What is a Gold 401(k)?

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Investing in precious metals is often used as a way to mitigate risk and as a hedge against inflation. Most savvy investors who invest in precious metals like gold and silver use it to diversify their portfolios in addition to other traditional investments.

Although some investors shy away from precious metals due to complications regarding taxes, liquidity, and physical storage, gold and silver investing remains a hot topic among the investing community.

Since the prices of gold and other precious metals fluctuate based on market conditions, there are some considerations you should take into account before deciding to invest in this asset class. 

This article will discuss the details of the benefits of holding gold in 401(k), the pros and cons of investing in precious metals, and how to convert a 401(k) to gold with our free gold IRA kit today.

Precious Metals as an Investment

Precious metals like gold have a rich history in their association with power and riches in many different cultures throughout the millennia. 

In fact, ancient Mali king Mansa Musa had so much gold that historians cannot accurately estimate his net worth, but often claim he was the wealthiest person ever to live. The king’s generosity in giving gold to the poor is said to have significantly deflated its value in the Egyptian Empire in the 14th century.

Today, some investors use gold and silver to protect themselves against inflation and mitigate risk. However, some detractors of gold investing are against the idea of owning precious metals and recommend other traditional methods of portfolio diversification. 

Continue reading to find out how to decide if gold and silver investing is right for you and to find out the best gold IRA you can use to start investing in gold today.

Pros of Gold and Silver Investing

Like any investment vehicle, there are advantages that come with a long-term approach to investing in gold and silver, including:

Diversification 

Diversification is an important part of investing that helps to ensure you don't rely on one asset class too heavily. Investors tied up in illiquid assets like real estate or automobiles may find that gold and silver offer a way to mitigate their risk exposure. Investors with stock portfolios also benefit by diversifying with different asset classes across various economic sectors.

Preservation of wealth

Precious metals have continually held their value throughout history better than any other physical currency. After thousands of generations, gold and silver remain essential parts of the economy in the modern world. Those who decide to invest in gold through a gold 401(k) or IRA should expect to see it continue to hold its value as a precious metal commodity.

Hedge against inflation

Although there are inflation investment strategies to mitigate its effects on your portfolio, inflation in 2022 is out of control. The Consumer Price Index measured an enormous 8.5 percent increase in year-over-year inflation as of July 2022, and the price of goods and services continues to increase drastically. 

Inflation also significantly affects housing prices and borrowing costs, as demonstrated by record high property values and rising interest rates. Hedging against inflation is possible by investing in precious metals since their supply is both limited and finite. 

Gold and silver are easy to understand

Modern financial instruments and investing strategies are often too complex for average investors, and we tend to leave the difficult investment decisions up to financial planners or robo-advisors. Investing in gold and silver is straightforward and typically easier to understand for many people.

Benefits of owning a physical asset

Some investors prefer to possess tangible assets like gold instead of only relying on stocks, mutual funds, and investment accounts that provide a digital representation of value. Tangible assets appeal to investors since you can add value directly to your investments by buying more and acquiring undervalued assets during market fluctuations. 

Long-term upside

Gold has traditionally been a less volatile long-term investment than the stock market, according to a 2013 study by the National Bureau of Economic Research. The study analyzed the price of precious metals and found that gold performed better than the stock market from a long-term perspective.

Cons of Gold and Silver Investing

While gold investing has some clear advantages over traditional asset classes, there are some disadvantages to investing in precious metals, such as:

Storage issues

Since gold is a tangible asset, you’ll need to determine a method of storing it securely which can complicate your investing strategy. You’ll either need to store gold in a safe on your property or pay a company to handle storage for you. Additionally, transporting your gold investments securely is another expense that gold investors deal with.

Theft and misplacement

Unlike stocks and traditional investments, gold is a physical asset that can be stolen or misplaced at any time. Choosing to invest in gold also means investing in the resources necessary to keep your gold safe since gold bars and coins are susceptible to theft and misplacement.

Not an income investment

Investing in gold doesn’t pay dividends like stocks. In other words, gold investing doesn’t provide the backing of a company to increase or decrease its value or provide returns like some public stocks. 

Gold also doesn’t have the same upside as investing in a company. You may be forced to wait many years for gold to change significantly in value since the price, again, doesn’t have the same movement as a stock.

