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Gold Investment with 403(b) Accounts

by IRA Rollover in 403b with Comments Off on Gold Investment with 403(b) Accounts

When you are considering buying gold in preparation for retirement you can probably think of a dozen questions to ask, especially if you’ve never had the opportunity to invest in gold. Your IRA (individual retirement account) is a great product to use in gold investment but what if you have a 403(b) account? Let’s take a look at exactly what a 403(b) retirement account is and what you can do with it if you want to invest in gold.

What is a 403(b) Account?

If you work for a tax-exempt organization such as a public or private school, hospital, a church, a museum, or a charitable organization you probably have a 403(b) retirement account. The 403(b) is so named simply because it is in section 403(b) of the tax code that deals with retirement plans. Established in 1913, the tax code originally was 400 pages long. By 2010 it had grown to 71,684 pages and is surely much longer now! With so many rules, requirements, and exemptions, referring to specific financial products by their number in the tax code is about the only way to keep them straight.

A 403(b) retirement plan is tax deferred, which means you won’t be taxed on it until you start to use it. Anything you take out of it during retirement is taxable income. Unlike other IRAs, you must begin mandatory minimum distributions at age 59 ½ whether you have stopped working or not. Once you begin to withdraw money from your 403(b) you will have to pay taxes on it just as you do on the money you earn before retiring.

How Much Can I Contribute to a 403(b)?

If you are younger than 50 you would have been allowed to contribute $18,000 into the account in 2016; if 50 or older you could make catch-up contributions up to $6,000. You should check with your human resources department or the tax code to get the current limits.

What Investment Products do 403(b) Accounts Use?

The 403(b) plan used annuities as their sole investment product until the mid 1970s. Annuities are basically insurance policies; your contributions to the fund pay the premiums on the policy. When you retire you can draw a monthly income or a specific amount in a lump sum. The lump sum will consist of your contributions plus the interest they have earned. Some annuities offer a fixed interest rate while others vary with the market. And although the contributions are tax free, there are stiff penalties for withdrawing from the account before the annuity matures.

These days most 403(b) plans allow participants to invest in stocks and mutual funds, as well as annuities or a combination of the three products. If you have done any research on investing, you know that the key to success is diversity. Having a 403(b) retirement plan limits your investing options but you may be able to contribute more over your lifetime since your contributions are not taxable.

There are four types of investments currently approved for 403(b) retirement accounts:

  • Mutual funds
  • Individual bonds and stocks
  • ETFs, or exchange traded funds
  • Fixed or variable annuities

Can I Fund a 403(b) With Gold?

You cannot yet use a 403(b) retirement account to invest in gold or other precious metals but some plans do allow gold investment in the form of gold stocks and gold ETFs (exchange traded funds). While many investors find that gold stocks and ETFs are profitable for them there are significant risks in “paper gold” as these investments are called.

The Pros and Cons of Funding a 403(b) Account with “Paper Gold”

Paper gold is just that—a declaration of gold value on paper or papers that state you hold shares in a gold mine or a company that owns a gold mine. You can find companies like this on the Gold Miners Index (GDX). ETFs are another form of paper gold whose value rises and falls depending on how risky the financial climate is.

Owning part of a mining facility can be very profitable but you are also prey to circumstances beyond your control. You are at the mercy of regulations and taxes imposed on these companies by the federal government. If you buy stock in a mine that is located in a foreign country you could profit more due to the lack of regulation. However, if your mine is in a volatile, unstable country you run the risk of it being confiscated by a temporary government, rendering your investment worthless.

Owning stock in a mine also means that your profits depend on the costs or production and the quality of management in charge of the facility. Poor management can mean that you are left holding worthless paper if the mine shuts down. You are also out of luck if the nation experiences a currency collapse since the value of your gold is only on paper, not in your physical possession.  

currency fail - buy gold

Gold ETFs are also riskier than owning physical gold because the stocks rise and fall faster as the spot gold price moves around. There are scores of these ETFs on the market today and some perform very well, making nice profits for their owners. Others aren’t efficient gold investment products because of excessive fees. When choosing an ETF product it’s important to make sure that all your profit isn’t consumed by fees and other expenses.

You Can Still Use a 403(b) Account to Buy Gold

If you work for a tax-exempt company that has provided you a 403(b) retirement account you can still use that account to invest in gold bullion, bars, or other forms of physical gold. All you need to is roll over your 403(b) into a more conventional 401K or other retirement account that allows you to fund it with physical gold. 

Rolling over your 403(b) is not at all difficult. You have a choice of a direct rollover or cashing out and re-investing in a 401K. If you choose to cash out you have exactly 60 days to invest the funds. If you haven’t done so by day 61 you’ll pay a hefty 10% penalty on those funds. You are not permitted to use the cash to buy investments before you establish a new IRA. Having an IRA already set up before you withdraw funds is the best way to maneuver those funds and keep within the time limits allowed. You are limited to one rollover annually.

Of course, you can also take advantage of a direct rollover in which you never see the proceeds of your 403(b). It is transferred directly into a waiting IRA, ready for you to invest it as you see fit. Most people choose this option because it’s so convenient.

Once your funds are deposited to a more conventional IRA you can begin buying gold and storing it for your retirement.

gold value always rising - safe investment

Diversity is the Key to Successful Retirement

Successful, profitable investing depends on diversity. Gold investment should be only one of many financial products that you use to insure a comfortable retirement. While gold will always be valuable and never worthless, don’t put all your money into precious metals. You should have an assortment of products such as stocks, mutual funds, bonds, real estate, and other investments. When one product is not doing so well the others will likely be earning. Ideally you should invest at least 5-20% of your retirement assets in precious metals. You can do more if you want but the more you diversify the more secure and comfortable your retirement will be. 

As you can see, the form your IRA takes doesn’t have to keep you from buying gold. There are legal and sensible ways to invest in gold no matter what type of IRA your money is invested in.