IRC 408(m) provides that the investment by a retirement account, including a Solo 401k or Individual 401k, in personal property items known as “collectibles” subjects the plan’s participant/trustee to immediate taxation on the purchase amount.
Collectibles Defined: A collectible is a work of art, rug, antique, metal, gem, stamp, coin, alcoholic beverage, musical instrument, or historical object pursuant to IRC 408(m)(2) and Prop. Treas. Reg. 1.408-10(b). The Treasury may expand this list to include any other tangible personal property.
Treated as Distribution: When the Solo 401k or Individual 401k participant/trustee invests the plans assets in collectibles, the cost of the collectibles is treated as a distribution to the participant/trustee for tax purposes in accordance with IRC 408(m). This deemed distribution for tax purposes applies even though an actual distribution is not available to the participant/trustee of the Solo 401k or Solo k at the time the investment in collectibles is made.
Definition of Cost: The “cost” of the collectible is the fair market value at the time of the acquisition. This is outlined in Prop. Treas. Reg. 1.408-10(e).
Definition of Acquisition: A purchase of the collectible occurs if Solo 401k or Individual 401k acquires the collectible by purchase, exchange, contribution, or any method by which the account directly or indirectly acquires a collectible. This is detailed in Prop. Treas. Reg. 1.408-10(d).
10% premature (under age 59 1/2) distribution penalty applies: Since the acquisition is treated as a distribution for tax purposes, the premature distribution penalty under 72(t) is applicable.
Reported on Form 1099-R. The distribution is reported on a Form 1099-R and treated as if the Solo 401k or Individual K participant/trustee has actually received a distribution.
Exception for investments in certain coins and bullion: IRC 408(m)(3) exempts Solo 401k or Individual K from the collectibles rule any investments in gold, silver and platinum coins, and other coins issued under the laws of any State, and to gold, silver, platinum, or palladium bullion. This has been in effect since January 1, 1998 and is detailed in section 304 of the Taxpayer Relief Act of 1997.