401(k) Plan

What is a 401(k) Plan?

A 401(k) is categorized as a “defined contribution plan”, where the employee funds the account with paycheck deductions prior to taxation. Additionally, with some 401(k) plans, the employer will make proportionally matched contributions to the account based on elective deferrals of the employees. 

This type of qualified plan was first introduced in 1980 by attorney and benefits consultant, Ted Benna. In 1978, the section of the Internal Revenue Code, 401(k) became enacted legislation. The impetus for this legislation had been to permit a tax break on deferred income. Benna realized that the 401(k) provision could be utilized as a straightforward, tax-advantaged method for employees to save for retirement. In the US, 401(k) plans are now the most popular type of retirement plan, and are offered by virtually every employer.

The main advantage of 401(k) plans is the potential for contributions to be proportionally matched by the employer, which are not taxed and allow the participant to exceed the contribution limits outlined by the Internal Revenue Agency (IRS). However, this type of retirement vehicle is limited by the investment options permitted within the account. As per the IRS regulations, funds from a 401(k) cannot be used to invest in numerous alternative assets, such as precious metals and real estate. 

401(k) Plan Rollover Rules & Limitations

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a 401(k) plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds. 

It is crucial to note that not all 401(k) providers permit rollovers. Prior to embarking on a rollover, you first must ensure that this is allowed by your plan provider.

 401(k) Plan vs. Other Retirement Accounts

The table below compares the various types of retirement plans:

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

 

401(k) Contribution Limits

The Internal Revenue Agency (IRS) has specific contribution limits for a 401(k) plan. For 2020, the IRS has increased 401(k) contribution limits to $19,500. Additionally, for employees with a 401(k) who are 50 and over and the specific plan allows for catch-up contributions, these too have increased to $6,500 for 2020. 

As per IRS regulations, “these amounts are subject to cost of living adjustments”.

 

401(k) Calculator

A 401(k) plan can prove to be an excellent retirement investment choice because it is a tax-advantaged investment vehicle.  There are numerous components that contribute to the amount of savings you set aside for retirement. Use this 401(k) calculator to determine how much you could potentially save.

 

Major 401(k) Providers

Fidelity 401(k)

Fidelity has consistently been one of the highest-rated multinational financial services companies in the industry. It has proven to be an excellent option for retirement investing, thus why many workplaces choose to offer a Fidelity 401(k) retirement plan. 

Prudential 401(k)

Prudential is one of the largest financial services companies in the world. The Prudential 401(k) is one of the most popular retirement plans offered by workplaces throughout the United States. This is one of the highest-rated retirement plans available on the market.

Principal 401(k)

Established in 1879, Principal Financial Group is another world-renowned financial services company. A Principal 401(k) is another popular retirement plan provider for employers around the United States.

 

401(k) Plan FAQs

The Internal Revenue Agency (IRS) has specific contribution limits for a 401(k) plan. For 2020, the IRS has increased 401(k) contribution limits to $19,500. Additionally, for employees with a 401(k) who are 50 and over and the specific plan allows for catch-up contributions, these too have increased to $6,500 for 2020.

As per IRS regulations, “these amounts are subject to cost of living adjustments”.

If you are 59 ½ or over, you can withdraw funds from a 401(k) without penalties. However, if you are not yet 59 ½ years old, the IRS will also impose a 10% penalty tax on the withdrawal on top of the normal income taxation.

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a 401(k) plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

It is crucial to note that not all 401(k) providers permit rollovers. Prior to embarking on a rollover, you first must ensure that this is allowed by your plan provider.

The primary benefit of rolling your 401(k) into a self-directed IRA like a Precious Metals IRA, is that this type of retirement account permits a myriad of diversified assets not allowed in other retirement vehicles. In addition, a self-directed IRA is solely managed by you the investor. Although under federal law, you must have a custodian who acts as an administrator over this type of retirement vehicle.

In essence, the IRS has imposed little restrictions on what you can hold in a self-directed IRA. Unlike many other retirement accounts, a self-directed IRA can be used to invest in everything from precious metals like gold and silver, to real estate, to commodities. Akin to other IRAs, the only investments not allowed in a self-directed IRA are S corporation stock, collectibles, and insurance investments.

It is crucial to understand that if you do choose to rollover a 401k to a Roth IRA, the funds that you rollover will be taxed. It is also important to note that some 401k plans do not permit rollovers.

The first step is to select a reputable IRA custodian who will ask for identifying questions such as date of birth and Social Security Number to open your new Roth IRA account. Then, request that your 401k administrator put the funds into the Roth IRA. Next, you are now able to choose which investments you want in the Roth IRA.

A Roth 401(k) is similar to a regular 401(k) in that it is an employer-sponsored qualified plan. However, this type of retirement vehicle is funded with after-tax dollars.

The investment options offered through a 401(k) plan are dependent upon the plan provider. Below are the types of investments available to you with a 401(k):

• Mutual funds
• Exchange-Traded Funds (ETFs)
• stocks
• bonds
• Certificates of Deposit (CDs)

It is crucial to note that as per IRS rules, a 401(k) cannot be used to invest in physical precious metals bullion. The easiest method to invest in gold, or another precious metal with a 401(k) is to buy mutual funds that include mining company stocks, or invest outright in the shares of gold mining companies. This investment strategy is known as purchasing “paper gold.” Mining ETFs and gold ETFs are also available, which provide indirect exposure to the precious metal.

The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.

A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

The IRS has strict regulations and rules pertaining to an IRA rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.

Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.