments. Hence, pay special attention to confirming the price the Roth IRA is paying for the shares can be defended as its fair market value. Having a record of other non-IRA investors paying the same price for the same shares is advisable.
Conclusion
Using a Self-Directed Roth IRA to buy start-up stock can prove to be very lucrative. Peter Thiel provided all of us with a blueprint on how to talk advantage of the Roth IRA tax rules in conjunction with a start-up business investment.
However, generating Thiel type returns is highly unlikely considering he was an early investor of three hugely successful publicly traded companies. Regardless, ensuring that the company is not deemed a “disqualified person” as per IRC 4975 and that the IRA is paying fair market value for the shares is crucial in successfully structuring a Self-Directed Roth IRA investment into a start-up business.
The Solo 401(k) Plan – Ultimate Retirement Plan for Truckers
According to the Americas Trucking Association, America's trucking industry is the lifeblood of the U.S. economy. In fact, nearly every good consumed in the U.S. is put on a truck at some point. As a result, "the trucking industry hauled 72.5% of all freight transported in the United States in 2019, equating to 11.84 billion tons."
- Truckers are the lifeblood of America
- Owner operator truckers have the most flexibility
- Independent truckers should consider the Solo 401(k) for their retirement savings
There is a growing trend in the trucking industry to hire truckers as independent contractors versus employees of the trucking company. In other words, truck drivers are frequently owner-operators of their own freelance trucking business and are therefore considered independent contractors. An owner-operator has the truck and has control over the type of trucking jobs it takes. Owner operator truckers are essentially free agent truckers who have greater control over their hauls and schedule.
Most trucking companies have an employment contract with their truckers that describes whether they are considered an employee or independent contractor. This classification is essential for IRS purposes, and each classification comes with its own benefits. The classification comes down to W2 Employees or 1099 Workers (independent contractors) for taxes and the IRS. Both of these represent two forms that relate to the earnings you make from your employment.
Advantages of Being an Independent Contractor
1099 independent contractors do not receive the same benefits as an employee, such as health care. Although, being classified as a 1099 worker has its own benefits. There are many advantages to working as an independent contractor, such as:
Work Flexibility
A 1099 independent contractor provides one with more flexibility with the type of work one does, as well as with work-life balance. An independent contractor can select the jobs they want to work on and how many hours they want to work. Basically, an independent trucker can work whenever they want, however many hours and days they want, and wherever you want.
Greater Earnings
As a 1099 worker, a trucker can get paid more than a W2 employee. An independent trucker may also have the ability to set their own prices and rates for each contract and delivery. A trucker that is operating as a 1099 independent contractor, is basically operating their own business rather than serving as an employee.
Superior Retirement Plan Options
One of the biggest advantages of being your own boss and choosing to be an owner operator trucker is that you can take advantage of one of the most powerful retirement tools available – the Solo 401k) plan.
A 401(k) Plan is an IRS approved qualified retirement plan. As the name suggests, the Solo 401(k) plan is an IRS-approved qualified 401(k) plan designed for a self-employed individual or the sole owner-employee of a corporation. Hence, any owner-operator trucker who is self-employed and does not have any employees that work more than 1000 hours annually, excluding a spouse or partner, can set-up a Solo 401(k) plan.
Why Should a Trucker Choose a Solo 401(k) Plan?
- Put away up to $67,500 a year in pretax or Roth. In 2022, the maximum one can contribute to an IRA is $6,000 (with a $1,000 additional “catch up” contribution for those age 50+). The Solo 401(k) annual contribution limit is $61,000, with an additional $6,500 catch-up contribution for those at least age 50. In addition, if your spouse generates compensation from the business, he or she can also make high contributions to the plan.
Based on the 2022 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $20,500. That amount can be made in pretax or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to the combined maximum for the year, including the employee deferral, of $61,000.
For plan participants who are at least age 50, an individual can make a maximum employee deferral contribution in the amount of $27,000. Again, that amount can be made in pretax or Roth funds. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to the combined maximum for the year, including the employee deferral, of $67,500.
- Borrow up to $50,000 tax-free for any purpose. An IRA, including the popular SEP IRA, does not allow one to borrow even one penny from the plan. However, assuming the plan documents allow for it, a Solo 401(k) participant can borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose! The best part is the interest rate. The lowest interest rate is Prime for the loan, which is 5.50% as of August 30, 2022. This is way lower than any bank loan you may receive.
This offers a Solo 401(k) plan participant the ability to access up to $50,000 to use for any purpose, including paying personal debt or funding a business. In fact, you can use the loan to help buy a truck or even finance your trucking business. Best of all, the loan option will allow you to have tax- and penalty-free use of the funds, and the loan payments go back to your plan instead of a bank or a credit card company. Hence, you can use your 401(k) funds for personal or business purposes and instead of paying back a with credit card company you are paying your plan back, with interest.
- Self-Directed investment options. IRA Financial is one of the few companies that offer Solo 401(k) plans with self-directed investment options, including real estate, private placements, precious metals, cryptocurrency, tax liens, investment funds, private business investments, and much more. The Internal Revenue Code does not describe what a Solo 401(k) can invest in, only what it cannot invest in. Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. In general, if the self-directed Solo 401(k) does not purchase collectibles or engage in a prohibited transaction outlined in Code Section 4975, then the investment can be made!
Having the ability to invest in alternative asset investments with a Solo 401(k) plan can provide truckers with the ability to better diversify their retirement assets as well gain the opportunity to invest in a wide variety of investments. Best of all, all income and gains generated by the Solo 401(k) plan will go back to the plan without tax. This is known as tax-deferral.
- Use leverage to buy real estate with no tax. For truckers that are interested in using a retirement funds to invest in real estate, the Solo 401(k) plan offers participants the ability to invest in real estate and use a non-recourse loan without triggering the Unrelated Debt Financed Income (UDFI) tax. UDFI is a type of Unrelated Business Taxable Income (UBTI) which, if triggered, could subject the investment to close to a 37% tax for 2022 when using an IRA.
