401(k)s, IRAs, TSPs… the average American employee today has a multitude of retirement plans and options at their disposal. While having access to such a range of retirement plans is ultimately beneficial, it can be difficult to assess which plan is most suited for your personal financial goals and needs. That’s why we have created this guide, in which we will be covering some frequently asked questions related to two of the most popular retirement plans: 401(k)s and IRAs.
The guide will go over the following questions:
- What are the main benefits of a 401(k) plan?
- Is it possible to own physical gold in a 401(k)?
- Why should I invest in gold and how can I do so?
- I want to use some of my 401(k) funds for gold investment purposes; how do I do so?
What are the main benefits of a 401(k) plan?
First, a quick summary. A 401(k) plan is an employer-sponsored retirement plan which allows employees to make contributions to said account in the form of automatic salary deferrals. Such contributions can be made on a pre-tax basis with taxes paid upon withdrawal (traditional) or on an after-tax basis with tax free withdrawals (Roth). In 2015, the maximum amount of salary deferrals and employee can make into the plan was $18,000 yearly.
401(k) plans are highly popular, with recent data estimating that as many as 50 million Americans having 401(k) plans. Such plans benefit the employee in several ways:
While a 401(k) is a defined contribution plan where the employee has to fund the plan with his or her own salary (unlike a defined benefits plan where the employer funds everything, such as a pension plan), many employers offer matching contributions into an employee’s 401(k). This is because as more and more employees are increasingly thinking long-term toward retirement, an employer’s decision to implement matching contributions to their 401(k) plan can be a significant factor in talent retention and acquisition. A study by the American Benefits Council indicated that 92% of companies surveyed offered matching contributions.
It is no secret that the majority of people struggle daily with self-discipline, including financial discipline. An employee may think “I’ll save 15% of my salary every month!”, yet when month end comes, that 15% never made it into the savings account, although that employee now has the latest iPhone 7. As 401(k)s operate on an automatic deferral basis, this saves the employee from having to exert limited willpower in spending choices as the money is deposited into the account automatically and cannot be withdrawn until retirement without incurring penalties.
Multiple Investment Options
While the range of investment options offered under most 401(k) plans can be quite limited from the perspective of a more sophisticated investor, for an average employee with limited financial knowledge, the range of mutual funds offered through the plan may give said employee more financial investment options that he or she may not have been previously aware of.
Under specific circumstances, employees are allowed to borrow from their 401(k) plan. Such circumstances can include home purchases, medical expenses, education expenses, or economic hardship. Loans must be repaid within five years and any interest paid (interest rates are typically lower compared to commercial borrowing) goes back into the account. That said, this is a last resort option and should not be considered by most employees as it violates the long-term savings intention of the plan.
Is it possible to own physical gold in a 401(k)?
Short answer: No.
In a typical 401(k) plan, the employer, or plan sponsor, is responsible for selecting its plan provider companies, which are historically mutual fund companies. The final list of funds offered to the 401(k) participants would be dependent on the employer’s requirements, such as lower expense ratios, as well as the employer’s negotiating power (which may be dependent on the total size of the 401(k) plan’s assets). The better the employer’s negotiating power, the higher chance it would be able to negotiate with the plan provider to provide mutual fund options outside of its own proprietary ones. Hence, for more investment-savvy employees, they may feel that the options offered under their employer’s 401(k) plan are insufficient for their needs.
As such, employees are typically limited to mutual funds offered by the plan provider, and mutual funds do not offer the option of physical gold investments. However, it may be possible that a 401(k) plan offers employees an option of indirect investment in gold, such as via Gold ETFs or gold miner stocks. For a detailed breakdown of the various methods of investing in gold, kindly refer to our guide titled ‘Gold IRA Investing’.
Why should I invest in gold and how can I do so?
More and more investors today are looking at gold as a powerful long-term investment, particularly physical gold. Using gold investment companies to help you move in the right direction has three main benefits, namely:
- As a store of value and hedge against inflation.
- Portfolio risk reduction via diversification as gold is lowly or negatively correlated with traditional investments such as equities and bonds.
- Good long-term returns.
For a detailed elaboration of the above points, you may refer to our guide titled Why Invest in Gold?.
For the employee who wants to add physical gold into his or her portfolio, a self-directed precious metals IRA is the ideal choice (see ‘Gold IRA Investing’ guide previously linked). A self-directed IRA is an IRA in which the account owner retains full control over where the funds are invested, and under IRS regulations, such accounts are permitted to invest in four physical commodities, being gold, silver, platinum, and palladium.
I want to use some of my 401(k) funds for gold investment purposes; how do I do so?
If you are an investment-savvy employee who wishes to utilize some of your 401(k) funds to invest in gold, then you will have to perform a 401(k) to Gold IRA rollover. Note however that if you are still employed by the company that sponsors your plan, you will likely not be able to rollover said funds into a Gold IRA, although you should check with your employer as there may be some exceptions. In such cases, an employee can simply open up a Gold IRA account directly using other personal investment funds. If the 401(k) is from a previous employer however, then it is perfectly fine to rollover said funds into a Gold IRA.
The 401(k) to Gold IRA rollover process is very simple, particularly if you are performing a direct rollover, which is the safest and most efficient method where the funds are transferred directly from your 401(k) to your IRA. There is also the indirect method, where funds are deposited into your personal account prior to being transferred into the IRA (for a maximum of 60 days), however this method carries additional risk of penalties, and unless the employee requires short term use of said funds, there is no benefit to utilizing an indirect rollover.
401(k) plans are undoubtedly a great retirement plan for the average employee. With the potential for matching contributions from the employer and enforced financial discipline, it is no wonder that most financial advisors recommend that a 401(k) be maxed out. However, due to the structure of a 401(k) plan, more sophisticated investors may consider the range of options offered to be too limited. For example, 401(k) plans do not offer investors the option to invest in physical gold, which can be advantageous to an investor’s portfolio. Should an investor wish to invest in gold using retirement funds, the best option would be to perform a 401(k) to Gold IRA rollover as previously described. We hope that this guide has educated you on some of the investment options available outside of the typical 401(k) and that you are better equipped to make the best investment decisions for your goals and needs.