How To Move 401k To Gold Without Penalty

Let's find out if you can move 401k to gold without penalty or not

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In the wake of the COVID-19 pandemic, inflation has been at its worst since 1982—reaching a jaw-dropping rate of 8.5%. Because of this, investors and retirees are now looking for ways to preserve their earnings in the future. One such way is purchasing and investing in gold.

Moving your 401k to gold is one of the best ways to protect your retirement savings, especially with today’s volatile market. But with so many tax fees and potential penalties to consider, taking the first step can be daunting.

Don’t worry—I am here to help. In this article, I’ll show you how to move 401k to gold without penalty, guaranteed.

Let’s dive right in!

Is My 401k Account Eligible For A Gold Transfer?

The answer to this question depends on the 401k account type you currently have (i.e., active 401k account or eligible 401k account), as well as company requirements.

Requirements and transfers vary from plan to plan, so it’s wise to check with your plan’s administrator before you proceed with any transfer.

Tell them what you’re planning to do—move your 401k to gold—and they’ll be able to tell you what legal procedures to take to avoid penalties from the IRS.

Active 401k Vs. Eligible 401k: What’s The Difference?

Generally, you can move your 401k to gold if your account status is “eligible” rather than “active.”

A 401k is considered active if you’re at the age of 54 or younger and still working for the company providing the 401k plan.

An active plan doesn’t allow “in-service withdrawal” without incurring penalties and tax liabilities.

To use the funds in your active 401k account to purchase gold without the risk of fees, you’d have to either change employers or wait until you’re older and no longer working for the employer in question.

In today’s current economic environment, I don’t recommend leaving your job or changing employers unless you have a solid backup plan lined up. Hang on to your job for now and invest in gold later down the line with your 401k.

If you don’t want to wait, you might want to fund your gold IRA account from another source—like your personal savings. You can also take a 401k loan to buy gold, which I’ll discuss in detail in the next section.

Things are less complicated if your 401k account is considered eligible, meaning that it’s either no longer attached to an employer or you’re of retirement age of 59 and a half. In such a case, you’re free to move your 401k to gold without any issues.

One thing to note is that if you decide to roll your eligible 401k into your active 401k, the funds you’ve transferred would be considered active and can’t be moved to gold. Thus, it’s best to keep both active and eligible accounts separate.

What Is A 401k Loan?

If you’ve found a great opportunity to purchase or invest in gold but are strapped for cash, consider taking out a 401k loan.

A 401k loan allows you to borrow money from your active 401k account with the intent to pay it back within a few years’ time.

Depending on what your employer plan allows, you can either borrow a maximum of $50,000 or 50% of your savings within a 12-month period.

Unless you’ve opted otherwise, the loan you’ve taken out will automatically be deducted from your paycheck, after taxes. If the deducted balance doesn’t cover the full loan in a timely manner, you may have to pay taxes and penalties.

When done for the right reasons—such as investing in gold or stocks when the stock market is down—taking out a 401k loan can be a good idea as long as you keep up with the payments.

What you do with your 401k loan is entirely up to you. Your employer doesn’t need to know that you’re using the loan to buy gold and precious metals. If an explanation is required, “investment opportunity” is as good a reason as any.

Before taking out a loan on your 401k, consult with your investment advisor, financial planner, and tax accountant. They’ll be able to inform you of all the risks, advantages, and potential penalties you may face during the loan.

Here are some important points to take note of:

  • The loan must be repaid at least quarterly within 5 years.
  • You’ll pay interest on the loan, but the interest you’ll be paying will be returned back to your 401k account.
  • You’ll borrow pre-tax money from your 401k and pay it with after-tax money from your salary.
  • Leaving your job requires you to repay the full outstanding balance of the loan.
  • If you don’t pay the outstanding balance in full after leaving the job, the full unpaid loan balance will be considered a taxable distribution by the IRS.
  • You could face a 10% federal tax penalty on any unpaid balance if you’re under retirement age.

Do 401ks Offer Gold Investing?

Some 401k plans allow investors to invest in gold bullion, but these plans are few and far in between. In fact, the vast majority of 401k plans don’t offer direct investments in gold and other precious metals.

This means that you can’t purchase gold coins or gold bullion as part of your retirement portfolio. At least, not without transferring your 401k funds into a gold IRA account or investing in gold through exchange-traded funds (ETFs) or mutual funds.

Let’s take a look at these options individually:

Gold ETFs

If your 401k plan offers a brokerage option, you’re in luck. This option gives individual investors the freedom to invest in numerous assets through a standard brokerage account, including gold investments.

Investing in Exchange Traded Funds (ETFs) is the simplest and arguably the cheapest way of investing in gold.

It gives investors the means to invest in shares of a fund that holds gold, such as Sprott Gold Miners ETF (SGDM) and the iShares Gold Trust ETF (IAU). It also gives investors the option to invest in gold stocks in large industrial firms.

