Employee Stock Ownership Plan (ESOP)

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Do you participate in an Employee Stock Ownership Plan? Are you wondering how you can 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is rolled forward into another qualified retirement plan in another company, there is no tax until the money is withdrawn, when the withdrawal is taxed as ordinary income.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

The table below portrays the differences between an ESOP and various other retirement vehicles such as 401(k)s and IRAs.

Plan TypeSponsorship2024 Contribution LimitRoth Option?Allow Gold Stocks?Allow Gold ETFs?Allow Gold Bullion
401(k)Private Employer$23,000YesMaybeMaybeNo
Solo 401(k)Self-employed$69,000YesYesYesYes
Keogh PlanSelf-employed or Unincorporated EmployerDepends on Type of PlanNoMaybeMaybeNo
403(b)Government or Non-profit Employer$23,000YesMaybeMaybeNo
457(b)Government or Tax-exempt Employer$23,000YesMaybeMaybeNo
SIMPLE IRAPrivate Employer$16,000YesYesYesMaybe
SEP IRABusiness Owners & Self-employed$69,000 or 25% of CompensationYesYesYesMaybe
Profit Sharing PlanPrivate Employer$69,000 or 100% of CompensationNoMaybeNoNo
Money Purchase PlanPrivate Employer$69,000 or 25% of CompensationNoMaybeMaybeNo
ESOPPrivate EmployerVariesYesMaybeNoNo
SARSEPPrivate Employer$69,000 or 25% of CompensationNoYesYesMaybe
Traditional IRAIndividual$7,000 / $8,000YesYesYesNo
Precious Metals IRAIndividual$7,000 / $8,000YesYesYesYes
Thrift Savings Plan (TSP)Government or Military$23,000 + $7,500 Catch-up ContributionYesNoNoNo
("Maybe" indicates that gold investment options' eligibility is subject to the account custodian or administrator's discretion.)

What Types of Gold Can I 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’: Key Differences

There are myriad differences between “paper gold” (i.e., gold or silver mining stocks) and real, physical gold bullion. Although paper gold may be the more convenient option to buy or sell, it carries a more concerning risk profile that investors should be aware of.

Paper gold (or paper silver) refers to shares of companies that are active in the mining and exploration sector. These include individual stocks such as Barrick Gold (NYSE: GOLD) or entire industry-specific index funds such as SPDR Gold Trust (GLD) or Van Eck Vectors Gold Miners (GDX).

Gold stocks are known to be highly volatile assets that suffer from dramatic price swings brought about by fickle investor sentiment. However, there are several other forms of risk that investors should be aware of before they invest in paper gold, such as:

  • Regulatory Risk: it's impossible to predict the future regulatory environment of the mining and exploration sector since environmental protection laws change rapidly depending on political sentiment.
  • Cost of Production Risk: mining is a capital-intensive operation that can incur costs significant enough to bankrupt or financially jeopardize a company if their equipment needs to be replaced or repaired.
  • Management Risk: a new management team can come on board and drive a mining company to financial ruin; therefore, it's crucial that a mining company maintain a competent, experienced executive team.
  • Fiat Currency Risk: fiat currencies are necessary for buying and selling paper gold, which exposes the buyer and seller to currency risk if the currency is devalued or affected by hyperinflation.

These risks stand in stark contrast with physical metal bullion, which carries none of these risks. Gold and silver have never entirely lost their value or suffered from a market crash comparable to the great stock market crashes of the 20th and 21st centuries. Gold and silver bullion hold an inherent value that makes it a safe store of value for retirement investors.

Advantages of Rolling Over an ESOP to a Precious Metals IRA

Many investors choose to transfer the funds in their ESOP into a self-directed IRA so that they can invest in real assets like physical precious metals. This is facilitated via a process known as a rollover, where funding from one tax-advantaged account is sent to another account. Note, however, that the IRS only permits one rollover per 365 day period (for each account) without incurring fees or penalties.

Employer-sponsored plans, like 401(k)s or ESOPs, have very limited investment options. For greater freedom and diversity of choice, investors often rollover their funds into a new IRA that's self-directed (i.e., not set up with a brokerage like Vanguard or Charles Schwab). Plus, IRAs don't require vesting, which means they can be withdrawn at the account holder's discretion without undergoing a mandatory waiting period.

Aside from greater flexibility, IRAs don't carry the risk of an employer not holding up their end of the deal. Employer-sponsored plans are at the mercy of a third party. If the employer declares bankruptcy or can no longer meet their obligations, the longevity and security of the ESOP is called into question. This, fortunately, isn't true of IRAs.

What Are the Benefits of Dedicating 5-20% of Your Retirement Portfolio to Precious Metals?

Gold and silver have been used since antiquity as a safe store of wealth and medium of exchange. They are widely used in manufacturing due to their unique chemical properties, which confers them with inherent utility and value. This isn't true of gold stocks or equities more broadly, which only signify ownership in a company that could theoretically dissolve at any point in time.

In this way, gold and precious metals are safe assets that can diversify a portfolio. When stock markets crash, gold and silver often remain resilient. For this reason, more and more investors are turning to precious metals to manage risk in their portfolios.

If you're close to retirement age, you might want to consider dedicating more of your wealth to precious metals. In the event of a stock market crash similar to September 2008 or March 2020, you can lose your wealth in a matter of days if you're over-exposed to stocks. Spreading some of your wealth into precious metals allows you to shield your retirement savings from market shocks, letting you retire on time.

Investing in gold or silver via an IRA is an excellent idea if you're looking to grow your wealth as well. In recent years, gold broke all-time highs (most recently in August 2020) and silver is poised for record growth as President Biden's renewable energy plan is set to draw heavily on the world's silver reserves in the construction of solar panels.

Ready to take the next step?

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FTC Disclosure: We are an independent blog that aims at providing useful information for retirement account owners interested in alternative assets like precious metals. However, our content does NOT constitute financial advice. Please speak to your financial advisor before making any investment decision. Also, the data quoted on this website represents past performance and does not guarantee future results.


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