Do you participate in a 403(b) plan at work? Have you ever wondered if (and how) you can invest in recession-proof physical gold bullion (or other investment metals) with your 403(b)? Here, we’ll go over 403(b) accounts, gold investments, and how you can safeguard your assets against economic calamity.
What is a 403(b) Plan?
Named after Section 403(b) of the Internal Revenue Code, a 403(b) plan is a tax-advantaged defined contribution retirement plan available to certain public school employees, tax-exempt non-profit organizations, and some church ministers.
Much like with a 401(k), employee participants in a 403(b) plan are able to defer money from their paychecks into a retirement investment account. In fact, 403(b)s act very similarly to 401(k)s in many aspects. Each has a plan provider and plan administrator, and the investment options available to a participant are limited to what their specific plan offers.
403(b) accounts used to be referred to as “Tax Sheltered Annuities”, as they were initially set up to only offer annuities as an investment choice. Even though more investment types are now eligible to be offered, many 403(b) plan providers are still insurance companies who predominantly feature annuities (much like how many 401(k) providers are mutual fund companies, and therefore most 401(k) funds are allocated towards mutual funds).
Most employers who offer 403(b) plans do not offer contribution match programs like many 401(k) plans do, since doing so would subject the plan to ERISA compliance guidelines and regulations. That said, avoiding ERISA guidelines often means smaller administrative costs and fees within a 403(b).
403(b) Plan Rollover Rules & Limitations
If you have a 403(b), you can roll them into an Individual Retirement Account (IRA), other 403(b) accounts, a 401(k) plan or other select qualified plans without incurring any tax penalties. Here is an overview of some 403(b) rollover rules:
When you receive funds from your 403(b) for a rollover, you have 60 days to complete the process. If you fail to do this, the IRS will treat your money as a taxable distribution. Additionally, if you are not yet 59 ½ years old, the IRS will also impose a 10% penalty on the withdrawal on top of the normal income taxation.
You are limited to one rollover per year from a 403(b) into an IRA. This one-year period begins on the date that you receive your 403(b) distribution. This applies separately to each IRA that you own.
You cannot use the cash from your distribution to purchase investments in the period in between receiving your 403(b) distribution and establishing your IRA.
It is advised that you select the option to perform a “direct rollover” with your 403(b) funds. In a direct rollover, you never receive a check for your distribution; rather, your 403(b) plan provider will transfer the money directly into you new IRA plan.
403(b) Plan vs. 401(k) vs 457(b) vs Other Retirement Accounts
Here is a table that illustrates how a 403(b) plan compares to other similar retirement vehicles.
("Maybe" indicates that gold investment options are at the discretion of the plan provider. For instance, some 403(b)s offer gold mutual funds or ETFs, while others do not.)
Types of Gold you can Invest in Through a 403(b) Plan
403(b) plans offer more investment options than they used to; however, they still tend to have some of the most limited choices of any retirement plan.
Though your options are limited to what your plan provider makes available to you, 403(b) plans are eligible to include:
fixed, equity indexed and/or variable annuities
individual stocks and bonds
exchange-traded funds (ETFs)
In short, this means that you cannot invest in physical gold bullion (or any other precious metal) through a 403(b) Plan. The simplest way to invest in gold through a 403(b) is to purchase stocks in gold mining companies, or to purchase a mutual fund that includes mining company stocks. This is referred to as buying “paper gold.” There are also gold ETFs (GLD) and mining ETFs, which provide indirect access to investing.
Investing in Physical Gold vs. ‘Paper Gold’
So-called ‘paper gold’ stocks are the shares of companies that mine, produce and explore for gold. There are literally hundreds of gold stocks to choose from, and the larger companies are listed on major gold stock indices like the Gold Miners Index (GDX) or the BUGS Index (HUI).
Gold stocks tend to be more risky than owning physical gold. This is because, historically, gold stocks will appreciate very quickly as the spot price of gold rises; if the price of gold falls, gold stocks tend to fall much faster.
Gold stocks are also exposed to additional kinds of risk. Some examples:
Regulatory Risk – mining and exploration companies are subject to increased regulation and taxes.
Cost of Production Risk – mining equipment depreciation, increased land values, and labor costs can all negatively impact a mining company.
Management Risk – mismanaged or overly-leveraged companies can and do declare bankruptcy or close shop altogether.
Fiat Currency Risk – when you sell securities like gold stock or shares of a gold mutual fund, you will be paid in a fiat currency. That means that, in the event of currency collapse, you can be left holding worthless paper.
The value of physical gold has never hit zero and has retained value for thousands of years. In terms of staying power, physical gold wins hands down.
Benefits of Rolling Over a 403(b) Plan to a Precious Metals IRA
The advantage of rolling over your 403(b) Plan assets into a self-directed IRA is that you are able to control the designation of your retirement funds and open up new tax-free investments – like precious metals.
In an employer-funded retirement plan, such as a 403(b), your investment options are more limited than with a precious metals IRA. Additionally, 403(b) plans require the account owner to establish a vesting schedule, which means that you are only entitled to your funds after a certain length of time has passed. In terms of flexibility, the self-directed IRA wins hands down.
Additionally, 403(b) plans are vulnerable to the business risks of your employer. If your employer declares bankruptcy, for instance, you could lose the ability to contribute to your retirement plan.
Benefits of Dedicating 5-20% of your Retirement to Precious Metals
Gold investments are simple, safe way to diversify your retirement portfolio. Gold (along with other investment metals like silver, platinum and palladium) will help protect your assets against stock market volatility and inflation.
Not only is gold a great hedge, but gold offers plenty of growth potential; in fact, many investors purchase gold for its growth prospects alone, and many analysts predict gold to continue to see gains in the future.
The total amount of precious metals in your retirement portfolio will depend on your own risk tolerance and retirement horizon. One of the best ways to set up a diversified retirement portfolio – and receive tax benefits on your precious metals investments – is to open a self-directed IRA.
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