Do note that Gold ETFs invest in gold-backed assets rather than the physical commodity itself. This is a good option for investors who can’t afford to spend a lot of money on physical gold.

That said, Gold ETFs do have their disadvantages, with the biggest being that they can expose investors to liquidity-related risks regardless of the state of gold prices.

And since investors can’t make a claim on the gold shares, owning a share in the ETF represents owning a collectible under IRS regulations. This makes long-term investment subject to capital gains tax that’s 8% higher than most other long-term capital gains, totaling 28%.

Gold Mutual Funds

Another way to invest in gold through your 401k is by purchasing paper gold through mutual funds.

Investing through mutual funds provides investors the opportunity to participate in stocks related to gold and other precious metals.

Some of the best precious metal funds include:

  • First Eagle Gold Fund
  • Invesco Gold & Special Minerals Fd
  • American Century Global Gold Fund
  • Franklin Gold and Precious Metals Fund

Rollover To Gold IRA

Employees that don’t have access to gold investment opportunities in their 401k can choose to opt-out of their 401k and move to an Individual Retirement Account (IRA).

IRAs give investors full access to almost every type of investment related to gold, including ETFs, funds, stocks, and commodity futures.

There are several types of IRAs available, but if you want to purchase physical gold, your best option is opting into a gold IRA.

A gold IRA is a self-directed IRA that allows you to purchase physical gold bullion or gold coins and other approved precious metals as qualified investments.

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, platinum, and palladium coins with a purity level of at least 99.5%. Silver coins and bullion must be of .999 fineness or higher.

Gold and silver coins must be IRS-approved to be considered a valid gold IRA purchase. 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)

Gold and precious metals that are classified as “collectible” by the IRS are subject to a 28% tax. If you’re younger than 59, an additional 10% withdrawal penalty will be added. (Check the guide on the gold IRA tax rules).

How Can I Transfer My 401k To Gold Without Penalty?

Now that I’ve discussed the eligibility of your 401k transfer, here’s how to move 401k to gold IRA without incurring any penalties:

Step 1: Choose A Gold IRA Company

The first step in moving your 401k to gold IRA is, of course, choosing a reputable gold IRA company to work with.

Gold IRA companies that have been working with the gold industry for decades are your best bet.

These companies will provide you with accurate steps in investing in gold and help you choose your precious metals along the way.

They’ll also be able to help you decide where and when to store your gold.

Some of the top gold IRA companies include:

There are multiple factors to consider when choosing a gold IRA company, including reputation, customer reviews, company history, and fees.

Seek out personal references from people close to you, like family and friends. Browse through reviews and testimonials from platforms like the Better Business Bureau and the Business Consumer Alliance. Don’t rely on a single source as reviews can easily be faked or bought.

Avoid companies that make huge and unsupported claims, such as those that guarantee massive profits in a suspiciously short time to lure in retirees.

Unlike stocks that can swing astronomically within a few months or even weeks, gold takes several years to increase in value. Any company that promises quick profit isn’t to be trusted.

Finally, take a look at the company’s fees.

Fees vary from company to company; some offer annual storage and management fees while others charge taxes on interest earnings. Ask the company to lay out every fee imaginable, including any potential hidden fees, to avoid any nasty surprises later down the road.

Step 2: Create A Gold IRA Account

Once you’ve decided on which company to work with, you’re now ready to create a gold IRA account.

Part of the account-setup process is deciding on what type of gold IRA account you want to have: Traditional or Roth.

Traditional Gold IRA

A Traditional Gold IRA reduces your taxable income for the year while setting aside money for retirement.

It’s funded with pre-tax dollars, and you pay income tax on withdrawals when you reach the age of retirement (59 and a half).

If you withdraw money before retirement age, you’ll pay a 10% early withdrawal penalty.

It’s important to note that Traditional Gold IRAs are subject to Required Minimum Distributions (RMDs). This means that you’re legally required to withdraw a certain amount from the gold IRA when you reach 72 (or 70 and a half if you’ve reached that age before January 1, 2020).

If you don’t withdraw that year’s RMD within the applicable deadline, you’ll be taxed 50% of the amount that wasn’t withdrawn.

Roth Gold IRA

Unlike traditional IRAs, Roth Gold IRAs don’t provide immediate tax savings or deductions. You’re required to pay taxes on the money going into your account.

But with that comes one big advantage: all future withdrawals after retirement age are tax-free. Since you paid the tax bill upfront, you don’t owe anything on the backend.

Another advantage of opting for Roth IRAs is that Roth IRAs don’t have RMDs. You’re not required to withdraw money at any point in time and you won’t be penalized for doing so.

Regardless of which account you choose, make sure it’s set up as a “self-directed” gold IRA. This way, the gold IRA company you’re working with won’t be able to take control of your assets and make decisions on your behalf.

Step 3: Contact Your 401k Plan Administrator And Request A Rollover

The next step to moving your 401k to gold IRA is to contact your plan administrator and request a rollover.

You’ll be given two options: a direct rollover or an indirect rollover. In both cases, you can transfer all or just part of your 401k funds to your gold IRA.

