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?
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.
Types of 401k
There are now basically three types of 401k plans
The original and Traditional 401k is distinguished by the tax benefits and limitation on contributions.
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.
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.
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
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
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.
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:
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
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:
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