Gold in 401ks: Should You Invest?
If you own a business with a Solo 401(k), you may be wondering if adding gold is the right decision for you. Adding special metals bullion is a great way to diversify your retirement portfolio and protect yourself from economic troubles and currency devaluation.
In this article, we’ll discuss what a Solo 401(k) is and how it compares to other retirement vehicles. We’ll also look at the benefits of adding gold to your retirement portfolio and how to get started if you’re ready to take advantage of gold’s benefits.
What is a Solo 401(k) Plan?
As the IRS website tells us, a Solo 401(k) is the same as a regular 401(k) plan, but it is for business owners who do not have any other employees. These plans were introduced in 2001 to help self-employed workers save for retirement. They can be used in addition to Profit Sharing Plans, Keogh Plans, or Individual Retirement Accounts.
Solo 401(k) plans are similar to regular 401(k) plans, with two exceptions. First, the employer/owner and their business aren’t subject to the costly and complex guidelines of the Employee Retirement Income Security Act (ERISA). Also, there can be no other employees of the company who are considered full-time (1,000+ hours worked annually).
Contributions to Solo 401(k) plans are quite different than other plans. The only people considered as employees are the account owner and the employer. This means that, in 2014, employee contributions can only be $17,500 ($23,000 for people age 50 or older). After that, any additional contributions must be considered employer contributions. In the end, these distinctions are just semantics required by IRS rules. The total value of employer and employee contributions cannot be more than $52,000.
Solo 401(k) plans do not have to use a particular custodian as IRAs do. This means that almost any bank or financial institution can be a trustee for the plan. If you find the right institution, the program can invest in a variety of different assets classes, like real estate or precious metals. Under some situations, Solo 401(k) plans can even invest in life insurance policies, something self-directed IRA plans cannot do.
Solo 401(k)s are a great retirement plan because they have low fees, are flexible, and are easy to use. However, they are not available to most workers, and they require a lot of paperwork and document maintenance.
Solo 401(k) Plan Rollover Rules & Limitations
A Solo 401(k) is an individual retirement account that you can use if you are self-employed. You can put money into it, and you can also withdraw cash from it. You can also use it to save for retirement if you have a job. But you should be careful because not all Solo 401(k)s allow you to do rollovers. This is why it’s essential to set up your Solo 401(k) carefully.
There are no fees or tax penalties for rolling over within IRS guidelines, as long as you do it correctly:
- If you want to roll over your Solo 401(k), you have to do it within 60 days. If you don’t, the money you take out will be taxed, and you will also have to pay the penalty for taking the money out early if you are not yet 59 1/2 years old.
- You are allowed to make one rollover from one IRA to another IRA in a calendar year. This is the date you receive your distributed funds. You can do this rollover for every IRA you own.
- You cannot use the money from your distribution to buy investments until you have put the money in your IRA account.
It’s an excellent idea to only do a “direct rollover” when you move your retirement account funds. With a direct rollover, the money never enters your hands. The funds are sent directly to the receiving account, which means there is less chance for human error. Indirect rollovers are often considered less safe and less efficient than direct ones.
Types of Precious Metals Compatible For Inclusion in a Solo 401(k) Plan
If you are picking a financial institution to be your trustee for a Solo 401(k) plan, it is essential to know what kind of investments they will let you invest your money in. The limitations the trustee puts on you will be significant in deciding what type of gold you can buy.
In general, Solo 401(k) plans may invest in the following:
- individual bonds (corporate and government)
- Precious metals
- certificates of deposit (CDs)
- mutual funds
- exchange-traded funds (ETFs)
- life insurance
- Individual stocks
- real estate
- S corporations
You can also invest in gold bullion through a Solo 401(k) plan, as well as other alternative assets. However, not all trustees are able or willing to finish investment metal transactions. If you own a Solo 401(k) and don’t have any trustee who can complete a precious metals purchase, you’re best done to either roll over into a self-directed IRA or create a separate one.
Physical Gold (Bullion) vs Paper Gold Investment
When you buy precious physical metals, you own the asset. The metal bars are stored in a safe and secure place. You can get them any time you want. There is no risk that the other person will not give you the metal, and you are the only one who owns it.
You can indirectly own gold by buying stocks in companies that mine gold. These stocks are found on exchanges like the TSX or NASDAQ. Some examples of these companies include AngloGold Ashanti and Newmont.
