Employee Stock Ownership Plan (ESOP) | Gold IRA Guide
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Employee Stock Ownership Plan (ESOP)

Gold IRA Guide / Types of Retirement Plans / Employee Stock Ownership Plan (ESOP)

GoldESOP

Do you participate in an Employee Stock Ownership Plan? Have you ever wondered how to diversify your retirement assets by investing in physical metal bullion, such as gold and silver?

Not traditionally compared with other employer sponsored retirement plans (such as 401k or 403b plans), an Employee Stock Ownership Plan — or ESOP —  is nevertheless an important, tax-advantaged investment vehicle. Here, we’ll go over what Employee Stock Ownership Plans are, how precious metals investing works, and how you can safeguard your retirement assets against economic calamity.

What is an ESOP?

In an ESOP, the employer sets up a trust fund where it is able to share its own stocks or designate cash to purchase existing shares. In the United States, ESOPs are the most common method for employees to become part owners of their company.

Shares in an ESOP trust are allocated to specific employee accounts, although the formulas that govern the allocation of shares may differ from company to company. Like other employer sponsored benefits, employees are usually not fully vested in their ESOP account until they have attained a certain seniority with the company.

If you leave your company, you will receive your vested stock and the company must buy them back from you at a fair market price.

ESOPs also have tax benefits. For the issuing company, stock contributions are tax deductible. Employees pay no taxes on any received contributions, and they can even roll over distributions into an IRA or other qualified retirement plan in order to avoid paying income or capital gains taxes.

ESOP Rollover Rules & Limitations

ESOP distributions can be rolled into other qualified retirement plans, but the distribution rules may differ from employer to employer. If you have an ESOP, consult the Summary Plan Description for specific distribution rules.

Much like a 401(k), there are penalties for taking distributions in cash prior to retirement age, and distributions are mandatory on April 1 following the year you turn 70 ½.

Your company can make your ESOP distribution in stocks, cash, or both. No matter how it is received, you always have the option of cashing in your stocks.

If you put the money into a traditional or self-directed (not Roth) IRA or the distribution is rolled forward into another qualified retirement plan in another company, there is no tax until the money is withdrawn, when the withdrawal is taxed as ordinary income.

ESOP vs. 401(k) vs. 403(b) vs. Other Retirement Accounts

Here is a table that illustrates how an ESOP compares to other retirement vehicles.

Plan TypeSponsorship2016 Contribution LimitRoth Option?Allow Gold Stocks?Allow Gold ETFs?Allow Gold Bullion
401(k)Private Employer$18,000 / $24,000YesMaybeMaybeNo
Solo 401(k)Self-employed$18,000 / $24,000YesYesYesYes
Keogh PlanSelf-employed or Unincorporated Employer$53,000NoMaybeMaybeNo
403(b)Government or Non-profit Employer$18,000 / $24,000YesMaybeMaybeNo
457(b)Government or Tax-exempt Employer$18,000 / $24,000YesMaybeMaybeNo
SIMPLE IRAPrivate Employer$12,500 / $15,500YesYesYesMaybe
SEP IRABusiness Owners & Self-employed$53,000YesYesYesMaybe
Profit Sharing PlanPrivate Employer$53,000NoMaybeNoNo
Money Purchase PlanPrivate Employer$53,000NoMaybeMaybeNo
AnnuityIndividualNoneNoMaybeMaybeNo
ESOPPrivate EmployerVariesYesMaybeNoNo
SARSEPPrivate Employer$18,000 / $24,000NoYesYesMaybe
Traditional IRAIndividual$5,500 / $6,500YesYesYesNo
Precious Metals IRAIndividual$5,500 / $6,500YesYesYesYes
Thrift Savings Plan (TSP)Government or Military$18,000 / $24,000YesNoNoNo
("Maybe" indicates that gold investment options are at the discretion of the plan provider. For instance, some 401(k)s offer gold mutual funds or ETFs, while others do not.)

Types of Gold You Can Invest in Through an ESOP

Unless you have accumulated diversification rights through your employer, ESOP participants cannot add gold investments through their ESOP. Unless you work for a gold mining company, your ESOP account will not contain any physical gold or “paper” gold.

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 property values, and labor cost increases can all negatively impact a mining company's valuation.
  • 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 gold mutual funds, you will be paid in a fiat currency. In the event of currency collapse, that means 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 an ESOP to a Precious Metals IRA

The advantage of rolling over your ESOP distributions 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 profit sharing plan, such as a ESOP, your investment options are obviously quite limited.  Additionally, ESOPs 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, ESOPs 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 Portfolio 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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