A 401(k) is an employer-sponsored retirement plan. Those who are self-employed can also open an individual or self-directed 401(k), a type of retirement account specifically designed to support businesses that employ only the owner, the owner’s spouse and business partners. If you have a 401(k), you may want to understand the relevant investment rules.
4 IRS 401(k) Investment Rules to Follow
Below are four rules to follow if you want to invest in a 401(k).
1. Contribution Limits
Self-directed 401(k) investment rules for contribution limits mean you can currently contribute a maximum of $22,500. Catch-up contributions for those over 50 add another $7,500, making the total contribution limit $30,000. There is also a limit set by the IRS on the maximum joint contribution an employee and employer can make. Currently, this limit is $66,000.
The maximum joint contribution also must not exceed the employee’s annual compensation. Highly paid employees can use only the first $330,000 of their income when calculating maximum potential contributions.
2. Withdrawing Money
There are also 401(k) rules for withdrawing money. If the account owner withdraws from the account early, they will typically have to pay income taxes on the withdrawal and pay a penalty. If you are younger than 59 ½, you may be required to pay a 10% penalty on the early distribution. To get a payout from your 401(k) plan, a triggering event needs to be satisfied. Examples of triggering events include:
- Experiencing a qualifying hardship
- Retiring from the job
- Reaching age 59 ½
- Becoming disabled
- Leaving the job
Other exceptions to the 10% early withdrawal tax include the death of the account owner and the termination of the plan.
3. Investment Options
Typically, you can choose from several types of investment options with a 401(k). Options may include:
- Stocks
- Bonds
- Index funds
- Mutual funds
- Foreign funds
- Small-cap funds
- Large-cap funds
- Exchange-traded funds (ETFs)
Conventional 401(k) plans typically don’t permit investing in alternative assets like collectibles or precious metals. This is where a self-directed 401(k) comes in. With this type of plan, you can also invest in:
- Tax liens
- Real estate
- Trust deeds
- Private equity
- Cryptocurrency
- Precious metals
4. Transactions
401(k) plans prohibit certain transactions. For example, you cannot conduct a transaction with a disqualified person. A disqualified person is someone who has a financial interest in your plan or provides services to your plan, such as:
- Child
- Parent
- Spouse
- Grandchild
- Grandparent
- Account beneficiary
- Son-in-law or daughter-in-law
- Account administrator or custodian
- Companies in which you own 50% or more of the voting stock
Contact Accuplan to Learn More About Investing Your 401(k)
At Accuplan, we can help you invest in a 401(k) or IRA. These accounts are self-directed, and investment options include real estate, gold, private equity and cryptocurrency. Our team has years of experience in this industry, so we can offer you the guidance you need.
Contact us at Accuplan to learn more about self-directed and solo 401(k) investment rules, or fill out a form for onboarding today.
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Our content should not be relied on for investment advice but simply for informational or educational purposes only. Our information is not meant to provide, nor should it be depended on for advice regarding investment, tax, legal or accounting concerns.
Author: Nick Barker