There are gold ETFs and mining index funds that give you more exposure to the underlying asset. For example, the BUGS Index (HUI) or the Gold Miners Index (GDX).
Remember that gold stocks are much riskier than owning physical gold. This is because they can be quickly bought and sold, which makes them more volatile and prone to price swings. But that’s not the only form type of risk associated with this type of asset. With paper gold, you also need to consider:
- Regulatory Risk – Companies that are involved in mining and exploration have to follow state laws and regulations very closely.
- Cost of Production Risk – Exploring and mining can be expensive and require a lot of capital. Equipment often breaks down, which can result in significant expenses for the company.
- Management Risk – There is always a risk that the company will get new management who is not good at their job or that the company will be bought by new owners who will not manage their assets well.
- Fiat Currency Risk – When you buy or sell paper gold, you risk losing value in your currency. This can happen because of inflation, hyperinflation, or a currency crash.
Gold has been valuable for a long time. It’s never hit zero, and it’s always been a safe place to store value. You don’t need to be wary about the risks mentioned above when it comes to investing in physical gold.
Rolling Over a Solo 401(k) Plan into a Precious Metals IRA
A Solo 401(k) can give you a lot of benefits for retirement. But there are plenty of rules that you have to follow carefully, or you might have to pay the penalty or fee. A self-directed IRA is much more flexible and lets the account owner do what they want with their retirement savings.
If you can’t invest in IRS gold bullion in your Solo 401(k), then you can rollover your funds into a new precious metals IRA will fix the problem. A rollover is tax-free and lets you invest in a broader range of assets.
Dedicate 5-20% of your Retirement Fund to Precious Metals
Investing in gold is a fun and ideal way to protect your retirement savings. Gold, silver, and platinum are resistant to knee-jerk reactions in the market, so they are a more stable investment. They also do not have any counterparty or inflation risk.
Precious metals are an excellent way to protect your money. But they are also a perfect way to grow your money. Many more investors are getting on board with precious metals because they can help shield your cash from volatility and also help it grow. After gold broke all-time highs in the summer of 2020, investors are looking for new ways to protect their wealth and grow their savings.
How much you invest in precious metals depends on how old you are and how much risk you are willing to take. If you’re close to retirement, you should think about investing more money into gold or silver so that you will lose less money if the market crashes.
Frequently Asked Questions about Gold in 401k
In fact, the vast majority of 401(k) plans do not allow individuals to make any direct investments in gold. This means you can’t go out and purchase gold bullion or gold coins as part of your retirement plan portfolio.
A self-directed IRA account lets you invest in physical gold and other precious metals. This can help grow your wealth and diversify your portfolio. You can also invest in other assets, like real estate, with a self-directed IRA account.
Gold is a valuable investment because it is not as volatile as some other investments in the short term, but it still maintains its value over time. Gold has been a hedge against inflation and the erosion of major currencies for many years, making it a wise investment to consider.
A gold IRA is an Individual Retirement Account that possesses physical gold or other approved precious metals. It is just like a regular IRA, but you have physical bullion coins or bars instead of paper assets.
You can only buy “paper gold” in the form of ETFs or mutual funds if your 401k plan allows precious metals investments. This means you can purchase eligible gold and silver coins and bullion and have them physically allocated with a third-party custodian.
Gold can be an excellent investment to have in your portfolio. This is because it often increases in value over time and has high liquidity in the commodity market.
The reason why gold is taxed at a 28% long-term capital gains rate is that the U.S. Internal Revenue Service (IRS) categorizes it as a “collectible.” Other assets held for more than a year are usually taxed at the 15% or 20% long-term capital gains rates, depending on which one you qualify for.
You can postpone your tax bill by doing a 1031 exchange. This means that you reinvest the money you made from selling your gold into buying more gold. If you follow the IRS requirements, then all of these transactions will not be taxed.
If you sell physical gold, you will have to pay a 20% tax. You will also have to pay a 4% tax on any long-term capital gains. There is no TDS rate when selling gold, but if you buy jewelry worth more than Rs 2 lakh in cash, you will have to pay 1% TDS.
Gold is a popular investment tool because it is easy to sell. It is easier to sell than stocks or bonds, which can be challenging to get rid of in a hurry. This makes gold an excellent choice for an emergency investment.
Read more: Should You Buy Gold?