However, a Solo 401(k) plan using nonrecourse financing for a real estate investment is exempt from the UDFI tax (Internal Revenue Code Section 514(c)(9).
Conclusion
Being an owner operator trucker has so many financial and work-life benefits. In addition, being a self-employed trucker allows one to take advantage of the most powerful retirement plan – the Solo 401(k). With a Solo 401k), an owner-operator trucker can maximize his or her tax deductions, while at the same time gaining investment diversification, as well as the ability to borrow up to $50,000 to use for any purpose, including starting or financing a trucking business.
Solo 401(k) Contribution Limits and How to Maximize Your Savings
Solo 401k Contributions for 2026
Starting a Solo 401(k) plan in 2026 has even more benefits than it did in years prior. The Solo 401(k) plan is designed specifically for self-employed individuals or small business owners with no full-time employees other than the owner(s) and their spouse(s). There are many features of the plan that make it so appealing and popular among self-employed business owners. However, the ability to make high annual maximum contributions is probably the most popular Solo 401(k) plan feature.
Solo 401k plans are designed for entrepreneurs, contract workers and the self-employed who have no employees other than a spouse, and there can be big benefits to using this type of plan. Participants can self-direct their money and investments, there are generous contribution limits, and there are minimal tax filing requirements. It offers all of the benefits of a traditional plan as well as some additional benefits. The generous contribution opportunities are what will be discussed herein.
Maximum Solo 401(k) Plan Contribution
In general, a Solo 401(k) plan consists of two components: (i) employee deferrals and (ii) employer profit sharing contributions. First, there is the elective deferral which is the contribution you make as the employee. The second type of contribution for a Solo 401(k) is the employer contribution, which is a percentage of your self-employment income or your schedule C if you’re a single member LLC or sole proprietor.
For 2026, the maximum aggregate Solo 401(k) contribution, including employee deferrals and employer profit-sharing contributions, is $72,000 for individuals under age 50, and $80,000 for those age 50 or older. For participants between ages 60 and 63, the maximum contribution can be as high as $83,250.
Two Types of Solo 401k Contributions
As the employee, you can contribute $24,500 if you are under age 50, or $32,500 if you are 50 or older in 2026. This contribution can be made on a pre-tax basis, up to 100% of your earned income.
Additionally, you can contribute up to 20% of your net self-employment income as the employer, which is also made with pre-tax dollars. Your contributions as both employer and employee can quickly add up.
Your Solo 401k limits apply per person, rather than by plan. So, it’s important to know your individual contributions. Some Solo 401k providers also offer a Roth 401k option, but this requires investment on an after-tax basis. Those would be tax-free in retirement.
Who Can Get Started?
If you generate some form of self-employment income, you can (and should) establish a Solo 401k plan. Even if that self-employment income is a side gig in conjunction with a regular 9-to-5, you qualify. Establishing a Solo 401k is a great way to maximize your retirement savings if you were late in getting started. It will also benefit investors who are uncomfortable making traditional investments.
Related: Solo 401(k) Investment Options
How to Get Started:
To establish a Solo 401k, set up an application with your Self-Directed 401k provider. You must have an Employee Identification Number (EIN). As you contribute more and more to your plan, you may need to fill out additional paperwork. Be aware of any fees a plan custodian may charge so you know what your true cost is, and then begin building your retirement savings for yourself.
Using 401k Funds to Start a Business
Many entrepreneurs are shocked to learn that the IRS allows you to use your former employer 401(k) funds or even your IRA funds to buy or start a business. Individuals can also use their 401k funds to invest their current businesses. This article will explore how you can use your 401k to fund or invest in a business with ROBS 401(k). The ROBS 401(k) structure will allow you to start or fund a business you can run, manage and even earn a salary from. If you are leaving your job or plan to leave your job and have a qualified 401(k) retirement plan, then the Rollover Business Start-Up Solution (ROBS) will likely be the most tax advantageous solution for you.
Can I Use 401(k) Funds to Start a Business?
This may come as a shock to some 401(k) plan participants, but a plan participant is not permitted to rollover current employer 401(k) funds to an IRA or another 401(k) plan unless there is a plan triggering event. The plan triggering rules essentially restrict a plan participant from rolling over 401(k) plan funds to another retirement plan or take a distribution, except for certain hardship exceptions, until they reach the age of 591⁄2, their job is terminated, or the plan is terminated. Hence, unless a plan participant can satisfy one of the plan triggering rules or specific exception, such as a hardship, he or she will likely not be able to use their 401(k) to start a business.
Read More: ROBS Solution for Entrepreneurs
ROBS 401(k)
The ROBS solution is basically the only way one can use retirement funds to invest in a business they will personally be involved in. Although a Self-Directed IRA allows one to make passive investments with retirement funds, it does not permit one to use IRA funds to invest in any business that the IRA holder or any disqualified person will personally be involved in, directly or indirectly. In other words, if one wants to use former employer 401(k) funds or IRA funds to buy or start a business that they or a family member (lineal descendant) will be personally involved in, the ROBS solution is essentially the only way to do it
Learn More: What is the Rollover as Business Startup Solution?
Schedule a Free Consultation
How to Use Your 401(k) Funds to Start a Business
The ROBS solution typically involves the following sequential steps:
1. A new or existing C Corporation is set-up or used. IRA Financial can assist with the set-up of the C Corporation.
2. The C Corporation adopts a prototype 401(k) plan from IRA Financial that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.”
3. The retirement account holder directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan. Note Roth IRA funds cannot be rolled into a 401(k) plan.
4. The 401(k)-plan trustee then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that the entrepreneur wishes to invest in the new business).
