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The purchase or investment in gold remains, today, one of the most popular operations on the planet, since, in addition to offering lucrative returns in any investment portfolio, it protects investors against inflation. The “gold” factor is so characteristic that it has been described as one of the safest investments, at least as long as you have enough money to make the purchase. This begs the question, how do you buy gold with a 401K?
From the outset, we tell you that retirement plans do not allow the direct purchase of physical gold or its derivatives, but this does not mean that you cannot get on this train. Let’s see how to do it.
Table of Content
- Basics Key of 401K Accounts
- How to buy gold with your 401K?
- In Brief: How to Buy Gold with Your 401K
Basics Key of 401K Accounts
A 401K plan is a retirement savings account that is managed and sponsored by the employer. As offered by so many companies, millions of Americans rely on these investment plans to live their old age comfortably and carefree. Remember that, in addition, this plan has certain tax advantages that will allow you to save today on your federal tax bill.
How does the 401K plan work?
But how does the 401K work? Although we already have an article with everything you need to know about the 401K retirement plan, we are going to remember some key concepts. When an employee enrolls in his employer’s retirement plan, he diverts part of his salary (before taxes) to make long-term investments.
Many employers enhance this saving/investment with a partial contribution to the amount derived or exactly equal to the amount contributed by the worker. For example, if you put $100 of your paycheck into your 401K account, the employer that matches the 100% contribution will also put $100. Thus, you will have $200 per month adding to the assets you are using to invest.
401K Retirement Plan Contribution Limits
Another thing to know is that all of these plans come with contribution limits set by the IRS. For example, for 2020-2021, an employee can put up to $19,500 of their annual salary into a 401K plan. If the worker is over 50 years of age, he can make an additional contribution of $6,500 per year.
Who manages the 401K plan?
Now, who is behind the success of the 401K? These plans are typically managed by 1) a mutual fund manager or 2) a financial services group. These companies often offer employees a number of investment options so they can diversify their portfolio and earn even more money. Typically this is done through mutual funds.
Plan members can choose from a host of funds, including large and small caps, index funds, bonds, and more. They all have a different growth potential (as well as their own level of risk).
401K Plan Potential
Due to the importance of these plans, members have the opportunity to take advantage of the best opportunities in the market with their 401K. That is why investors often fix their eyes on gold as a mechanism for multiplying money, since, in addition to insurance, it protects against inflation and does not usually depreciate.
How to buy gold with your 401K?
One of the best ways to take advantage of the spikes in gold’s rise is to invest directly in it. Now, be on the lookout for there’s a catch with the 401K: very few retirement plans allow savers to invest directly in gold bullion.
In fact, most 401K plans don’t allow people to buy gold. This means that if you have a savings plan like this, you will not be able to go out and use your money to buy gold bars or coins.
Does that mean all is lost? Not necessarily. If you really want to invest your money in gold, you might consider looking at equally valuable alternatives (that invest in the precious metal) like a mutual fund or an exchange-traded fund (ETF).
With gold mutual funds
If you can’t invest your 401K money in tangible gold, you can by buying what’s known as “paper gold” and mutual funds. By examining the descriptions and features of the various funds that are available for your 401K, you may be able to find one or more profitable options with shares in companies involved in the mining industry. This would be a quick and easy way to invest in gold indirectly.
For example, Fidelity Investment offers Fidelity Select Gold Fund ( FSAGX ). It is an active management fund, low cost and oriented to the multiplication of values. To give you an idea, as of February 28, 2021, the fund had approximately $1.7 billion in assets under management (AUM) and an expense ratio of 0.79%.
The fund invests mainly in exploration, mining and gold production companies, among others; such as Barrick Gold, Franco-Nevada, Newmont Corporation, and Agnico Eagle Mines.
With gold ETF
A 401K plan with brokerage options gives individual investors the opportunity to invest in a much broader range of assets related to gold. How? Through the very same brokerage account. If your plan allows it, this will be an easier and cheaper way to invest in gold with your 401K than mutual funds.
ETFs offer the ability to invest in stocks based on real gold bullion, such as BlackRock’s iShares Gold Trust (IAU) ETF. This ETF was launched in the market in the year 2005. Today, it has more than 28.8 billion dollars in net assets.
Are there other options? Thousands, but one of the most promising is the Sprott Gold Miners (SGDM) ETF, which today has $216 million in assets.
Remember: Employees with a 401K with a brokerage option will also be able to invest in shares of companies in the gold or mining sector.
With a self-managed IRA
If you really want to buy gold with your 401K and notice that your plan does not allow you to access investments in ETFs or mutual funds, you can opt out of the plan, take the accumulation in the 401K and switch to an IRA retirement account. With it, you can invest in gold, either through the purchase of shares in mining or exploration companies, ETFs, mutual funds and the futures market.
There is even an IRA account that works specifically with precious metals (IRA Gold). This is a unique type of individual retirement plan that allows savers to add gold bullion or coins as a qualifying investment.
How difficult is the account switch? Not much. When an employee with a 401K plan leaves his job – or retires – he can request a transfer of money from his 401K account to an IRA account. Haven’t you quit your job? Then you can talk to your employer about doing an in-service retirement. In that case, the company will get the retirement funds early.
When an employee makes a transfer from a 401K account to an IRA or any other retirement plan, they will not have to pay a penalty; at least as long as the transfer is made within 60 days of withdrawing the money.
That’s right: keep in mind that traditional IRA accounts do not allow savers to buy physical gold. If you do not want to invest in mining companies, but in the metal itself, we recommend you to opt for a self-managed IRA account. This will be your best option.
In short: how to buy gold with your 401K
Before saying goodbye, we leave you a couple of keys that you should take away from this article:
- Most 401K plans do not allow savers to directly invest in physical gold.
- However, there are gold IRA accounts that specialize precisely in holding precious metals to multiply retirement savings.
- Additionally, investors can find specific mutual funds or ETFs that hold stock in gold mining companies, all through their very own 401K account.
- Rolling over a 401K into a self-managed IRA can give you access to a wide variety of gold investments.