Gold coins vs Etfs

[portart]

If you are holding all your money in an 401k retirement account and want to hold your gold in coins, how can you avoid a tax pulling  it out to buy coins?

[Pointedstick]

You could take out a 401k loan, maybe. Use the proceeds to buy (taxable) coins, and then pay off the loan with new contributions or an internal sale-and-rebalance? Actually, can you do that?

[Libertarian666]

You could take out a 401k loan, maybe. Use the proceeds to buy (taxable) coins, and then pay off the loan with new contributions or an internal sale-and-rebalance? Actually, can you do that?

Yes, you can do that if the plan lets you, with the usual caveats about having to pay off the loan if you lose your job.

[portart]

I think it all comes down to how comfortable you are keeping 25% of your life savings in a gold etf.

[Libertarian666]

I think it all comes down to how comfortable you are keeping 25% of your life savings in a gold etf.

That would make me VERY nervous.

[stuper1]

I think I'm in a similar situation as the OP.  I have about 25% of my funds in gold, but only 2% is physical, and the other 23% is in an ETF (IAU) in my 401k or in CEFs (GTU/PHYS) in my Roth IRA.  I don't feel very comfortable having so much paper gold.  I can see the value in keeping some of my gold in ETFs/CEFs for rebalancing, but I've often thought that maybe I should take a loan from my 401k or a withdrawal from my Roth IRA (which I can do without a penalty, as you can withdraw contributions, but not earnings, without penalty) to increase my physical gold holdings.  In particular, the 401k loan sounds attractive, because I don't have to pay taxes on the loan money; I just have to repay my 401k with interest, plus a fairly small fee (about $70).  This sounds like a good idea, rather than using after-tax money to buy more physical gold.  The way I see it, the most likely scenario is that I will never touch my physical gold and it will pass to my heirs on a stepped-up tax basis.  But it will be there as insurance in case of EOTWAWKI scenarios.

Am I missing anything here in how I'm looking at this?

[ns3]

I think I'm in a similar situation as the OP.  I have about 25% of my funds in gold, but only 2% is physical, and the other 23% is in an ETF (IAU) in my 401k or in CEFs (GTU/PHYS) in my Roth IRA.  I don't feel very comfortable having so much paper gold.  I can see the value in keeping some of my gold in ETFs/CEFs for rebalancing, but I've often thought that maybe I should take a loan from my 401k or a withdrawal from my Roth IRA (which I can do without a penalty, as you can withdraw contributions, but not earnings, without penalty) to increase my physical gold holdings.  In particular, the 401k loan sounds attractive, because I don't have to pay taxes on the loan money; I just have to repay my 401k with interest, plus a fairly small fee (about $70).  This sounds like a good idea, rather than using after-tax money to buy more physical gold.  The way I see it, the most likely scenario is that I will never touch my physical gold and it will pass to my heirs on a stepped-up tax basis.  But it will be there as insurance in case of EOTWAWKI scenarios.

Am I missing anything here in how I'm looking at this?

What's wrong with using after-tax money to buy physical gold? (other than maybe you don't have very much left over after taxes if you aren't in your peak earning years like me and my wife which is quite understandable). That's what I've been doing, starting out with 100% ETF gold and now up to about 25% physical. And with gold going down so much lately I haven't even had to sell any of the ETF gold to stay at 25%.

Next Step: Geographic diversification - probably some gold at the Perth Mint.

[stuper1]

Let's say I take out a $30,000 loan from my 401k and pay it back over two years at 5% interest.  I'll end up paying my 401k about $32,500, and I'll end up with $30,000 of physical gold right now, and another $2,500 in my 401k in two years.  I'll sell IAU in my 401k to get the $30,000 loan, so I'm trading paper gold for physical gold.

Instead, if I don't contribute that $32,500 to my 401k, but I use it to buy physical gold, I'll have to pay 25% taxes first, so I'll only get $24,375 in physical gold.

