401(k) plans are a staple for people seeking early retirement and come with significant tax advantages. Contributions to a 401(k) plan may be tax deductible. As a result, you might be able to lower your current tax bill and grow your portfolio at the same time. Granted, you will owe income tax on withdrawals taken at retirement age, but by the time most people retire, they have less income. That means the 401(k) withdrawals are taxed in a lower bracket. Combine that with the IRS stretching of tax brackets each year, and you can pay significantly less in taxes in retirement than you would have without a 401(k).
Most investors buy assets found on public markets, like stocks, bonds, and mutual funds. Most 401(k) plans have more restrictions in place that limit the assets you can buy and sell. If you only want to get involved with stocks, bonds, and mutual funds, a conventional 401(k) plan can be great for you. However, if you want to explore alternative assets like gold, you may need a self-directed 401(k) plan to explore more possibilities. We will cover how to get started with a 401(k) plan focused on gold and if it makes sense for your financial goals.
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Is Gold a Good Investment?
With any investment, it’s important to consider the strengths and weaknesses. Understanding more about what makes an asset perform or decline helps investors determine how to allocate their capital. Gold isn’t the type of asset to lead your portfolio during a bull market. You’re typically better off with growth stocks during good times; however, economic recessions and depressions can bode well for gold, depending on how those economic conditions were reached.
2022 was an exemplary year in this regard and highlighted gold’s value. While gold futures remained steady in 2022, stock prices tumbled. The S&P 500 and NASDAQ fell 19.4% and 33.1%, respectively. Of course, investors would have been better off buying gold during this time, but why did gold futures hold their own during economic uncertainty?
Gold has several characteristics that protect it from economic downturns. First, the limited supply of gold protects it from inflation. As inflation grows, the prices of goods and services also increase. This narrative breaks if a company overproduces goods and services and must now lower prices to reduce excess inventory. This doesn’t happen with gold since the vast majority of businesses cannot produce more of it. Instead, they must use available resources and hope miners and others find more gold.
Interest rates also don’t have as strong an effect on gold. These rates typically affect stocks and real estate more, as higher rates increase the cost of borrowing money. That means lower housing prices to compensate for higher monthly mortgages and weakened balance sheets of companies that rely on debt. Gold is less dependent on interest rates, and some investors run to gold during economic cycles where rates dramatically increase. In the 1970s, gold continued to gain value as interest rates continued to rise.
Gold is a time-tested asset that can be a portfolio hedge during economic downturns and uncertainty.
Can You Buy Gold in a 401(k)?
Your ability to buy gold in a 401(k) depends on the plan documents that govern your 401(k) account. If you have a conventional 401(k) plan, you likely cannot buy gold. Most conventional 401(k) plans limit you to public market assets like stocks, mutual funds, and bonds. You won’t have much wiggle room beyond those assets. Investors can compensate by purchasing gold ETFs and stocks with significant exposure to gold. For example, you can buy mining companies and jewelry companies that use gold in their jewelry. However, buying ETFs and companies with ties to gold can render you vulnerable to stock market correlations. Even though some stocks and mutual funds provide exposure to gold, they can correlate with index funds to a degree. Physical gold generally has less correlation to the stock market than gold ETFs and stocks that rely on gold. However, you can open a gold 401(k) account, which provides more flexibility.
What is a Gold 401(k)?
A gold 401(k) account lets you buy gold and other precious metals from your retirement account. You can buy the actual precious metals at custodian stores on your behalf instead of buying a stock or mutual fund that only gives exposure to gold but not direct ownership. This is similar to buying real estate vs. real estate investment trusts (REITs). REITs provide exposure to real estate, but you haven’t actually purchased a property. Buying real estate has its pros and cons compared to REITs, but when you own property, you have purchased an asset, whereas REITs provide a more direct means of exposure to an asset, just like buying precious metals with a company or mutual fund as the intermediary. You’re also able to choose which precious metals to buy and how to construct your portfolio.
Gold 401(k) plans also provide the same advantages as any 401(k) plan. You can accumulate gold and other precious metals while lowering your current tax bill.