5. The C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.
Related: Top Businesses Using Rollover Businesses as Startups
Common Questions About Using Your 401k to Start a Business
IRA Financial Rollover Business Startup Solution
IRA Financial literally wrote the book on the ROBS Solution. Our founder, Adam Bergman, published the first book on the ROBS solution titled, “Turning Retirement Funds Into Start-Up Dreams”
IRA Financial has helped thousands of entrepreneurs and small business owners over the years use their retirement funds to start the business of their dreams or help build their existing business. The ROBS solution is the most tax advantageous way to use retirement funds in a tax and penalty free manner to start or fund a business. With the ROBS solution, you will not have to pay tax or even a 10% early distribution penalty on any IRA or 401(k) plan distribution. For example, if one is under the age of 591⁄2 and in the 25% income tax bracket, taking a taxable distribution of $100,000, would leave the individual with approximately $65,000, not including any state income tax. Whereas the ROBS solution would allow the individual to rollover the full $100,000 to start or fund a business without any tax or penalty.
Related: Rollover as Business Startup Compliancy Rules
Learn More
You can learn more about the ROBS solution by downloading the free IRA Financial Rollover for Business Startups info kit.
McNulty Case Reaffirms Physical Possession Rules
The recent court case, McNulty v. Commissioner has reaffirmed the physical possession rule. Although there hasn't been much guidance in the past, this case shows why you should not hold IRS-approved metals and coins personally. It's a clear violation of Internal Revenue Code Section 408(m). Here is what we know about the case.
McNulty Case - Summary
The McNultys established a Self-Directed IRA under I.R.C. sec. 408 and directed assets held in the IRA to invest in a single-member LLC. Ms. McNulty was the manager of the LLC that her IRA invested in. She directed it to purchase American Eagle coins and took physical possession of the coins. The IRS determined that the McNultys received taxable distributions equal to the cost of the coins in the year they received physical custody of them.
The Facts of the McNulty Case
In August 2015 Mrs. McNulty purchased services from Check Book IRA, LLC through its website, that included assistance in establishing a Self-Directed IRA. She then formed an LLC to which she would transfer IRA funds through purchases of membership interests. From there, she purchased American Eagle coins using IRA funds.
During 2015, Check Book’s website advertised that an LLC owned by an IRA could invest in the coins and IRA owners could hold the coins at their homes without tax consequences or penalties so long as the coins were “titled” to an LLC.
There are, in the record, no certificates of ownership for the coins or any other documentation that establishes legal title.
On August 19, 2015, Mrs. McNulty established a Self-Directed IRA using Check Book’s services and named Kingdom Trust Co. the IRA custodian. They are an independent qualified custodian under the Investment Advisers Act of 1940.
On August 24, 2015, Check Book formed Green Hill Holdings, LLC. Green Hill’s articles of organization, which were filed with the secretary of state of Rhode Island on August 25, 2015, state that Green Hill is a single-member LLC that is a disregarded entity for Federal tax purposes and its sole initial member was Mrs. McNulty’s IRA.
Petitioners were appointed Green Hill’s initial managers and were the managers during 2015 and 2016. Petitioners’ personal residence is Green Hill’s principal place of business. Green Hill opened a bank account over which petitioners had signatory authority.
During 2015 and 2016 Mr. McNulty used funds from his IRA to invest in a condominium and American Eagle coins through an LLC structure. Mrs. McNulty exercised sole control over her IRA’s investment decisions. She funded the IRA through direct transfers from two qualified retirement accounts: an individual retirement annuity and a 401(k) plan.
Mrs. McNulty instructed Kingdom Trust to use her IRA funds to purchase membership interests in Green Hill. The IRA purchased membership interests on three occasions during 2015 and 2016 (Green Hill investments). For each investment, Mrs. McNulty instructed Kingdom Trust to transfer the purchase price of the membership interests from the IRA to Green Hill’s bank account.
In turn, Mrs. McNulty, as the LLC’s manager, had Green Hill use almost all of the funds to purchase American Eagle coins from Miles Franklin, Ltd. The invoices from Miles Franklin list Green Hill as the purchaser. However, the shipping labels identified Mrs. McNulty, individually or along with her IRA, as the recipient of the shipments.
The coins were shipped to petitioners’ personal residence and were stored in a safe there along with coins purchased with funds from Mr. McNulty’s IRA and coins purchased by petitioners directly. The coins purchased with funds from Mrs. McNulty’s IRA, through Green Hill, were labeled as such.
The first Green Hill investment and coin purchase occurred in August through September 2015 with the funds transferred from the annuity. Mrs. McNulty instructed Kingdom Trust to purchase 375,000 membership units of Green Hill at $1 per unit for an investment of $375,000. The funds for the purchase were wired from the IRA to Green Hill’s bank account.
Mrs. McNulty then had Green Hill purchase 320 one-ounce American Eagle gold coins for $374,000 from Miles Franklin and that money was wired from Green Hill’s bank account to Miles Franklin. Miles Franklin shipped the coins to petitioners. residence, addressed to “Donna McNulty Green Hill”, where they were stored in the safe.
The second Green Hill investment and coin purchase occurred in late January through February 2016 with IRA funds that had been transferred from the 401(k). Mrs. McNulty instructed Kingdom Trust to purchase 43,274.70 membership units of Green Hill at $1 per unit for an investment of $43,274.70.
Kingdom Trust wired $43,274.70 from the IRA to Green Hill’s bank account. Mrs. McNulty had Green Hill use part of the funds to purchase 2,000 one-ounce American Eagle silver coins for $37,380, and the funds were wired from Green Hill’s bank account to Miles Franklin. Miles Franklin shipped the coins to petitioners’ residence, to “Green Hill * * * FBO Donna McNulty”, where they were stored in the safe.
In August 2016, Green Hill used $6,731 of the funds remaining in its bank account from the annuity and 401(k) transfers to purchase four one-ounce American Eagle gold coins, two one-quarter-ounce American Eagle gold coins, and one one-tenth-ounce American Eagle gold coin. A payment of $6,746 for the coins plus insured shipping was wired from Green Hill’s bank account to Miles Franklin.
Miles Franklin shipped the coins to “Donna McNulty” at petitioners’ residence, where they were stored in the safe.
Kingdom Trust filed Form 5498, IRA Contribution Information, with the IRS for 2015 and 2016, reporting the IRA’s fair market values of $349,856 and $388,247, respectively. The 2015 Form 5498 omitted Green Hill’s year-end bank account balance, and the 2016 Form omitted the value of the 2016 silver coins. Kingdom Trust did not have any role in the management of Green Hill, the purchase of the coins, or the administration of Green Hill’s assets or the IRA assets.