1. Direct Rollover

A direct rollover is the easiest way to move your 401k funds to your gold IRA. It’s also the best way to ensure the rollover is executed in a timely manner so you won’t get any tax penalties.

As the name suggests, a direct rollover—also known as a trustee-to-trustee rollover—is a direct transfer of funds from one account to another without the account owner ever touching it. This can happen electronically or through a check payable to the administrator of the gold IRA.

Taxes aren’t withheld during this transfer and you don’t have to follow a timetable in terms of how long it takes to carry out the direct transfer.

Though the IRS limits rollovers to once every 12 months, this rule doesn’t apply to direct IRA-to-IRA rollovers, conversions to a Roth IRA, and transfers from one asset admin to another.

2. Indirect Rollover

If you’d rather handle the transfer and the funds yourself, an indirect rollover may be more up your alley.

When you opt for an indirect rollover, you receive assets from your 401k in the form of a check.

Financial institutions like the IRS withhold a certain amount of tax (normally 20%) when you execute this type of rollover. These institutions return the withheld tax as a tax credit when the rollover process is complete.

If you don’t deposit the money in an IRA or similar retirement plan within 60 days, you’re subject to a tax penalty on top of the withheld tax.

For this reason, I recommend opting for a direct rollover rather than an indirect rollover to avoid potential penalties.

Indirect rollovers are limited to once every 12 months, with no exceptions.

Step 4: Appoint An IRS-Approved Custodian Trustee

When purchasing gold and other precious metals, you must appoint an IRS-approved custodian trustee to manage your account.

Your account is a self-directed IRA so you alone can make decisions in terms of buying and selling precious metals. However, your decisions must be reviewed and executed by an account custodian.

The custodian will handle all transaction records and related paperwork without you needing to lift a finger. Custodian trustee firms are usually banks, trust companies, and similar legal entities.

Some gold IRA companies, such as Augusta Precious Metals and Regal Assets, work with several custodian firms and provide you with their services as part of their gold IRA packages.

Others have established partnerships with third-party custodians, so even if they don’t directly offer custodian services, they can still point you in the right direction and offer recommendations.

Step 5: Select A Gold Storage Facility

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

This means that you can’t buy gold and similar precious metals and store it in the drawer of your house. And if the gold was scratched or handled in your home, there is a chance that you might not be able to transfer it to your gold IRA.

Gold needs to be stored in specialized IRS-approved gold storage, like Brinks and Delaware Depository.

So before you buy gold, you must open an account in a trust-worthy storage facility to store the gold you’ve purchased. You can’t store your gold “temporarily” in your home and transfer it to a storage facility afterward as you may incur penalties for doing so.

Usually, gold IRA companies have connections to reputable IRS-approved gold storage facilities.

It’s worth inquiring about these facilities and seeing if they’re a proper fit for you. Ask about their fees, insurance policies, safety measures, and record-keeping capabilities. If they’re up to your standards, open an account with them to store your gold.

Some of the best gold IRA-approved depositories include:

  • Delaware Depository Service Company
  • HSBC Bank U.S.A.
  • CNT Depository
  • Regal Assets
  • Brinks Global Services
  • ScotiaMocatta Depository
  • JP Morgan Bank

Step 6: Buy Your Gold

All that preparation finally leads to this: buying gold (and/or silver, platinum, or palladium) without receiving a penalty!

You can choose to invest in gold and silver bullion, IRS-approved minted coins. or both. However, make sure the precious metal you’re purchasing meets the IRA purity or “fineness” requirements, which are as follows:

  • Gold, palladium, or platinum bullion: 99.5% minimum purity
  • Gold, palladium, or platinum bullion: 99.5% minimum purity
  • Silver bullion or coins: 99.9%. minimum purity

The only exception to this rule is American Gold Eagle coins, which have a purity of 91.67% (22-karat gold).

Numismatic (or collectible) coins don’t meet the IRS’s standards of purity, so you can’t add them to your gold IRA. The same is said with United Kingdom Sovereign and South African Krugerrand coins.

For every improper transaction, the IRS will count it as a withdrawal, which results in income tax on the value of the item. An additional 10% withdrawal penalty fee will be added if you’re under the age of 59 and a half.

Once you’ve purchased the precious metal of your choice, contact your gold IRA provider to officially confirm your transaction. Your IRA company will provide you with the necessary paperwork to invest in your account.

And there you have it—you’ve successfully moved your 401k to gold IRA without penalty, and purchased gold along the way!

Also, you can learn from this guy by watching the video below:

Final Thoughts

As long as you follow the steps above and invest in IRS-approved gold bullion and coins, you won’t face any tax issues or penalties when moving your 401k to gold.

As a side note, stay away from proof, collectibles, and special edition coins as they’re not only expensive but can also be rejected by the IRS.

Purchase bullion bars that are minted by a well-known, respected minter that guarantees the purity of the gold through paperwork or official stamps.