Background

George Compton is a 45-year-old self-employed graphic designer with a successful business. After years of steady income, he decides to focus more on retirement planning. Aware of the risks associated with traditional investments, George wants to diversify his portfolio with precious metals. He is particularly interested in gold and silver, known for their stability during economic downturns. George has a Solo 401(k) in place, and he plans to use it for this purpose.

Objectives:

• Diversify Retirement Portfolio: Reduce exposure to traditional investments by adding precious metals.
• Hedge Against Inflation: Use gold and silver to protect against potential inflationary pressures.
• Long-Term Growth: Preserve wealth through a tangible asset with historical appreciation and reap the rewards of the tax-advantaged retirement plan.

Steps Taken

1. Research and Education:
   • George begins by researching IRS regulations on Solo 401(k) investments. He learns that while Solo 401(k)s allow alternative investments, including precious metals, the metals must meet specific purity standards (e.g., gold must be at least 99.5% pure).
   • He also discovers that not all Solo 401(k) custodians support precious metals investments, so he ensures to find one that offers this option.
2. Choosing a Custodian:
   • George selects a custodian experienced in handling precious metals within a Solo 401(k). He chooses IRA Financial which allows direct ownership of physical metals, stored in an approved depository, rather than purchasing precious metals ETFs or mining stocks.
3. Rollover and Funding:
   • George rolls over $40,000 from his traditional IRA into his Solo 401(k) to fund the purchase of the metals.
   • He ensures that this rollover is done correctly to avoid any penalties or taxes.
4. Purchasing Precious Metals:
   • With the help of IRA Financial, George purchases $25,000 worth of gold coins and $15,000 worth of silver bars. These are stored in a secure, IRS-approved depository.
   • The purchase includes a mix of American Gold Eagles and other coins, and silver bars that meet the IRS purity standards.
5. Portfolio Monitoring and Rebalancing:
   • George monitors the value of his precious metals regularly, along with the rest of his retirement portfolio.
   • He maintains a diversified approach, ensuring his Solo 401(k) still holds a mix of traditional and alternative investments.
6. Tax Implications:
   • George understands that any gains on his precious metals will be tax-deferred, just like other investments within his Solo 401(k). He also knows he will not have to pay taxes on these assets until he starts taking distributions at retirement.

Outcome

Over the next 10 years, the value of George’s gold and silver investments increases by 33%, providing a solid hedge against inflation and economic uncertainty. This growth, combined with the rest of his portfolio, puts George on a stable path toward retirement. By using his Solo 401(k) for this investment, he also benefited from tax deferral, allowing his assets to grow without the drag of yearly taxes.

Lessons Learned

• Diversification is Key: George successfully diversified his retirement portfolio, reducing overall risk.
• Due Diligence: Thorough research ensured George complied with IRS rules, avoiding costly penalties.
• Long-Term Focus: George’s decision to invest in precious metals was part of a long-term strategy, which paid off as part of his broader retirement planning.

This case highlights how a Solo 401(k) can be used effectively to invest in alternative assets like precious metals, offering a unique way to diversify and protect retirement savings.

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