Yield and illiquidity 

The only way to turn a profit with gold investing is to sell it or wait for it to increase in value. Gold doesn’t offer any yield for investors. It’s also illiquid, meaning it’s not as quickly turned into liquid cash as a loan or money in your checking account. 

If you’re looking for returns that generate consistent income, you’ll want to look into investing in dividend-yielding stocks or real estate investment trusts (REITs). 

The Price of Gold

The price of gold is a combination of supply and demand factors and trends in the market. This means that gold prices are not influenced by only one factor, and the way these factors interact can be complex and difficult to understand.

Gold is also a commodity, which means it’s an asset that consumers can easily exchange with the same type of gold for the same value. Commodity investments are heavily influenced by supply and demand, and commodities like oil are available for investors on the Futures Market (also known as the Futures Exchange).

As of August 2022, the spot price of gold varies between $1,725 and $1,875 per troy ounce.

Below are some additional factors that influence the price of gold.

Central banking

Central banks tend to liquidate their gold assets from time to time since they don’t generate returns. However, when a central bank chooses to sell some of its gold reserves, gold investing becomes less desirable and prices tend to fall.

Inflation

Several studies have examined the effects of inflation and how they correlate to the fluctuating price of gold. One study found that gold prices don’t strongly correlate with higher inflation. This is evidenced by the Great Recession, when gold prices soared to record highs and investors decided to flock back to gold investing.

Gold mining

Mining for precious metals is something we see in the movies or while playing games like Minecraft. Very few of us have been to a gold mine and seen the operations and effort put into mining for gold in the deepest depths of the Earth. 

Gold is also a finite resource, meaning the supply of gold will eventually run out. If there's no more gold to mine, gold prices are almost guaranteed to increase drastically unless demand declines in step.

Demand for jewelry and industrial use

Since gold prices are influenced by supply and demand factors, it makes sense that as the demand for jewelry increases, gold prices tend to follow. 

In fact, The World Gold Council estimated that the demand for jewelry accounted for a large chunk of the overall gold market. Gold is also becoming more popular for industrial use in medical devices and high-end electronics.

The London Bullion Market Association

The London Bullion Market Association is responsible for setting the price of gold bullion and conducts daily auctions for precious metals. 

The London Bullion Market Association has two prices for investors to pay attention to–the spot price and futures price. Both prices are benchmarks in the gold market, and the London Bullion Market Association has a strong presence in regulating gold.

The US dollar

Believe it or not, gold has a strong inverse relationship to the value of the US dollar. Times when the US dollar is stronger tend to lead to lower gold prices and more control by central banks and regulators. The value of the US dollar plays a big role in inflation, which is when prices for goods and services rise and the US dollar becomes less valuable.

What is a 401(k)?

A 401(k) plan  is a retirement savings account that your employer typically sponsors (although self-employed workers can open one too). The 401(k) is one of the most popular investment vehicles designed to allow you to enjoy a comfortable retirement when you’re ready to stop working as you get older.

Contributing to this retirement savings plan is very easy since automatic deductions are taken from your paycheck and deposited into your 401(k) typically every pay period. Employers may also offer to match some of your contributions, so it’s important to read the details to find out how long you must stay at the company for your employer match to kick in.

A 401(k) also allows employees to contribute to their retirement savings by choosing their investment allocations. This means that your employer gives you a list of stock indexes, mutual funds, and other investments you can choose based on your risk tolerance. As these investment allocations go up and down over the years, your 401(k) balance will fluctuate as well. 

The 401(k) plan has many benefits that make it a great option for many people regardless of their stage in their working lives. Young professionals just out of college should start contributing to their 401(k) immediately and look into a gold 401(k) to take advantage of compound interest over their entire working life. Even small contributions today could turn into large sums by the time you’re ready to retire.

Pros of a 401(k)

401(k)s provide some clear advantages over other retirement accounts, including:

High contribution limits

One of the best parts about opening a 401(k) and saving for retirement is that you have high contribution limits each year. The 401(k) contribution limits tend to fluctuate, but as of 2022, you can contribute up to $20,500 each year to your 401(k) plan.

The employer match

We already touched on the employer match, but we want to dive deeper into how it works and why it's important. The employer match incentivizes workers to stay with the company for a long time since hiring and onboarding new employees is a long and expensive process. The average American employer matches 401(k) contributions up to 6% of the worker's salary.

