With economic headwinds growing stronger every day, more and more investors are looking into ways to protect their hard-earned money from the possibility of loss due to recession. Many remember the losses they or their family members experienced during the 2008 financial crisis and they’re determined not to suffer the same thing this time around. But especially for those with tax-advantaged retirement accounts such as 401(k)s or IRAs, the question becomes where to move those assets before a recession?
Trying to invest in assets that gain value during a recession can be difficult, but it’s not impossible. Still, for most investors they’re looking to minimize losses during a recession more than they’re looking to make gains.
When it comes to thinking about where to move a 401(k) before a recession, you also have to think about potential tax implications. Cashing out of a retirement account can bring with it potential tax liabilities or penalties, so that’s something that you’ll need to consider when making your decision.
With all that in mind, let’s take a look at some of the possibilities that exist to help protect your retirement savings. For the sake of simplicity, we’ll assume that you have a 401(k) or IRA that’s invested in a mix of funds, whether they’re index funds or others, that mirror the popular 60/40 mix of stocks and bonds. That is to say, 60% of your retirement savings are invested in stocks or other equities, while 40% are investing in bonds or other debt instruments.
So what are your options for moving your 401(k) assets before a recession?
When financial conditions start to deteriorate, investors often engage in a flight to safety. They look to offload risky assets and invest in assets that are considered safe. And one of the assets with the safest reputation is US Treasury bonds.
Even though US Treasury debt is no longer AAA-rated, it’s still considered one of the safest investment assets there is. When things start to turn south, many investors decide to load up on Treasury bonds, assuming that they’re going to be safe investing in them. But there are a few considerations that you need to think about, especially if you’re trying to protect a 401(k).
First, there’s the fact that US Treasury bonds aren’t 100% risk-free. No asset is. And even though the US hasn’t defaulted on a bond in decades doesn’t mean that it can’t happen in the future.
The US national debt is climbing, and is now over $31 trillion. Interest expense on that debt is climbing as well, and at some point in the future the US government is going to face some real difficulties in servicing all of its debt. This may not be for a while, or it could be sooner than we realize. No one really knows, but that danger is there.
The second consideration is that bond funds don’t necessarily do well during times of recession. For instance, let’s look at Vanguard’s short-term and long-term Treasury funds, VUSTX and VFISX. At the time of writing, the short-term Treasury fund VFISX is down 6.22% year to date, while the long-term fund VUSTX is down 28.69% year to date.
You might be wondering how this is the case, since bond yields are rising so bond returns should be increasing. That may be so, but bond prices are inverse to yields. And because interest rates are rising, bond prices are falling.
Many bond funds don’t always hold bonds to maturity either, so they’re further subject to pressure from lower bond prices. And as investors look to unload poorly performing bond funds, that can put further downward pressure on bond prices.
If you have a 401(k) plan, you likely have a limited range of bond fund options. Look at yours and see how they’re performing. There’s a good chance that the bond fund options you have available to you aren’t doing that well this year.
This brings up the possibility of cashing out your 401(k) and using the money to invest in bonds, like short-term T-bills or even I-bonds. But that would mean that you would have to pay taxes on your distributions. Depending on your existing income level and tax brackets, that could mean that you would end up paying 20% or more in taxes. Is that really worth it to buy assets that only yield 4-5%?
Another option considered safe is holding cash. When we talk cash here we’re talking about physical cash or cash equivalents such as savings accounts or checking accounts. We’ll talk about money market funds later.
Cash has one big drawback, namely that it doesn’t yield anything, and so it loses value to inflation. The higher inflation rises, the lower cash’s purchasing power falls. With inflation at nearly 8%, that means cash holdings are losing nearly 8% of their purchasing power each year to inflation.
The other problem with cash is that in order to buy it with 401(k) funds, you would have to take a distribution from your 401(k). Once again, you would be subject to taxes that could end up being over 20%, 30% or more, depending on your overall income. And would you really want to pay that much in order to hold an asset that loses money to inflation?
