401k To Gold IRA Rollover Guide

Let's find out if it's a good idea to transfer your 401(k) to gold or not

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Whether you’re looking to extend your retirement portfolio or simply want a retirement option separated from the volatility of the stock market, rolling over your 401k to gold IRA is a surefire way of doing so.

Investing in a gold IRA may seem lengthy and daunting, but it’s actually a relatively simple and straightforward process. This full 401k to gold IRA rollover guide to aims to help you efficiently and easily diversify your retirement savings with a few simple steps.

To fully understand the process and benefits of rolling your 401k to a gold IRA, let’s start with the basics: what exactly is a gold IRA? And more importantly, what purpose does it serve in an investor’s retirement portfolio?

What Is Gold IRA?

Facilitated by the Taxpayer Relief Act of 1997, a gold IRA (Individual Retirement Arrangement) is a self-directed individual retirement account that specifically invests in physical gold and other precious metals, such as silver coins, palladium, and platinum.

To classify an account as a gold IRA, it must include physical bullion such as sovereign-minted coins or gold bars rather than paper-based gold assets alone (i.e., ETS or mining stocks).

As of 2022, roughly 14% of US adults held gold and other precious metals as an investment. This figure has already increased and is expected to further increase by the end of 2022 and the beginning of 2023.

What Is The Purpose Of Gold IRA?

Like most other IRAs, opening a gold IRA provides the investor with special tax benefits. (Read gold IRA tax regulations).

Gold IRAs come in three types: traditional, Roth, and SEP.

Traditional gold IRAs are funded with pre-tax dollars, for which taxation is deferred until withdrawn during retirement.

On the other hand, Roth gold IRAs are funded with after-tax dollars. Assets held within this account are free from long-term capital gains taxes. As such, investors aren’t required to pay taxes when distributions are taken in retirement.

SEP gold IRAs are targeted toward small business owners or those who are self-employed.

Like traditional gold IRAs, it’s funded with pre-tax dollars. However, it offers higher contribution limits. As opposed to the $5,500 to $6,500 limit in traditional gold IRA, SEP gold IRA owners can contribute up to 25% of their income or $53,000, whichever is less.

Business owners can also contribute on their employees’ behalf.

How Does Gold IRA Work?

To open a gold IRA, you’ll have to work with a dedicated gold IRA company to set you up with an account and fund it with the precious metals of your choice.

You can do so by rolling over an existing retirement account—such as a 401k—to your self-directed IRA.

As long as the funds remain within a qualified retirement plan, you won’t owe taxes on the move.

If you don’t have a retirement account, you could deposit cash each year while following the annual IRA contribution limits. You can use the money you’ve deposited to buy precious metals for your gold IRA.

The IRS (Internal Revenue Service) has strict rules regarding the type of precious metals you can own in a gold IRA.

For example, you can only purchase gold bars that are at least 99.5% in purity. The same is said with platinum and palladium coins and bullion. Silver coins and bullion must be of .999 fineness or higher.

You can also purchase certain IRS-approved coins for your IRA. Some options include:

  • Canadian Maple Leaf coins
  • American Gold Eagle coins
  • Australian Gold Nugget coins
  • American Buffalo coins
  • Canadian Arctic Fox coins
  • Canadian Polar Bear coins
  • Chinese Panda coins
  • British Britannia coins (2013 and newer)

The IRS doesn’t allow the investment of United Kingdom Sovereign and South African Krugerrand coins, as well as gold collectibles.

The statutory body will count every improper transaction as a withdrawal, so you’d end up owing income tax on the value of the item. If you’re younger than 59, an additional 10% withdrawal penalty will be added.

Due to the rules set by the IRS, opening an account with a reputable gold IRA rollover company is key to remaining compliant with the tax code and minimizing penalties.

How To Set Up A 401k To Gold IRA Rollover

Here’s a basic guideline on how to set up a 401k to Gold IRA rollover:

Step 1: Search For A Reputable Gold IRA Provider

To make the transfer a seamless one, you must first find a reputable gold IRA provider to guide you through the process.

Respectable gold IRA companies will not only supply you with the proper information required to start investing in gold but will also help you choose your metals and determine where they’ll be stored.

These companies can potentially be a valuable resource for setting up your account until the liquidation process.

When searching for a gold IRA company, you must first look into its history. Find out how long it’s been in operation and what its overall reputation is within the industry. Look through reviews from current customers and talk with friends who’ve used the company before.

Also, don’t forget to ask about the company fees.

Fees vary from company to company, so it’s important to inquire how much the service will cost you before investing in a gold IRA.

Some providers charge an annual fee while others only charge taxes on interest earnings. Make sure the fees are laid out in full so you won’t be surprised by any hidden costs later down the road.

Some of the best gold IRA companies include:

It’s important to keep in mind that gold IRA companies are not—and will never be—financial advisors. They’re not bound by a fiduciary duty to operate in your best interests.

For this reason, it’s wise to seek out reputable outside sources for investment advice if you’re unsure how to proceed with your gold IRA investment.