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How Does a Gold 401(k) Work?
A Gold 401(k) plan is a self-directed account that grants investors more control over their asset choices. They aren’t restricted to the small number of asset types in a conventional 401(k) plan. Instead, a custodian stores the gold on your behalf. This custodian works with other customers and knows how to keep gold safe. These 401(k) providers may also charge an extra storage fee to oversee your assets.
Precious metals held in a retirement plan must be held with a depository; you cannot take possession of the metals and store them at home. Investors must fund their accounts with cash and then use those proceeds to buy gold and other precious metals. You cannot contribute precious metals you already own personally into a 401(k) plan.
How Is It Different from Other 401(k) Plans?
Gold 401(k) plans and conventional 401(k) plans have the same tax advantages. The main difference lies in which assets you can buy and sell. Gold 401(k)s let you buy physical gold and sometimes allow the purchase of other precious metals as well. In addition, gold 401(k) plans are self-directed. Self-directed IRAs and 401(k) plans offer a wide range of assets not available in conventional 401(k) plans, such as cryptocurrency and real estate.
Pros of a Gold 401(k)
A gold 401(k) retirement account offers several advantages; we’ve highlighted some of those primary benefits below.
Buy Gold in a Tax-Deferred Account
Most people want to save on their tax bill, and gold IRAs and 401(k)s turn that goal into a possibility. You can accumulate assets while deferring taxes into the future. By the time you retire and the IRS has continued expanding tax brackets, you may owe less in taxes when you withdraw funds from your account.
Inflation Hedge
Gold’s limited supply and strong demand make it a reliable inflation hedge. While other assets lose value during inflation as consumers buy fewer goods and services, gold can gain value during inflationary cycles.
Less Volatile
Gold can be volatile at times but is typically less so than the stock market. Growth stocks posted incredible gains in 2021, only to be hit hard in 2022. Changes to the gold price are less dramatic, providing more stability to your portfolio.
Portfolio Diversification
A diversified portfolio helps investors navigate all types of market conditions. Some assets perform well during bull markets, while protective assets like gold limit losses during bear markets. Most investors begin with stocks and bonds due to their versatility and ease of access. However, after mastering the basics, exploring alternative assets like gold can increase returns or minimize the downside during bad market conditions, depending on the nature of the asset.
Store of Value
Gold is likely to always hold intrinsic value due to its limited supply and ongoing demand in the global economy. Gold is, for a multitude of reasons, considered vital for society, And is not just for jewelry or Olympic medals. Gold is used in medical equipment due to its biocompatible nature. You’ll also find it in smartphones, cars, airplanes, and other equipment and transportation methods. Society needs gold, which gives the asset its store of value status.
Cons of a Gold 401(k)
Gold 401(k) plans present several advantages, but it’s important to be aware of potential downsides. Consider these disadvantages before opening a gold 401(k) account.
Storage Fees
Gold 401(k) plans cost more than conventional 401(k) accounts due to storage fees. The gold and other precious metals you invest in must be stored at a depository on behalf of your 401(k) account. Investors can’t store the precious metals themselves to avoid this fee, as doing so is prohibited by the IRS. The extra storage fee can affect profits, but many investors consider it justifiable due to gold’s appreciation potential, unique characteristics, and the tax savings of a 401(k).
Not as Liquid as Other Assets
Want to sell a stock and use that cash to cover an emergency? You can sell it right away and deposit the funds into your bank account. Physical gold is a little more complicated. There are gold exchanges that help you buy and sell gold to limit how long it takes, but this process is not as quick as stock trading. You probably won’t hold onto gold as long as real estate, but don’t expect to sell a physical gold coin in a few minutes.
May Not Perform as Well in Bull Markets
Gold has its strengths and weaknesses, but it usually isn’t the best asset to hold in a bull market. Gold won’t necessarily nosedive, but other assets historically achieve stronger returns when the economy is roaring. In addition, gold thrives on uncertainty and can act as a hedge to minimize risk. However, if you’re too heavily weighted in gold, you can miss bull market opportunities. Gold suits diversified portfolios, but too many limits upside during rallies.
