7707 / When a precious metal that is held within a 401(k) is sold, how is the transaction taxed?

A qualified plan could permit plan participants to invest in precious metals on a pre-tax basis. Moreover, trading by the participant in such an account would be tax-deferred. However, the distribution would normally be payable in cash rather than in-kind, and would thereby produce ordinary income rather than capital gain, unless a distribution in-kind is specifically taken. Distributions can be made in-kind from a defined contribution qualified plan. However, the prohibited transaction rules must be carefully observed, and there is a 10 percent penalty for distributions of any kind taken prior to age 59½ and the required minimum distribution rules (RMD rules) apply to accounts beginning at age Therefore, with potential negative income tax consequences, reporting and technical issues, use of a qualified plan to acquire precious metals, except in the stock or precious metals ETF form, generally may not be attractive (even in smaller companies for a sole participant with a solo 401(k) or defined benefit plan) as compared to owning metals personally.

---

Planning Point: An investor should not use the 401(k) vehicle for precious metal stocks (and similar investments) until satisfied that any purported provider of such investments inside a 401(k) has both the expertise and experience to judge the appropriateness of use of this vehicle and to handle the special issues raised by actual precious metal purchases by a qualified plan, even (and maybe especially) in the sole shareholder situation. Finally, the costs of investing and selling precious metals within a plan should also be compared with the costs of just purchasing the metal with after-tax monies and owning them personally.

---