Step 2: Create An Account

Once you’ve found a company you want to work with, choose what account type you’d like to go for: Traditional or Roth.

Traditional and Roth accounts have similar goals but differ in some key ways.

For one, a traditional IRA allows you to contribute a portion of your pre-tax dollars while Roth IRA allows you to contribute post-tax dollars.

This means that traditional IRAs reduce your taxable income for the year while setting aside money for retirement.

Withdrawals are taxed as current income after the age of 59.5. If you withdraw money before the age of 59.5, you’ll pay a 10% early withdrawal penalty.

Roth IRAs don’t provide immediate tax savings or deductions so they don’t lower your AGI (Adjusted Gross Income) like Traditional IRAs.

However, the amount you’re paid and the money you earn are tax-free once you retire. This is because you paid the tax bill upfront, so you don’t owe anything on the backend.

Roth IRAs don’t have Required Minimum Distributions (RMDs), making them ideal wealth-transfer vehicles. You’re not required to withdraw money at any point during your lifetime, and if you do withdraw, you’re not taxed or penalized even if you do so before the age of 59.5.

Both traditional and Roth IRAs offer generous tax breaks. Your choice entirely depends on the timing of when you’re planning to claim your funds.

When opening an account, make sure your account is set up as a “self-directed” IRA. With this option, you’ll be able to take personal control of your assets within the IRA and not rely on the company to make decisions.

Step 3: Determine Your Self-Directed IRA Custodian

Section 408(m) prohibits personal storage of precious metals and holding coins using a self-directed IRA.

As such, you must select a trustworthy custodian to manage all transaction records reliably and efficiently, as well as handle all related paperwork on your behalf.

Step 4: Contact Your 401k Plan Administrator

Once you’ve created a gold IRA and chosen a reliable self-directed IRA custodian, contact your 401k plan administrator and initiate the transfer of funds.

There are two types of fund rollovers: direct rollover and indirect rollover.

A direct rollover is a process in which funds are moved from one account to another without you touching it. This is our preferred method because it avoids tax penalties.

If you’d rather handle the funds yourself, request an indirect rollover. You’ll receive a check, which you must deposit to an approved retirement plan within 60 days. If you’ve not deposited the check within this period, you’ll incur additional taxes and penalties.

In both cases, you can transfer all or just part of your 401k funds to your gold IRA.

The amount of money that’s transferred into the Gold IRA should ultimately depend on your overall retirement plan.

If you’re less than 10 years away from retirement, it’s worth setting aside 20% to 30% of your wealth for gold IRA investing. If you’re more than 10 years away from retirement, invest only 5% to 10% of your money.

If you’re not sure how much to invest in gold at this point in time, you may want to consult a financial advisor or two.

With their expertise, they’ll be able to note down your risk tolerance, your expectations for inflation and the economy, and other financial assets you’re currently investing in or might be investing in the future to make an informed decision.

Step 5: Purchase Gold And Other Precious Metals

With the funds allocated to your gold IRA, you can now purchase gold and other precious metal. The gold IRA company you’ve chosen will help you choose and purchase precious metals and store them at a reputable storage facility of your choice.

Though gold and precious metals can be bought in thousands of marketplaces, only a select few can be added to your gold IRA as per IRS guidelines.

Gold and silver coins must have a purity of 99.5% and 99.9% respectively. The American Gold Eagle coin is the only exception to this rule, with a purity of 91.67%.

Collectible gold and precious metals under IRC Section 408(m) can’t be added to your gold IRA. If you invest in collectibles, you’re subject to ordinary income tax and a 10% additional tax on early withdrawals under age 59.5.

Once you’ve selected the precious metal you want to purchase, contact your gold IRA provider to officially confirm your transaction and provide you with the necessary paperwork to invest in your account.

Check this in-depth gold IRA rollover guide’s video below:

Advantages And Disadvantages Of Opening A Gold IRA

Like most investments, investing in a gold-backed IRA has its own advantages and disadvantages.

Here are some pros and cons to take note of before opening a gold IRA:

Reasons Why You Should Open A Gold IRA

Some of the biggest advantages of opening a gold IRA are as follows:

1. Diversifies Your Portfolio

If you’re just starting off in the world of investments, one of the most common investment advice you’ll hear is to diversify your portfolio.

Holding assets across different categories not only protects you against market volatility but also increases your chance to capitalize on costs in any environment.

Investing in physical assets—such as gold and precious metals—is one of the more effective ways to diversify your portfolio.

Since the price of gold isn’t directly correlated to the performance of the stock market, gold IRAs serve as a hedge against the erosion of major currencies as well as market inflation.

Hence, investing in gold is a well-worth consideration, especially during periods of uncertainty driven by major global events and geopolitical instability.

2. Reduced Tax

Gold IRAs are given the same tax treatment as most other IRAs, wherein transfers are tax-deductible in traditional accounts and withdrawals are tax-free from Roth accounts.