The employer match typically means your employer contributes a small percentage and “matches” your contributions as long as you stay with the company and meet the requirements of their vesting schedule.

Tax deferral

A gold 401(k) allows you to contribute to your retirement savings with pre-tax earnings. This means the money in your 401(k) is taken out of your gross income, giving you tax savings as an added benefit. 

However, the pre-tax dollars you've contributed throughout your working life are taxed when you withdraw the money in the future for retirement, so don't expect to get the total value of your 401(k) when it's time to withdraw. The capital gains received over time from your 401(k) are not taxed until you start withdrawing the money when you're ready for retirement.

Loans and 401(k)s

Borrowing against your 401(k) allows you to take a loan that’s the lesser of 50 percent of your savings or $50,000 per year. Obtaining a loan based on your 401(k) is typically used for short-term emergency expenses like medical bills or funeral costs. However, you can also use the money from the loan to finance the purchase of an investment property or home remodeling.

Continuing contributions

Some investment vehicles don't allow you to keep contributing to the plan once you reach a certain age (usually 72). However, a 401(k) allows you to keep contributing to the plan as long as you're still actively employed, so you can keep growing your nest egg well into the later stages of your life.

401(k) Pros at a glance

• High annual contribution limits ($20,500 in 2022)
• Employer matching program often available of up to 6% of one's salary
• Tax deferral on savings throughout one's working life
• Can borrow against your 401(k) to secure a loan
• Can continue to contribute throughout your working life

Cons of a 401(k)

The benefits of a 401(k) tend to outweigh the drawbacks, but it's important to know both sides to understand how a 401(k) works and some things to look out for as you start contributing to your employer-sponsored plan. Below are some of the biggest cons of 401(k) plans.

Penalties for early withdrawal

Those who need cash fast for unexpected expenses like replacing a roof or medical bills may think that liquidating their 401(k) is a good idea, especially if you have a sizable chunk of change saved up. 

However, it's not that simple since there are major penalties for withdrawing your 401(k) contributions before you reach the age of 59 and a half. You should expect to incur a 10 percent penalty on your balance in addition to losing money due to taxes with early withdrawal.

The employer match

While we listed the employer match as a benefit of 401(k)s, it's a double-edged sword. Employer matches only take effect after staying with the company and meeting the required vesting schedule. On average, most employers require you to stay with the company anywhere from one to six years. 

Due to this long-term time horizon, many employees never receive the employer match by leaving before the vesting period is over. The company match may also be small and insignificant if you stay with the company long enough to receive it.

Restricted investment options

As mentioned above, you're responsible for allocating your 401(k) contributions to investments based on your risk tolerance. Unlike a traditional IRA, 401(k)s only allow you to allocate your contributions to the investment options your company gives you. 

In other words, you have a limited number of investment options with a 401(k), and your company may not choose the funds with the highest returns or upside. Other investment options allow you to diversify your portfolio by allocating contributions to stocks, bonds, money market funds, CDs, mutual funds, ETFs, and international markets.

High management fees

401(k) providers are required to disclose their management and service fees each year. However, most employees aren’t aware that there are management fees with a 401(k). According to CNBC, the average 401(k) management fee ranges from 0.37%, for large plans and companies, to 1.42%, for smaller businesses.

Employees typically open a 401(k) without digging into the fine details of their plan and how to maximize their retirement savings. Be sure to reach out to your HR department for more information about the details of your plan and how the management fees are structured.

Life expectancy

The last downside to contributing to a 401(k) plan is that you’re betting on yourself to live a long life well into your 70s and 80s. While the average American life expectancy in 2022 is about 77 years, some workers won’t make it to the age required to withdraw their 401(k) contributions tax-free. 

Whether it’s health issues, sickness, infectious diseases, or freak accidents, millions of people pass away before they can enjoy the nest egg they’ve saved up over the course of their working lives.

401(k) Cons at a glance

• 10% early withdrawal penalties before 59.5 years of age
• Long vesting periods for employer match eligibility
• Limited investment options and fewer available asset classes
• Average fees range as high as 1.42%
• High age requirements for tax-free withdrawals

Roth 401(k) vs. Traditional 401(k)

As you know, a traditional 401(k) plan uses your pre-tax gross income as contributions each pay period you're enrolled in the plan. However, some employers have started to offer their workers a Roth 401(k).