The above facts appear to have been discovered on audit of the taxpayer’s individual returns, though it is not clear how the details were uncovered.
Discussion
IRC section 408(m) generally prohibits the investment of assets of an IRA (and any self-directed qualified plan account) in certain “collectibles” including precious metals; however, there are exceptions for certain coins (American Eagle coins meet this exception) and bullion.
With respect to bullion, the exception applies “if such bullion is in the physical possession of a trustee [which is a bank or qualified non-bank custodian].” Some unscrupulous marketers have made false assertions that custody requirements do not apply to coins. However, based on the plain language of the text and legislative history, the court found that no such exception exists.
The surprising aspect of the Court’s opinion is how long it is. The Court simply needed to rule that holding the coins at home violated IRC 408(m). The facts were not at issue and holding coins at home in an IRA clearly violates IRC 408(m).
As stated:
“Independent oversight by a third-party fiduciary to track and monitor investment activities is one of the key aspects of the statutory scheme. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA”
The Court focus on the taxpayer’s “control” of an IRA asset can have far reaching implications for Self-Directed IRA LLC clients beyond bullion coins.
In outlining its argument, the Court cites numerous cases confirming that an IRA can own an LLC and that the IRA owner is entitled to direct how his or her IRA assets are invested without forfeiting the tax benefits of an IRA. Though, the Court stated, “IRA owners cannot have unfettered command over the IRA assets without tax consequences. It is on the basis of Mrs. McNulty’s control over the AE coins that she had taxable IRA distributions.”
The use of the term “unfettered command” goes above and beyond the analysis of bullion coins and IRC 408(m) and could potentially be used in the framework of an IRA owning other alternative assets.
The McNulty case will not impact Self-Directed IRA LLC investors investing in most alternative assets, such as real estate, notes, private placements, investment funds, private businesses, since there is no potential for the IRA owner to have “unfettered control” over the underlying asset.
For example, Ancira v. Commissioner, 119 T.C. 135, 137-140 (2002), held that no taxable distribution occurred when the IRA owner personally received a check that he could not negotiate. The funds were then used to acquire stock, and the stock certificate was issued in the IRA’s name.
Furthermore, in McGaugh v. Commissioner, the court held that no taxable distribution occurred even if a stock certificate was in the IRA owner’s possession but it was issued in the IRA’s name and thus the owner could not realize any benefits from it and did not have constructive receipt of IRA assets.
In this case, Mrs. McNulty had complete, unfettered control over the American Eagle coins and was free to use them in any way she chose. This is true irrespective of Green Hill’s purported ownership of the coins and her status as Green Hill’s manager.
Once she received the coins, there were no limitations or restrictions on her use of them, even though she asserts on brief that she did not use them.
While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets.
What About Cryptos?
However, in the case of digital assets, such as cryptocurrencies, holding the cryptos in a cold wallet that is controlled by the IRA owner would provide the IRA owner with “unfettered control” over the IRA asset even though IRC 408(m) does not apply to cryptos.
The majority of crypto investors tend to hold the cryptos on a licensed exchange, such as Bitstamp, which controls the private key and prevents the IRA owner from having constructive or actual receipt of the IRA owned cryptos. However, a number of clients wish to hold their IRA-owned cryptos on a cold wallet for security purposes.
A cold wallet can be detached from the internet. Hardware wallets and paper wallets are both cold wallet options. Hardware wallets use a physical medium — typically in the shape of a USB stick — to store the wallet’s private keys, making them de facto unreachable to hackers or other malicious parties.
Conclusion
The McNulty case should have been a very short and bland opinion since the facts concerning holding coins in an IRA at home so clearly violates IRC 408(m). Instead, the Court sought to focus on the criteria of “control” to determine whether an IRA owner holding assets in a Self-Directed IRA LLC triggered a taxable distribution.
The McNulty case will have very little impact on most Self-Directed IRA LLCs since case law is clear that holding stock certificates, deeds, and other forms of ownership documentation does not trigger a taxable distribution. However, in the case of digital assets, such as cryptocurrencies, held in a cold wallet off an exchange by the IRA holder directly, the opinion would seem to suggest that this could trigger a taxable distribution as the IRA owner would have “unfettered control” over the IRA owned cryptocurrencies.
The good news is that the majority of Crypto IRA clients hold their cryptos on a licensed and insured crypto exchange in the name of the IRA. For those IRA owners wishing to hold IRA-owned cryptos on a cold wallet off the exchange directly for security purposes, solutions exist, such as dual signatures, that allows the IRA owner to hold the cryptos on a cold wallet but without “unfettered control.”
How to Choose the Best Solo 401(k) Provider
When it comes to choosing the best Solo 401k provider, not all companies are the same. In a perfect world, all providers would offer all the same benefits at the same cost. However, in the real world, that's just not the case. While many companies offer Solo 401(k) plans, not all of them are created equal. Here at IRA Financial, we feel we're the best Solo 401(k) provider and offer everything you could possibly need at a reasonable cost. In the following, we'll talk about all the options to look for in a Solo 401(k) provider, including cost, investment opportunities, Roth and loan options, and checkbook control. Read on to see why IRA Financial is the best Solo 401(k) provider for you!
What is a Solo 401(k) Plan?
Let's take a minute to familiarize everyone about just what a Solo 401(k) plan is. It's a traditional 401(k) that's tailored for the self-employed individual or owner-only business operators. Basically, if you work for yourself in some capacity, you can open a Solo 401(k) plan, also referred to as an Individual 401(k) or Self-Employed 401(k). A Solo 401(k) offers high contribution limits of $72,000 for 2026 ($80,000 if you are age 50+) annually, which makes it better than other self-employed plans. You can invest in anything not disallowed by the IRS, such as many collectibles and life insurance. If the provider allows for it, you can also borrow money from the plan or make designated Roth contributions.