Money Market Funds
The other cash-equivalent investment is a money market mutual fund. While they’re treated as similar to cash, they’re not actually a cash investment. Instead, money market mutual funds invest in short term debt securities with minimal risk. Money market mutual funds generally try to keep their share prices at $1, which is why they’re often considered as a cash-equivalent investment.
Still, money market mutual funds aren’t risk-free. Investment gains in a money market mutual fund are minimal, as they’re intended to be a loss-free cash equivalent investment for short-term investment purposes. As such, they’ll lose value to inflation just like cash.
The assets held by money market mutual funds are also not risk-free, even if they’re of high quality, and they are subject to loss. During the 2008 financial crisis, the Reserve Primary Fund “broke the buck,” meaning that the net asset value of its shares fell below $1. Panicked investors sought to pull out their money, and the fund was unable to make them whole and was forced to liquidate.
Breaking the buck is a rare occurrence, but it can happen. And when it does it can really shake investor confidence in assets that are supposed to be some of the safest out there.
Money market mutual funds are also currently subject to liquidity gates and redemption fees, meaning that investors who hold funds in these funds may have to wait to withdraw their money, and may have to pay a fee to withdraw it during times of financial panic. The Securities and Exchange Commission (SEC) is proposing a rule that would eliminate these liquidity gates and redemption fees, but it hasn’t been adopted yet.
Unlike savings and checking accounts, money market mutual funds aren’t insured by the Federal Deposit Insurance Corporation (FDIC). That’s an additional risk that you’ll have to consider.
If you’re investing in a 401(k) plan, you may have access to a money market mutual fund through your plan. You may find that those funds are the only ones in your plan that haven’t lost money this year. That can help protect you against loss, but you also need to consider all the possible disadvantages of money market mutual funds too, especially the fact that money market funds, much like cash, will lose value to inflation.
Unlike the other assets we’ve discussed, precious metals aren’t an asset that just sits there not gaining value. Gold and silver move up and down in value depending on market conditions. But they have a history of performing well during times of recession and economic turmoil, which makes them popular safe haven assets to which many investors turn at the first sign of trouble.
During the stagflation of the 1970s, for instance, gold and silver both made annualized gains of over 30% over the course of the decade. And during the 2008 financial crisis, gold gained 25% during the same period markets lost over 50%. In the aftermath of the crisis, gold nearly tripled in price, while silver more than quintupled.
That’s why more and more investors are looking into buying gold and silver to protect their assets today. And one way they’re doing that is through a precious metals IRA.
What Is a Precious Metals IRA?
A precious metals IRA is an IRA account that holds precious metals coins or bars. It is exactly like any other IRA in every other respect, and is subject to the same rules and regulations as any other IRA.
Precious metals IRA investors often choose to set up a gold IRA that holds gold and silver coins and bars, or a silver IRA that holds silver coins and bars. Some often choose to buy both gold and silver for their precious metals IRA.
One of the advantages to a precious metals IRA is that it can be funded with a tax-free rollover or transfer from an existing 401(k), 403(b), TSP, IRA, or similar retirement account. That allows you to protect your existing retirement savings by rolling them over into a precious metals IRA. You get the benefit of owning gold or silver while not having to take a tax hit from distributing your tax-advantaged retirement assets.
The assets in your precious metals IRA accrue gains tax-free, just like with any other IRA account. And you only pay taxes when it comes time to take a distribution.
Which Safe Haven Is Right for You?
The decision about where to move a 401(k) before a recession is a personal one that you as an investor will have to make, taking into account your own financial situation, your financial goals, and your appetite for risk. There’s no right or wrong decision, and each potential safe haven asset has advantages and disadvantages that you’ll have to judge for yourself.
If you decide that a precious metals IRA is the safe haven for you and your hard-earned wealth, Goldco’s representatives are ready to help you. With over $1 billion in precious metals placements, Goldco has the expertise available to help you protect yourself with precious metals, and a reputation for customer service that is unmatched in the industry.
Don’t let the assets you’ve worked hard for years to accumulate lose value during a recession. Call Goldco today and start taking the first steps toward protecting your investments with gold and silver.