What is a Roth 401(k)?

The main difference between a Roth 401(k) and a traditional 401(k) is how you contribute to your retirement account and the withdrawal requirements. Since Roth 401(k) contributions are after-tax dollars, they won't affect your adjusted gross income. Roth 401(k)s also have fewer tax implications when you take distributions starting from age 59 and a half.

Can You Open a Roth 401(k) and Traditional 401(k)?

You may wonder if you can contribute to a Roth 401(k) in addition to your employer's traditional 401(k). The short answer is yes, but it's not always possible or worth it.

If your company offers both a Roth 401(k) and a traditional 401(k), you can open and start contributing to both once you become eligible with your employer (usually 60 or 90 days after your start date). However, you can't contribute to both accounts more than the dollar amount the government sets for 401(k) contributions (which was $20,500 in 2022). 

While it may be good to spread out your distributions, no one can accurately predict the tax rate in the future, making it more appealing only to use one or the other when it comes to a Roth 401(k) and traditional 401(k).

Buying Gold or Silver in 401(k) Retirement Accounts

The idea of gold investing seems attractive to many beginner investors. You'll own physical gold bars, coins, and other gold bullion that retain their value and increase as the value of the US dollar decreases.

You may think it’s possible to buy gold in a 401(k) retirement account, but most plans don't allow you to buy any precious metals as part of your investment portfolio. 

Mutual Funds

There are other ways to invest in “paper gold,” which is gold that you don't physically own or possess as a tangible asset. One way is through gold mutual funds, as long as it's an option your employer lists on their investment choices. 

These mutual funds comprise companies that dominate the gold industry and produce the highest profits for investors. One example is the First Eagle Gold Fund (SGGDX), which has seen 16 percent growth in the past five years.

Gold mutual funds are also significantly more liquid than an investment in physical gold bullion. You can sell your gold mutual fund investments easily and on short notice, and you don't have to deal with the security and transportation issues that come with physical gold.

Gold IRA

Gold IRAs (also known as or precious metal IRAs or a gold 401(k))  are individual retirement accounts that allow investors to hold precious metals in an IRA. This type of IRA is typically in gold or silver bullion like bars or coins and requires you to have a method of storage, security, and transportation to ensure you protect your investment.

Gold and silver IRAs are separate from traditional IRAs, but the contribution limits for both are identical, and the distribution process is the same. You can also set up your gold IRA with pre-tax dollars like a 401(k) or after-tax dollars like a Roth IRA. Visit our website to find out the best gold IRA companies we’ve reviewed in 2022.

Custodians

An essential part of understanding how gold and silver IRAs work involves knowing what a custodian is and their role in managing your IRA. 

The Internal Revenue Service (IRS) requires all IRAs to have custodians hold investments for several reasons. Custodians are responsible for keeping your investments safe and secure. These are generally banks or institutions that manage many other investment accounts for their clients. 

Another major function of custodians with gold and silver IRAs is to ensure that investors follow all the regulatory requirements for buying and selling gold. This means that custodians play a crucial role in overseeing gold 401(k) plans.

401(k) to Gold IRA Rollover Guide

While you may think it's a complex process to roll over your 401(k) into a gold IRA, it’s simple if you choose the right gold IRA custodian and administrator. 

However, those currently employed and wishing to do a rollover may find some hurdles along the way and discover that it's not easy to directly convert your 401(k) to gold. 

Rolling your existing 401(k) into a gold 401(k) starts by choosing a new custodian for your IRA who initiates the rollover on their end. The process is simple and easy for those with a 401(k) with a former employer.

The process tends to get tricky for those currently employed who want to do the same type of rollover into a gold IRA. You'll need to review the terms of your current 401(k) plan since we've seen many employers restrict your ability to invest in gold while employed with their company. 

Interested in learning further? Check out our complete gold 401(k) and IRA rollover guide.

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Final Thoughts

This article covered the basics of the gold 401(k), the pros and cons of investing in precious metals, and why you should consider adding this type of asset class to your investment portfolio. 

Ready to get started? Find out how you can buy physical gold with 401(k)s and invest in gold with our free gold IRA kit today.