Now that you know what a Solo 401(k) plan is and who can open one, let's talk about the benefits of it.
Identify Investment Options
Not all Solo 401(k) plans are the same. Most plans from banks or financial institutions are not self-directed. In other words, these companies will restrict you from making alternative asset investments. Your our only option will be traditional investments that you may not understand, like stocks, bonds and mutual funds. When you adopt a Solo 401(k), it’s important that your plan offers all the IRS options available for qualified retirement plans. This includes the ability to make traditional investments like mutual funds and ETFs, as well as alternative investments, like real estate, metals, and cryptos.
Determine if the Provider Offers a Roth Solo 401(k)
Another popular option for our clients is the Roth Solo 401(k) plan. For those that don’t know what a Roth is, it’s a 401(k) that allows for after-tax contributions. The major benefit is that all qualified withdrawals are tax free! Akin to the ever-popular Roth IRA, a Roth 401(k) does not provide an immediate tax break. You fund it with after-tax dollars, but so long as the account has been open for at least five years and you are at least age 59 1/2, your distributions are both tax- and penalty-free. One other advantage of a Roth plan is the ability to skirt the Required Minimum Distributions (RMD) rules. That way, you can leave your entire balance to your beneficiaries if you don’t need the money yourself.
Ensure Your Solo 401(k) Professional Understands Tax Laws
There are several companies that advertise themselves to be the best Solo 401(k) providers. Yet in most cases, the people who draft your plan documents and offer advice aren’t tax attorneys or even tax professionals. This is why it’s important to look for an experienced tax and ERISA professional as your Solo 401(k) plan provider. This helps to ensure that your Solo 401(k) plan will be properly set up. Additionally, it ensures that the plan remains in full IRS compliance.
The Solo 401(k) plan is based on rules found in the Internal Revenue Code (IRC). Oftentimes, the IRC rules can be complex to a non-tax attorney. Therefore, it’s advisable to work with a provider, like IRA Financial to establish your plan.When you rely on the advice of a document processor or non tax-professional, this can place your retirement future at risk.
Oftentimes, plan participants have unknowingly violated IRS rules, such as the Prohibited Transaction rules, when operating their plan. This is because an unqualified plan provider representative gave inaccurate tax advice or drafted the plan documents incorrectly. Don’t let this happen to you!
Determine if Your Provider Offers a Loan Option
Ever been in a tight jam and needed money right away? Maybe you needed start-up capital for a new business. How about that dream vacation or new car? While we don’t recommend using retirement funds for that last suggestion, it might make sense to utilize a Solo 401(k) loan for the others. If your provider offers a loan option, you can borrow money from your Solo 401(k). You can take out a loan at any time and for any reason (might be limited by your provider). The maximum amount you may borrow is the lesser of $50,000 or one half of your account balance.
A few benefits of a Solo 401(k) loan are there is no credit check required, faster turnaround time than a bank loan and the interest get paid back to your plan. It’s not usually ideal to take funds from your 401(k), however the option is there if you need it.
*You must pay the loan back over a five-year period at least quarterly at the minimum Prime Interest rate. However, you do have the option of selecting a higher interest rate.
Identify Whether the Provider will Give You Ongoing Support
After you establish your Solo 401(k) plan, that doesn’t mean you no longer need ongoing tax support. As you begin administering your plan, whether it involves employee deferrals or profit sharing contributions, you should have the ability to consult with a tax professional. However, many Solo 401(k) plan providers are nowhere to be found after the plan has been established.
The ongoing maintenance of the Solo 401(k) plan is a crucial element to ensure your individual retirement plan remains IRS compliant. Our tax professionals are fully trained on the special tax aspects of Solo 401(k) plans and are on-site to keep it in full IRS compliance. If you have any questions, feel free to contact them.
Determine if the Solo 401(k) Provider allows you to have Checkbook Control
Solo 401(k) plan providers may require that you hold the plan assets at their institution. With IRA Financial’s Self-Directed 401(k) plan, you can hold the plan assets at the bank of your choosing and gain “checkbook control” over the retirement funds.
Earlier we talked about the ability to invest in alternate assets. While the best Solo 401(k) providers offer this ability, not all of them give you the freedom to invest when you want. Other providers offer custodial-controlled plans only. With these types of plans, you have to ask permission to make your investment. This can be a long process since providers generally run a 9-5 weekday only operation. But what if you find an investment off-hours? Well, with those providers, you’ll have to wait and might lose out on an investment opportunity. However, IRA Financial offers you freedom with checkbook control. This allows you to attach a checkbook account (debit card, wire transfer, etc.) to your Solo 401(k) plan. Now, you can make any investment you want, anytime you want, just by writing a check. No need to wait for permission from your plan provider. This is what a true Self-Directed Solo 401(k) plan is.
Ensure the Solo 401(k) Provider Does Not Outsource Their Plan Maintenance
Most Plan providers do not assist or offer advice with respect to the maintenance and administration of a Solo 401(k) plan. This includes the completion of the IRS Form 5500-EZ. They generally refer all questions to an outside tax attorney or accountant. IRA Financial offers all of its Solo 401(k) plan clients direct access to its in-house retirement tax professionals regarding maintenance or administrative questions concerning the plan. Whether it’s answering a question about a plan feature, investment, an update in the law, or help completing the IRS Form 5500-EZ, you will work one-on-one with a retirement tax professional who are familiar with your plan and retirement goals.
Ensure you can talk Directly to a Solo 401(k) Plan Tax Professional
Oftentimes, a salesperson or representative of a Solo 401(k) plan provider will offer you tax or ERISA guidance with respect to a 401(k)-plan feature or an investment without adequate knowledge or expertise. Make sure you only receive plan related advice or information from a specialized 401(k) plan tax professional. Too often, plan participants make improper plan contributions or invest in a prohibited transaction because they were misled by a plan provider representative who was not qualified to provide proper tax advice regarding the unique features of the plan.
