How to Buy Gold With Your 401(k)

Investing in gold with a 401(k) involves using retirement savings to invest in gold-related assets, which may range from physical gold bars and coins to gold ETFs and mutual funds. It’s not as straightforward as buying stocks or bonds, but it can offer a valuable alternative to more well-known types of securities. Diversifying your portfolio is vital across your investments in order to spread risk and achieve a balance of returns. Investing in gold could provide a hedge against inflation and protect against economic downturns. If you’re not sure whether gold is a good investment for your portfolio, consider talking to a financial advisor.

Can Your 401(k) Buy Gold?

Before delving into the mechanisms of buying gold with a 401(k), it’s essential to understand the IRS guidelines surrounding this type of investment. This is because not all 401(k) plans permit the purchase of gold. If they do, the gold must meet specific fineness requirements and should be in the custody of an approved administrator.

Your plan administrator signs off on any gold investments within the 401(k) plans they manage. They hold a crucial role in the process, of approving or disapproving gold as an investment option based on your plan’s policies and IRS guidelines. So, it’s not merely about wanting to invest in gold, but it’s also about whether your 401(k) plan and the law allow such investments.

The majority of 401(k)s managed at your employer don’t typically allow gold investments. If this is the case for you then you’ll likely be out of luck in buying gold within your 401(k) unless you rollover your 401(k) to an IRA or a different 401(k) plan.

Ways to Buy Gold With Your 401(k)

Once you’ve confirmed that your 401(k) plan allows gold investments, the next step involves understanding the different methods of investing. There are several ways to invest in gold using a 401(k) or the funds in your 401(k), such as rolling over into a gold IRA, investing in gold mutual funds, buying gold ETFs and exploring other gold-related investments. Let’s take a look at each option to see if one might be right for you.

Rollover to a Gold IRA

A gold IRA is an individual retirement account that allows for the ownership of physical gold. To roll over a 401(k) into a gold IRA, you’ll need to set up a self-directed IRA, which requires a custodian to handle the gold and the transaction. Understand that this rollover process can have potential tax implications and premature withdrawals might incur penalties.

Mutual Funds

Investing in gold mutual funds using a 401(k) involves buying shares of a mutual fund that invests in gold and gold-related companies, if your plan allows. Remember, though mutual funds offer diversification, professional management is only a potential feature and isn’t a definitive characteristic of all mutual funds.

Gold ETFs

Gold ETFs are exchange-traded funds that track the price of gold. Investors can gain exposure to gold’s price movements without owning the physical metal, albeit with management fees and potentially imperfect gold-price tracking due to expenses and other factors.

Other Investments

Other gold-related investments can take several forms, depending on the options your 401(k) plan offers. These may include gold mining stocks, gold futures contracts or gold index funds. Each of these investments brings its unique advantages and risks, so it’s advisable to seek professional assistance from a financial advisor while choosing between these options.

Pros and Cons of Having Gold in Your Portfolio

A man pretending to water an artificial plant that is shaped like a dollar sign to represent growth.

Investing in gold can bring several benefits and drawbacks that you should consider.

The way it benefits you will depend on your unique situation but here are some of the most common advantages and disadvantages.

Pros:

Gold can act as a hedge against inflation and currency fluctuations.
Gold adds diversification, typically having a low correlation with other asset classes.

Cons:

Gold doesn’t yield dividends or interest.
The value of gold can fluctuate with market conditions.
Costs may be associated with storing physical gold.
The returns may not always be as high as other investment options.

This isn’t an all-inclusive list, however, as it could impact your individual portfolio in a unique way depending on what your goals are.

Steps to Buy Gold With Your 401(k)

If you want to buy gold with your 401(k), here are four general steps to help you get started:

Check your 401(k) plan allowances: First, verify whether your current 401(k) plan permits investments in gold. This includes gold mutual funds, ETFs, or even physical gold. If your plan does not allow these investments, consider rolling over your 401(k) to an individual retirement account (IRA) that supports gold investments.
Choose an investment type: Decide how you want to invest in gold. Options may include gold ETFs, mutual funds that focus on gold, or physical gold like coins or bullion. Each option has different implications for storage, costs and investment flexibility.
Rollover to a gold-supported IRA: If your 401(k) doesn’t support gold investments, rollover your funds to a self-directed IRA that allows gold investing. This process involves choosing a custodian who will manage the IRA and can handle gold investments.
Buy your gold investments: Once your IRA is set up and funded, purchase your chosen form of gold. Work with your IRA custodian to ensure that the purchase aligns with IRS regulations and your investment goals.

Tax and Legal Requirements

If you want to buy gold with your 401(k), consider these five general tax and legal requirements:

Eligible gold investments: The IRS has specific standards for the types of gold and other precious metals that can be purchased within a retirement account. To be eligible, gold products, such as coins or bullion, must meet minimum fineness requirements. For example, gold coins must be 99.5% pure.
Approved custodians: Investments in physical gold through a 401(k) must be held by an approved custodian. This could be a bank, a non-bank custodian, or a trust company. The custodian is responsible for the security and management of the gold, ensuring it complies with IRS regulations.
Rollovers and transfers: If your current 401(k) does not allow direct investments in gold, you may need to roll over your funds to a self-directed IRA that allows such investments. This process must be done according to IRS rollover rules to avoid taxes and penalties. Typically, a direct rollover is preferred because it reduces the risk of incurring early withdrawal penalties.
Tax implications: Purchasing gold within a 401(k) or IRA is generally done with pre-tax dollars, and the investments grow tax-deferred. However, distributions are taxed as ordinary income at the time of withdrawal. Knowing these tax rules will help you minimize your tax liability in retirement.
Legal restrictions and requirements: The purchase and storage of physical gold in a retirement account must comply with federal regulations. This includes storing gold in a secure facility rather than keeping it in personal possession, which is a prohibited transaction under IRS rules.

Tips for Buying Gold in Your Investment Portfolio

When considering gold for your portfolio, you might not be ready to dive in with both feet. Instead, there are some things you can do to test the waters and see if gold might be the beneficial investment you’re hoping for. Here are some tips if you’re considering buying gold:

Begin with a small amount
Understand market trends
Diversify your gold investments

Don’t forget the importance of regularly reviewing and rebalancing your portfolio, including your gold investments. You want to make sure that any investments in your portfolio are actively working for you and helping you reach your long-term goals. Those results can absolutely change over time.

Bottom Line

A financial advisor talking to a client about buying gold.

Investing in gold with a 401(k) offers diversification and a cushion against economic uncertainties. However, such an investment requires understanding IRS rules, potential tax implications and the various methods of buying gold with a 401(k). Before taking the plunge, consider this: Does investing in gold align with your financial goals and risk tolerance? A deep understanding of these aspects will help you make informed investment decisions that best suit your long-term financial and retirement goals.

Tips for Investing

If you want to diversify your portfolio, you may want to consider consulting with a financial advisor. Such a professional can help manage your investment portfolio or help you find the right investment choices. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You can also use a free asset allocation calculator to help find the right investment selections for your portfolio and see what might happen if you make different asset choices.