Investing in Gold with a Keogh Plan

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Are you an owner of a Keogh retirement plan and are wondering how to get the most value out of it? Do you want to know if (and how) you can invest in recession-proof physical gold bullion (or any other precious metal) through this account? This page will have all your answers.

What is a Keogh Plan?

Established in 1962 thanks to the efforts of Representative Eugene Keogh, a ‘Keogh Plan’ is a tax-advantaged pension plan designed for self-employed workers or unincorporated business entities.

Not all self-employed persons can establish a Keogh Plan. Independent contractors, for instance, cannot open a Keogh. Rather, they are only available to self-employed individuals that own an unincorporated business.

The defined benefit Keogh operates much like a traditional pension plan, with the caveat that it is self-funded.

Types of Keogh Retirement Plans

• Profit Sharing Plan
• Defined Benefit Plan
• Money Purchase Plan

Profit Sharing plans allow you to choose each year how much you want to contribute. The limit for 2024 is the lesser of 25% of income or $69,000 plus a $7,000 catch-up contribution if you are over age 50 or older.

For Defined Benefit Plans your contribution limits are set by the amount you wish to receive at retirement. You must make quarterly contributions to receive a maximum of $230,000 or 100 percent of the highest 3 consecutive years of income.

Money purchase plans require that you set a percentage of your income to contribute to the plan. The maximum is 25 percent, and you will be subject to a penalty if you do not contribute the established amount.

Keogh Plans are notorious for complicated paperwork, but remain a viable option for high earners who are self-employed. Establishing a Keogh Plan does not inhibit your ability to contribute to an IRA.

Keogh Plan Rollover Rules & Limitations

If you are self-employed and have a Keogh, you are considered an employee for rollover purposes. This means that you are allowed to rollover part or all of eligible rollover distributions into a self-directed IRA. This is considered a tax-free rollover between like accounts.

In other words, a Keogh Plan distribution that is subsequently rolled into a self-directed IRA is not counted as income. However, if the rollover distribution is paid directly to an IRA holder, typical withholding limits (20%) apply. You can avoid this requirement by instead choosing to execute a direct rollover.

Keogh Plan vs. SEP vs. Solo 401k vs. Other Retirement Accounts

Underneath this text, we've put together a chart that illustrates how a Keogh plan weighs up against other leading tax-advantaged retirement accounts.

("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.)

What Types of Gold Can You Invest In Via a Keogh Plan?

Keogh plans are able to invest in the same instruments as 401(k) plans and standard IRAs (traditional and Roth). This means that they are able to include:

• individual stocks
• individual bonds (corporate and government)
• certificates of deposit (CDs)
• mutual funds
• exchange-traded funds (ETFs)

Unfortunately, you simply cannot invest in real assets such as precious metals bullion with a Keough plan. However, you can gain exposure to assets that are tethered to the price of gold or silver, such as stocks in mining or exploration companies. Likewise, you could purchase shares of a gold or silver ETF or index fund that specializes in precious metals companies—these are what are known as “paper gold” assets.

Physical Gold Investments vs. ‘Paper Gold’: The Key Differences

There is no shortage of paper gold or paper silver stocks, such as Barrick Mining Corporation, or even publicly-listed indices such as Gold Miners Index (GDX) or the BUGS Index (HUI) that you can add to your Keogh plan.

These index funds invest in a diverse range of companies that are active in the precious metals sector, which can include those that operate mines, exploration campaigns, or refineries.

Sure, paper gold is a convenient and accessible alternative to physical bullion. Paper gold is not without its share of drawbacks, however. Thanks to their liquidity as public securities, these assets can be quickly bought and sold and, therefore, they are susceptible to volatility. When the spot price of gold drops, for example, the outsize negative impact of this is very quickly reflected in the value of a gold mining stock.

Unfortunately, that's not the other type of risk associated with paper gold. Investors also have to be aware of the following risk categories:

• Regulatory Risk – the regulatory environment surrounding mining and exploration is mired by controversy and can change depending on the political landscape.

• Cost of Production Risk – when mining equipment breaks or degrades, it requires costly investments from the mining company to recoup their losses that can impact their bottom line.

• Management Risk – if a paper gold company is mismanaged or runs into new management that isn't well-versed in the industry, the company's security can be put in jeopardy.

• Fiat Currency Risk – paper gold is purchased and sold with fiat currency, which can lose its value in the event of hyperinflation or economic catastrophe.

On the other hand, physical gold and silver never lose their value entirely. It's impossible for a bar of gold to go bankrupt or be mismanaged. For this reason, physical assets are much more secure and pose less risk to the investor than paper gold.

Benefits of a Keogh-to-IRA Rollover

There are plenty of advantages associated with rolling over your Keogh plan assets into a self-directed IRA. For one, an IRA gives you full checkbook control over what you want to invest in. Whereas a Keogh is limited to traditional stocks and bonds, IRAs empower investors to diversify with real assets and alternatives.

Employer-sponsored retirement accounts, like Keoghs, are limited in scope and are inherently conservative. If you want to diversify with precious metals and take real control of your retirement savings, an IRA is a far superior option. Plus, with an IRA, there's no vesting period. IRAs do not require investors to have their assets sit in their account for a period of time before a distribution can be made.

No doubt, IRAs win on flexibility and customizability. Not to mention, Keoghs often charge higher fees and are subject to more regulation, making them tricky to manage without accidentally triggering a penalty or fee.

Why Dedicate 5-20% of your Retirement Savings to Precious Metals?

Gold is the ultimate diversifier, and it has served this role for millennia. Since Roman times, gold and silver have been used to store value and protect one's savings. Financial markets are fickle, unpredictable, and vulnerable to collapse. However, gold, silver, and platinum-group metals are resistant to major price fluctuation and always hold their value over time.

Although gold is solid as a rock when it comes to hedging, it's also a reliable growth asset. A troy ounce of gold hit a market high of $2,058 per troy ounce in 2020, up nearly 25% from its high on the previous year at $1,542. This kind of growth rivals the S&P 500 and other stock market indices in their best years. As more investors seek safe growth in the years ahead, it's safe to assume that gold and silver will continue to trend upward with time.

Not everyone should dedicate the same share of their portfolio to precious metals. Going over 20 percent or under 5 percent is generally not recommended. The closer you are to retirement, generally speaking, the more of your portfolio you should devote to precious metals. Younger and more risk-tolerant investors can afford to be on the lower end, with a 5-10 percent allocation in precious metals in an IRA.

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