When you work directly with a 401(k) plan tax professional that has been specifically trained on the special tax aspects of the Solo 401(k) plan to establish and maintain your plan, you can guarantee your plan will remain in full IRS compliance and that you will not be engaging in any plan activities not approved by the plan or the IRS, such as prohibited transactions.
The IRA Financial Difference
IRA Financial will take care of everything. The whole process can be handled by phone, email, fax, mail or with the new IRA Financial app. With our app, you can quickly and securely establish your plan, rollover assets from one plan to another, perform basic maintenance and make investments on your mobile device. Get started with app today. Before getting started, we encourage prospective clients to download our free Solo 401(k) information kit.
IRA Financial Solo 401(k) Services
Our one time low fee includes the following Solo 401(k) services:
- Free tax consultation with our Retirement Specialists
- Adoption Agreement
- Basic Plan Document
- EGTRRA Amendment
- Summary Plan Description
- Trust Agreement
- Appointment of Trustee
- Beneficiary Designation
- Loan Procedure
- Loan Promissory Note
- Free tax updates
- Free tax and ERISA support
- Satisfaction Guaranteed!
Summary
Choosing the right Solo 401(k) provider is crucial for maximizing the benefits of your retirement plan. Knowing what to look for in a top-tier provider, including access to alternative investments, Roth and loan options, checkbook control, and ongoing support from qualified tax professionals is paramount. IRA Financial stands out by offering comprehensive services, direct access to tax experts, and full plan flexibility—all at a competitive cost.
If you have any questions, feel free to schedule a call to talk with one of our Solo 401(k) plan professionals.
How to Transfer a SIMPLE IRA to a Self-Directed IRA
Self-Directed SIMPLE IRA
Individuals generally transfer IRA (individual retirement account) or rollover eligible qualified retirement plan assets into a Self-Directed IRA LLC structure. You can also roll over after-tax retirement funds to a Self-Directed SIMPLE IRA.
What is the Most Common Way to Fund a Self-Directed SIMPLE IRA?
Transfers and rollovers are types of transactions that allow the movement of assets between similar individual retirement accounts. For example, traditional IRA to Traditional IRA, including Savings incentive match plan for employees of small employers (SIMPLE). A SIMPLE IRA transfer is the most common method of funding a Self-Directed SIMPLE IRA LLC.
It's important to note that SIMPLE IRA assets may rolled over to a Self-Directed SIMPLE IRA anytime. However, SIMPLE IRA assets can roll over to a 401(k) qualified retirement plan, 403(b) plan, governmental 457(b) plan, or a Traditional IRA only after you meet a two (2) year waiting period. But a 401(k) qualified retirement plan, 403(b) plan, or governmental 457(b) plan may not roll into a SIMPLE IRA. Also, a Roth IRA cannot be rolled into a SIMPLE IRA.
Rollover Chart
Self-Directed SIMPLE IRA Transfers
A SIMPLE IRA-to SIMPLE IRA transfer is among the most common methods of moving assets from a SIMPLE IRA to a Self-Directed SIMPLE IRA. A transfer usually occurs between two separate financial organizations. However, a transfer can also occur between SIMPLE IRAs held at the same organization. When a SIMPLE IRA transfer is handled correctly, it's neither taxable nor reportable to the IRS (Internal Revenue Service). With a SIMPLE IRA transfer, the SIMPLE IRA holder directs the transfer, but doesn't actually receive the IRA assets. Instead, the transaction is completed by the distributing and receiving financial institutions.
In order for the SIMPLE IRA transfer to be tax-free and penalty-free, the IRA holder must not receive the SIMPLE IRA funds in a transfer. The check must be payable to the new individual retirement account custodian. Also, there is no reporting or withholding to the Internal Revenue Service on an IRA transfer.
The retirement tax professionals at the IRA Financial Group will help you fund your Self-Directed SIMPLE IRA LLC. They will transfer your current SIMPLE IRA funds to your new Self-Directed SIMPLE IRA structure. This is tax-free and penalty-free.
How the SIMPLE IRA to Self-Directed IRA Transfer Works?
The Self-Directed Simple IRA is rather simple. We assign you to a retirement tax professional who will help you establish a new Self-Directed SIMPLE IRA account. This occurs at a new FDIC and IRS approved IRA custodian. With your consent, the new custodian then requests the transfer of your SIMPLE IRA assets from your existing individual retirement account custodian. The IRA transfer is tax-free and penalty-free. Once the IRA funds are either transferred by wire or check tax-free to the new SIMPLE IRA custodian, the new custodian will invest the SIMPLE IRA assets into the new SIMPLE IRA LLC “checkbook control” structure. After the transfer of funds to the new SIMPLE IRA LLC, you, as manager of the SIMPLE IRA LLC, will have “checkbook control” over your retirement funds. This means you can make traditional as well as non-traditional investments tax-free and penalty-free.
60-Day Rollover Rule
You generally have 60 days from receipt of the eligible rollover distribution from a SIMPLE IRA account to roll the funds into a Self-Directed SIMPLE IRA LLC structure. The 60-day period starts when you receive the distribution. Usually, no exceptions apply to the 60-day time period. In cases where the 60-day period expires on a Saturday, Sunday, or legal holiday, you can perform the rollover on the following business day.
What happens if you receive the eligible rollover distribution? You may rollover the entire amount or any portion of the amount you receive. The amount of the eligible rollover distribution that you don't roll into an IRA is generally included in the individual’s gross income. It may be subject to a 10% early distribution penalty if the individual is under the age of 59 1/2.
How the 60-Day Rollover Works with a Self-Directed SIMPLE IRA
The retirement tax professionals at the IRA Financial Group will assist you in rolling over your 60-day eligible rollover distribution to a new FDIC and IRS approved IRA custodian. Once you deposit the 60-day eligible rollover distribution with the new IRA custodian within the 60-day period, the new custodian will be able to invest the SIMPLE IRA assets. You also have the option to establish a Self-Directed IRA LLC with “checkbook control.” If you decide to open a Self-Directed IRA LLC, you will have access to your funds once the transfer process is complete. With a Self-Directed IRA LLC, you, as manager of the SIMPLE IRA LLC, will have “checkbook control” over your retirement funds. You can make traditional as well as non-traditional investments tax-free and penalty-free.