What am I missing here?  It seems like the loan is a no-brainer.  I'll still have paper gold in my 401k and Roth IRA to rebalance with.  As I said before, I fully expect the physical gold to pass to my heirs at a stepped-up tax basis, unless we encounter a EOTWAWKI scenario before I die, in which case I'll be glad to have the physical gold instead of paper.

[ns3]

Let's say I take out a $30,000 loan from my 401k and pay it back over two years at 5% interest.  I'll end up paying my 401k about $32,500, and I'll end up with $30,000 of physical gold right now, and another $2,500 in my 401k in two years.  I'll sell IAU in my 401k to get the $30,000 loan, so I'm trading paper gold for physical gold.

Instead, if I don't contribute that $32,500 to my 401k, but I use it to buy physical gold, I'll have to pay 25% taxes first, so I'll only get $24,375 in physical gold.

What am I missing here?  It seems like the loan is a no-brainer.  I'll still have paper gold in my 401k and Roth IRA to rebalance with.  As I said before, I fully expect the physical gold to pass to my heirs at a stepped-up tax basis, unless we encounter a EOTWAWKI scenario before I die, in which case I'll be glad to have the physical gold instead of paper.

You had me confused at first because I thought you were literally talking about taking $30k from your 401k and repaying it in 5 years. I'm not a tax accountant but I'm pretty sure that you absolutely can't do this. Somebody correct me if I'm wrong but I think you have no more than 60 days to play with a loan from your 401k.

So I re-read your post about the "loan" and am even more confused.

[stuper1]

Our 401k allows up to 5 years to repay a loan.

[ns3]

Our 401k allows up to 5 years to repay a loan.

Interesting. Explains why my daughter has been taking loans from hers (which is good because she has quit asking to borrow from me).

Upon further reading it looks like the 60-day rule only applies if you leave your job.

So it sounds like a reasonable plan what you are proposing to do but way too complicated for me.

[stuper1]

Let's say I take out a $30,000 loan from my 401k and pay it back over two years at 5% interest.  I'll end up paying my 401k about $32,500, and I'll end up with $30,000 of physical gold right now, and another $2,500 in my 401k in two years.  I'll sell IAU in my 401k to get the $30,000 loan, so I'm trading paper gold for physical gold.

Instead, if I don't contribute that $32,500 to my 401k, but I use it to buy physical gold, I'll have to pay 25% taxes first, so I'll only get $24,375 in physical gold.

What am I missing here?  It seems like the loan is a no-brainer.  I'll still have paper gold in my 401k and Roth IRA to rebalance with.  As I said before, I fully expect the physical gold to pass to my heirs at a stepped-up tax basis, unless we encounter a EOTWAWKI scenario before I die, in which case I'll be glad to have the physical gold instead of paper.

You have to pay back your 401k loan with after tax dollars.

Thank you for pointing out the obvious.  I knew it was too good to be true.  I just couldn't figure out why.

[Libertarian666]

This topic of having to repay 401k loans with after-tax money seems to trip up almost everyone, and the general opinion seems to be that you are paying taxes twice on the same money.

However, this is (mostly) wrong.
Let's look at an example:

1. You have $10k in your 401k, on which you have never paid taxes.
2. You borrow $5k and invest it. You still haven't paid taxes on it.
3. 1 month later, whatever you invested the $5k in is still worth $5k.
4. You sell it and repay the loan, owing no taxes. Note that you still haven't paid taxes on the money.

Of course this is a very simple example but it is correct as it stands.

Now let's assume instead that the $5k investment doubles in that month. Now you sell it and pay taxes on the gain, then pay back the loan from the remaining money. There is still no double-taxation, as you are paying back the loan with the money you borrowed, which you still haven't paid taxes on.

Of course the arithmetic gets more complicated if you are making periodic payments, but there is still no double taxation.

[Libertarian666]

Of course the money isn't taxed twice, but the point is that there isn't any tax benefit to a 401k loan.  So one is buying gold coins with after tax dollars, whether they use a 401k loan or not.

You would be astonished how many people don't understand that, including a lot of "financial experts".