Can I Put My 401k Into Gold?

Can I Put My 401k Into Gold?

The reason for your asking depends on your vantage point. You might already have a 401k and want to invest in gold. You might not have a 401k but want one. Do you want to invest your new 401k funds in gold securities or physical gold? You want to invest in gold and don’t care how you do it. Should you create a 401k to do it? We will cover all of the bases here.

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What is a 401k?

Can I Put My 401k Into Gold?

A 401k Plan is a tax-preference retirement savings plan authorized by Section 401k of the Internal Revenue Code enacted in 1978. They are tax-preferred because certain tax breaks are granted for contributions and withdrawals from the plan.

Initially, they were created by employers for the benefit of their employees. But self-employed people can also create a plan and enjoy the tax benefits.

Title to the funds of a 401k must be held in trust by a separate trustee who operates subject to fiduciary duties. Usually, the trustee is a bank, brokerage, or mutual fund. The trustee must also hire a record keeper typically an accounting firm.

The 401k trustee is responsible for making investment decisions. Accordingly, in addition to statutory restrictions on investments, the trustee tends to be conservative because of their fiduciary responsibilities.

Self-directed 401ks allow the Participant some say in investment decision-making, but ultimately the 401k trustee has fiduciary responsibility and veto power.

See our page explaining exactly what a gold backed 401k is for more information.

Types of 401k

There are now basically three types of 401k plans

❑ Traditional

The original and Traditional 401k is distinguished by the tax benefits and limitation on contributions.

Can I Put My 401k Into Gold?
  • Contributions by an employer in place of wages to the employee-Participant are not taxable to the employee. If the employee is allowed to make contributions they are deductible.
  • Self-employed people are allowed to set up a 401k Plan.
  • Taxation of earnings of the Plan is deferred until the Participant retires.
  • Withdrawals from the Plan are generally taxable to the Participant.

While weighing the kinds of investment the Plan should make please note the following. Gains from the Plan’s capital investments that would otherwise be taxed as capital gain are ultimately taxable as ordinary income upon withdrawal. So 401k tax advantage of deferral may or may not be a benefit depending on the employee’s circumstances.

❑ Roth

A Roth 401k is a 401k Plan that has been designated as a Plan qualified for special Roth treatment. Compared to traditional 401k, the tax treatment is reversed. That is, contributions to a Roth are not deductible, however, withdrawals of accumulated earnings are not taxable. Since withdrawals from a Roth are not taxable, the accumulated tax-free earnings are effectively never taxed.

❑ Self–Employed

The original 401k was intended as an employer-sponsored retirement plan. Normally, an employer would contribute funds to the employee’s Plan in place of wages. Eventually, 401k benefits were extended to Plans created by self-employed taxpayers. 

A self-employed 401k generally works like a traditional 401k. Contributions are deductible and earnings are tax-free until withdrawal.

However, since a self-employed Participant is both the employer and the employee, the Participation can contribute more funds on a tax-deferred basis.

Limitations on Contributions

Can I Put My 401k Into Gold?

Employer contributions to a traditional 401k Plan are not taxable to the employee. An employee may also make deductible contributions to their Plan but are subject to limitations. For 2022, an employee may contribute up to $20,500, subject to cost of living adjustments for future years.

If you are a self-employed person, as an employee you can contribute $20,500 to a self-employed 401k. In addition, as the employer, you may deduct contributions as employee compensation subject to a limitation of up to 25% of net self-employment income.

Hence, for 2022, if you have net self-employment income of $100,000, you could contribute before-tax dollars equal to $45,000 ($20,500 plus $25,000).

So-called ‘catch-up’ contributions of an additional $6,500 are allowed for Participants over 50.

You can also learn about moving your 401k to gold.

Restrictions on 401k investments

Can I Put My 401k Into Gold?

Traditional 401k Plans are restricted as to the kinds of investments they can make. The limit is intended to minimize risk investments that might threaten the security of funds of 401ks that are effectively subsidized by U.S. income tax deferral.

401k Plans are usually managed by professional fund managers who are limited by law and by practical considerations of a fiduciary. Self-directed plans allow Participants to direct the investment of their 401k funds but the same restrictions apply.

Generally, managed 401k Plans offer different kinds of investments subject to restrictions. Most Plans invest only in mutual funds that focus on different industries of other categories. Some offer investment options including individual stocks, bonds, other securities, real estate, and money market funds.

Investments in gold, silver or other precious metals are limited to indirect investments known as “paper gold”. For example, some allow mutual funds that focus on investments in precious metals but the 401k cannot possess direct or physical ownership of precious metals.