Learn More:
Buying Stocks in a Self-Directed IRA
Solo 401k Contributions After 70 1/2
Solo 401k contributions after 70 1/2 are different than contributions at this age with an individual retirement account (IRA). With a traditional IRA, participants cannot make additional contributions once they reach 70 1/2 and are required to take out a minimum distribution (RMD). One of the benefits of the Solo 401k is that participants can still contribute after 70 1/2. In this article, we will explain exactly how this can be done.
Making Contributions to a Solo 401k Plan After 70 1/2
Unlike a Traditional IRA, which doesn't allow you to make pre-tax IRA contributions after reaching age 70 1/2, a solo 401(k) plan participant can make 401(k) plan contributions after age 70 1/2. In other words, if you're still an employer with a solo 401(k) retirement plan, you can continue making contributions to your employer-sponsored solo 401k or SEP IRA. Additionally, there's no requirement to take required minimum distributions (RMDs). This is only if you do not own 5% or more of the company.
This differs in the case of a solo 401k plan, also known as a self-employed 401(k) or individual 401(k) plan. If you satisfy the 5% threshold, it may prove difficult since most solo 401k plans are adopted by a sole business owner.
Roth IRA at 70 1/2
In addition, an individual may contribute directly to a Roth IRA after he or she has reached age 70 ½ (up to the annual $7,000 limit, which includes a $1,000 catch up amount). Direct Roth IRA contributions, however, are subject to income limitations. These limitations apply to reduce the contribution limits for taxpayers who earn more than $189,000 (married taxpayers) or $120,000 (single taxpayers) in 2018.
In sum, if you have a solo 401k plan and receive earned income from the business that adopted the plan, you may still make contributions to the plan after age 70 1/2. However, assuming you don’t own less than 5% of the company, you must continue to take RMDs on the value of your 401(k)-plan balance as of 12/31.
The annual RMD amount is generally around 3% of the fair market value of the 401(k) plan assets. The same rules apply to a SEP IRA. Whereas, in the case of a Roth IRA, contributions can be made after the age of 70 1/2. There will be no RMD requirements. This is because Roth IRAs don't have an RMD requirement. However, in the case of a pre-tax traditional IRA, no contributions can be made after the age of 70 1/2. The pre-tax IRA is subject to the RMD regime.
You can learn more about our services, including our solo 401k plan here.
Using an IRA to Buy a Home
In general, one is not able to purchase a home with a retirement account that they or a “disqualified person” will use. A retirement account, nevertheless, is able to invest in real estate as a passive investment but it cannot be used for any personal purpose. You do have options when using an IRA to buy a home.
- One can use his or her IRA funds to help purchase a home.
- There are tax implications on certain IRA distributions
- A 401(k) loan is another option if you have one available to you
Below are the most common options an IRA owner has when it comes to using their IRA to buy a home for personal use.
IRA Distributions
IRS rules allow one to take an IRA distribution anytime that can be used for any purpose. The IRS rules dictate that for traditional (pretax) IRAs, tax and a 10% early distribution penalty are due on any distributions taken prior to the age of 59 1/2. However, if a distribution is taken after the IRA owner reaches the age of 59 1/2, only income tax is due.
On the other hand, in the case of a Roth IRA, so long as one is over the age of 59 1/2 and any Roth IRA has been opened at least five years, then all Roth IRA distributions are tax-free. In addition, all Roth IRA contributions can be taken out at any point tax free.
Hence, a smart strategy would be to make Roth IRA contributions over a number of years and pull out the contributions if needed to buy a home tax-free and the remaining Roth funds (the appreciation on the contributions) can continue to grow tax free. This strategy allows one to save for retirement in a tax-free account as well as use the Roth contributions as a down payment for a home tax free.
Hardship Distribution
The IRS allows an IRA holder to take a one-time $10,000 hardship distribution for new homeowners from an IRA. The hardship distribution is still subject to tax, but the 10% early distribution penalty will be waived. This is a smart option for someone with a pretax IRA that needs extra funds for the purchase of a home as a first-time home buyer. Note – a 401(k) plan does not include a hardship distribution option.
What is considered a "first-time home buyer?" It's important to keep in mind that this doesn't have to be your first home purchase. So long as it's been at least two years since you last owned a house, you will qualify for the hardship distribution. One last thing to keep in mind is the $10,000 is a lifetime exception. Once you exhaust those funds, that's it. For example, you can use $5,000 for a home purchase, and then use the remaining $5,000 for a future purchase (assuming you qualify).
Learn More About Using an IRA to Invest in Real Estate
401(k) Loan
If an IRA owner also participates in a 401(k) plan and the plan offers a Solo 401(k) loan option, the plan participant has the opportunity to borrow the lesser of $50,000 of 50% of the account value. The loan proceeds can be used for any purpose, including for the purchase of a home. The loan is generally a five-year loan where payments are due at least quarterly at an interest rate of at least Prime. That rate stands at 5.50% as of August 30, 2022. Generally, you'll pay a point or two above the prime rate, however, that's much better than any loan you can get at a bank. In addition, some plans allow for the loan term to be greater than five years for the purchase of a home.
You must keep up with your loan repayments. Failure to do so will lead to the distributions of the amount not repaid. Those funds will be treated as taxable income and an early distribution penalty will apply if you are younger than 59 1/2. The benefit is that you repay the loan back to your 401(k) plan, including interest. Much better than giving that money to a bank or other lender!
Using an IRA to Buy a Home
Obviously, you probably cannot outright buy a home with your IRA funds, unless you have a large balance and can afford an even larger tax bill. However, using an IRA to buy a home may be attractive for some individuals. It's important to work with a financial planner to see how this may affect your future. Remember, any funds withdrawn from your IRA or 401(k) won't be working for you anymore. Withdrawing funds from your retirement savings should really only be a last resort. However, if it's your dream to be a homeowner, your IRA can help!