As long as you keep funds in the gold IRA until retirement age (59.5), you’re not subject to taxes on gains or distributions you receive from your investment regardless of how they’re made, whether it be cash or in physical form.

You’ll only pay tax when you sell the precious metal at its full value as determined by its purity and weight.

3. Control On Investment

One of the biggest advantages of having a gold IRA instead of a 401k account is that it gives you better control over your investment.

With a gold IRA, you won’t be subject to inflation, market changes, and the volatility of the political climate. On top of that, you’ll have complete control over fees as most companies don’t charge for rolling your 401k to a gold IRA.

4. Long-Term Value

Like most IRAs, gold and other precious metals aren’t liquid investments. They’re mostly buy-and-hold investments that take several years to increase in value, unlike stocks that can swing massively within just a few months or even weeks.

These days, the demand for gold and other precious metals has risen significantly in the past three years. In the first quarter of 2022 alone, the gold demand increased above 34%.

With the continued demand for gold from the technology sector, this trend will likely continue in the upcoming years.

5. Inflation Protection

If you invest, say, $100 for retirement, this amount of money won’t buy you the same quantity of goods when you retire 20 years later. This is the curse of market inflation.

Fortunately, that’s not the case with gold IRAs.

Gold and other precious metals hold their value. If the market price increases, so do the value of precious metals. This is what makes gold IRAs a great long-term investment for retirement.

Reasons Why You Shouldn’t Open A Gold IRA

Here are some disadvantages that may dissuade you from opening a Gold IRA:

1. High Fees

IRAs are known to have high fees, but gold IRAs have significantly higher fees than most other types of IRAs. This is for multiple reasons, but perhaps the biggest is related to custodian and storage fees.

Since it’s technically illegal for individual investors to store gold in their own homes, they must pay monthly/yearly custodian and storage fees to hold their precious metals.

Some companies charge flat monthly/yearly rates, while others charge a fraction of the holdings. These fees can quickly add up, especially if you invest in precious metals several decades leading up to your retirement.

There’s also the fact that precious metals are subject to transport and shipping charges, which can quickly absorb investment revenues.

And that’s not even touching the surface. You’ll also be subject to long-term account maintenance fees, insurance fees against the loss of gold at the depository, cash-out costs for closing an account, and seller’s fees if you do decide to sell your metals.

2. Doesn’t Grow Your Wealth

Unlike stock- and bond-based IRAs, gold IRAs aren’t a wealth growth tool but rather a wealth preservation tool. It doesn’t receive interest, returns, and dividends for reinvestment.

While it’s true that you’re charged lesser capital gains tax when selling precious metals held in an IRA, you’ll likely earn more money when investing stocks in the long term.

3. Required Minimum Distributions

If you open a traditional gold IRA, you’ll have to withdraw a certain amount from the IRA account once you research the age of 70 years and six months.

This process is called the Required Minimum Distribution (RMD).

If you don’t withdraw from the account, you’ll be fined a hefty fee payable to the IRS—up to 50% of the distribution you don’t take in a tax year.

4. Strict Managing And Purchasing Rules

The IRS has several managing rules that you must adhere to when investing and managing a gold IRA.

For example, you can only store gold, silver, palladium, and platinum with a strict “fineness” or purity level. This limits you to only buying gold and silver bars, as well as IRS-approved coins.

Collectible gold items and coins don’t meet IRS standards, so you can’t include them in your account.

Additionally, you can’t move the precious metals you already own into your IRA or sell or buy gold to your IRA without a custodian lest you get into legal trouble.

Other eligibility conditions include:

  • Coins must be in excellent condition, come with a certificate of authenticity, and be wrapped in original mint packaging.
  • The producer/distributor must be associated with NYSE Liffe, TOCOM, NYMEX, LBMA, ISO 9000, COMEX, LPPM, or national government mint.
  • Bullion coins must be 100% free of damage and in flawless, uncirculated condition.
  • Small bullion bars must be produced to exact weight specifications.

5. Risk Of Loss

Unlike financial assets like stocks, bonds, and bank deposits, physical assets such as gold and precious metals can be stolen or lost during transportation and storage.

Though you can reduce this risk by insuring your assets, this is yet another cost an investor must take on.

6. Selling Difficulties

As mentioned earlier, investors are subject to RMDs at the age of 72 for traditional gold IRAs.

This wouldn’t be such a problem except for the fact that physical gold, silver, palladium, and platinum can be difficult to sell off.

The process of looking for buyers can be lengthy and tedious, and investors may be forced to sell their assets at a significantly lower price in their haste to meet deadlines.

Remember: those who fail to meet RMD regulations are subject to high penalties. Selling at a loss might be better than incurring fees from the IRS.

Final Thoughts

Executing a 401k to gold IRA rollover isn’t as daunting as you may have initially thought.

All you really need to do is to find a reputable gold IRA custodian, create an account, and perform a direct/indirect rollover with the help of your 401k plan administration.

Once the funds are in your account, you can start purchasing gold and precious metals. Just make sure the metals you’re purchasing meets IRS standards to avoid penalties.