Do You Really Want to Invest in Gold?

Here are some widely recognized reasons to invest in gold.

  • Gold historically holds its value. Hence it makes for long-term investment strategies to pass on wealth to younger generations.
  • Hedge against a weak U.S. Dollar. The U.S. Dollar is a strong currency but it has experienced some devaluations for example 1998 and 2008. During those periods Gold nearly doubled in value.
  • Hedge against inflation. Fiat currency (e.g. the Dollar) tends to lose its purchasing power during times of inflation. Gold values tend to rise with inflation.
  • Deflation protection. While prices are deflating (as happens during a recession and excessive debt), gold prices tend to increase because consumers are hoarding cash and stashing it in a safe investment like gold.
  • Geopolitical crises. It tend to drive investors to seek safe investments like gold till their confidence in governments are restored.
  • Supply factors. Most of the supply of gold is influenced by sales of bullion by central banks and gold mining activities. If central banks cut back on sales and/or mining slows, the value of existing supplies goes up.

How Can I Invest My 401k in Gold?

Because of the restrictions on 401k investments, 401k Plans cannot invest in physical gold or silver bullion. Plan investment in gold is generally limited to indirect investment or paper gold. They include:

  • Gold mutual funds. The gold mutual fund invests in companies engaged in gold exploration, mining, and production companies. Some funds buy a small amount of physical bullion, but the vast majority do not invest directly in bullion.
  • Gold ETFs. A 401k Plan can work with a brokerage option that offers more investment freedom. A simple way to invest in gold is by investing in exchange-traded funds (ETFs). Some ETFs offer investors the ability to invest in shares of an exchange-traded fund that holds mainly physical gold or silver bullion.
  • Self-directed IRS Rollover. If you really want to use your retirement plan to invest in gold bullion, you might consider rolling over your self-directed 401k into a Gold IRA Rollover.

Gold IRA

Can I Put My 401k Into Gold?

You can invest your 401k funds in physical gold by rolling your 401k funds into a Gold IRA. A Gold IRA is a self-directed individual retirement account (IRA) qualified to invest in any form of the qualified metals, including gold – mutual funds, individual stocks, exchange-traded funds (ETF), as well as physical bullion.

Qualified Gold IRAs are allowed to invest in physical gold, silver, platinum, or palladium, but only in the form of IRS-approved coins or bars. Bullion must meet certain fineness and purity requirements.

The IRS imposes strict rules governing the type of physical gold that a gold IRA can own. Gold bars must have at least 99.5% in purity. The IRA can own only gold coins that are among a specified list including American Gold Eagle, American Buffalo, Canadian Maple Leaf, and Australian Gold Nugget/Kangaroo, among others.

Some popular forms are specifically disqualified by the IRS. South African Krugerrand and United Kingdom Sovereign are not qualified for Gold IRAs. Likewise, gold collectibles are not qualified.

Storage Requirements of Precious Metals IRAs

Can I Put My 401k Into Gold?

The IRS requires that qualified IRAs must maintain their precious metals in the custody of the trustee or qualified custodian. The Participant may not possess the metals. The trustee or custodian must be a bank, federally insured credit union, savings and loan, or other entity approved by the IRS.

Beware of companies promoting so-called ‘checkbook’ IRAs designed to circumvent the IRS custodian and storage requirements. They are set up as a limited liability company (LLC) owned by the IRA. Under the scheme, the LLC purchases, owns, and stores the physical metals. While the IRA-controlled LLC is technically a separate entity there is scant substantive distinction from the IRA’s physical storage of the metals.

Neither the courts nor the IRS has taken a position on the legal efficacy of the checkbook IRA scheme. An unfavorable ruling could jeopardize the qualification of your Gold IRA.

Gold IRA Fees

Using a gold IRA has special costs because of the special IRS requirements. They include:

  • Seller’s markup. The purchase price of gold includes markups depending on whether you buy gold bullion, coins, proofs, etc. It is a one-time fee that varies with the vendor.
  • IRA setup fees. While they vary among financial institutions Gold IRA setup fees are usually higher than it is for regular IRAs.
  • Custodian fees. Regular IRAs involve similar fees, but precious metals require special costs. Typically, precious metal custodians require specialized services that are performed by different financial institutions than the trustee.
  • Storage fees. The extra qualifications and security capability of storage facilities add to the storage costs.
  • Cash-out costs. If you want to close out your gold IRA you sell your gold to a third-party dealer. The buyer expects to make a profit on a resale. Hence, they are likely to pay a below-market price.

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