If you have any questions, please reach out to us @ 800.472.0646. We will be glad to explain how it works in greater detail. In fact, if you are reading this before June 22, 2021, IRA Financial President and CEO will be doing a YouTube Live all about real estate investing with retirement funds. The video will be on our YouTube channel as soon as it's done! Check it out!
Buying Dogecoin with a Self-Directed IRA or Solo 401(k)
Why Use Retirement Funds to Buy Dogecoin?
There are three main reasons to consider investing in Dogecoin with your retirement funds: taxes, diversification and getting into an emerging asset class. While Dogecoin may be your primary interest, you can invest in countless Cryptos in a Self-Directed IRA.
- Using retirement funds is the smart way to invest in Dogecoin
- The top three benefits are tax treatment, diversification and investing in an emerging asset class
- Our partnerships allow you to get started quickly and affordably
Tax Benefits of Buying Dogecoin
Back in 2014, the IRS issued IRS Notice 2014-21, which classified cryptocurrencies, including Dogecoin, as property, like stocks and real estate. This subjects them to the capital gains tax regime. When you use a Self-Directed IRA or Solo 401(k) plan to invest, you don't need to worry about taxes.
When using personal funds to invest, you need to know the details of every Dogecoin transaction you make. This includes the date you bought it, how much you paid for it, the date and price when you sold it, and how long each crypto was held. At the time of sale, you will either owe short-term capital gains (held less than 12 months) or long-term capital gains (held greater than 12 months).
When you use retirement funds to invest, you don't have to worry about these details every time you transact with Dogecoin. Why? Because, retirement plans are tax-advantaged, meaning you do not pay taxes on the investments held inside of them. IRAs and 401(k) plans can either be pretax or after-tax.
Pretax or Traditional IRA or 401(k) - Traditional retirement plans are funded with pretax money, meaning you will receive an upfront tax break. You don't owe taxes on any funds you contribute to the plan each year. The taxes are deferred until you start distributing funds during retirement.
Roth IRA or 401(k) - Roth contributions are made with after-tax money. Because of this, there is no immediate tax break. The benefit of these plans comes on the back end. All qualified Roth distributions are tax free! To be qualified, you must be at least age 59 1/2 and have a Roth plan open for at least five years.
Diversification
Any financial advisor or retirement specialist will tell you that you must properly diversify your holdings. As the saying goes, don't put all your eggs in one basket. It makes good financial sense to spread across your investments, whether it be stocks, bonds and mutual funds, or alternative investments, such as real estate, precious metals, Dogecoin, and other cryptocurrencies.
If you are fully invested in the stock market and it takes a dive, guess what? So does your entire portfolio. Proper diversification allows one to ride through down periods with certain investments. For this same reason, you shouldn't put all of your money into Dogecoin. Cryptos have had a tumultuous ride since the start. Dramatic swings in the price can affect your bottom line if you are too invested.
Emerging Asset Class
Don't miss out on the latest, emerging asset class. Imagine if you can go back in time and invest in Amazon, Tesla or Microsoft when they first went public? The cryptocurrency market, including Dogecoin, is still in it's relative infancy. The Blockchain technology behind them is improving all the time, so why not take a chance?
Of course, investing in Dogecoin is not for everyone. There is an inherit risk in new asset types, especially something that not everyone is in favor of. It's up to you, as the investor, to decide if the risk is worth the reward. Working with a financial advisor is your best bet before deciding whether or not to make a particular investment. Of course, it's important that you do your own due diligence before investing in any emerging asset class.
Read More: Crypto IRAs and Private Keys
Self-Directed IRA or Solo 401(k) for Dogecoin?
You've decided you want to invest in Dogecoin, so what plan should you choose? A lot depends on the type of income you earn. Are you self-employed or do you work for someone else? If you are self-employed, it's a no-brainer; the Solo 401(k) is the best plan for you. For everyone else, a Self-Directed IRA is the way to go.
Solo 401(k)
In order to utilize the Solo 401(k) plan, you must have some kind of self-employment income. This can be from your own business, contract work or gig jobs, among other things. The second requirement is that you have no full-time employees, other than a spouse or business partner. The Solo 401(k) is arguably the best plan for the self-employed and features a number of benefits.
The Solo 401(k) plan offers high annual contributions limits, the ability to borrow up to $50,000, a Roth option, UBTI exemption and limitless investment opportunities. So long as your investment is not a collectible and does not involve a disqualified person, you can probably make it. This, of course, includes investing in cryptos, including Dogecoin.
Self-Directed IRA
Anyone with earned income can open and fund a Self-Directed IRA. In fact, if you already have a retirement plan, you can generally roll those funds into a Self-Directed IRA. Although it is not as feature-rich as the Solo 401(k), there are no restrictions for who can open one.
When you choose the right custodian, such as IRA Financial, you can invest in almost anything, including Dogecoin, with your retirement funds. A Self-Directed IRA can either be pretax (traditional) or after-tax (Roth). A traditional plan allows for upfront tax deductions since taxes are deferred until you withdraw from the plan. There is no immediate tax break with a Roth IRA, however, all distributions are tax free, assuming you are at least age 59 1/2 and any Roth IRA has been open for at least five years.
Why Choose Dogecoin?
As you may know, Dogecoin started out as a joke, based on the popular "Doge" meme, featuring a Shiba Inu with some text. Since its inception, it was barely worth a fraction of a penny. Of course, as with many things, it became popular for a couple of reasons. Redditors were the first to jump on the train, followed by Tesla founder, Elon Musk. Dogecoin topped out at about 72 cents in early May, 2021 before settling down about half that price.
Obviously, it's a way cheaper alternative to other cryptos, especially the "big dog," Bitcoin, which sits at over $50,000 per token. Dogecoin describes itself as "an open source peer-to-peer digital currency, favored by Shiba Inus worldwide." Obviously, tongue-in-cheek that doesn't take itself too seriously. It sits just shy of 50 billion market cap. It's become quite popular for "microtipping" and for unique fundraising campaigns. While it may not see the success of other cryptos, it's a fun, and cheap, way to get into the crypto space.