How to Move a 401K to Gold Without Penalty

Convert 401k to gold

Convert 401k to Gold

Years ago, it was common for workers to stick with a single company throughout their peak earning years. And as a reward for their loyalty, their employer would provide a generous pension plan that would see them through their retirement years in comfort. But those days are long gone.

Today’s workers have to save for retirement beginning as early as possible if they want to have enough money to last through their golden years. And to encourage them to do it, the government provides some attractive tax-deferred retirement savings vehicles. The two most common of those vehicles are traditional individual retirement accounts (IRAs), and 401(k) plans.

Both allow workers to save their pretax dollars and defer paying taxes on their contributions until withdrawal. And both offer investment options that help to grow the account holder’s contributions over time. But over a lifetime of saving, fluctuating economic conditions can have a profound effect on the eventual value of a retirement account.

For example, inflationary pressure can eat away at the real value of an investment account over time. That’s why it’s critical to diversify the underlying investments of a retirement account. But it’s not always easy to find safe-haven investments that protect against inflation while continuing to grow in value.

One of the most common diversification options retirement savers turn to is gold. But why is gold investing a solid retirement strategy? As a tangible asset, it’s unlikely to ever lose much value, even if the global economic system were to collapse. And for that reason, it makes for an excellent store of value and a bulwark against the volatility of other investment markets. And indeed, gold retained or increased its value during the majority of stock market corrections over the past four decades.

But using gold to diversify retirement investments isn’t as simple as just purchasing gold coins or gold bullion and holding on to it. Doing that wouldn’t reap the tax benefits that come with investing in gold through a tax-deferred retirement account. The trouble is that conventional IRA and 401(k) accounts don’t offer gold as an investment option, so it’s necessary for most people to make some changes to their accounts to do it.

Here’s how to convert existing retirement accounts to allow for investing in gold without paying a penalty, and some tips on the various gold investment options available. Let’s dive in.

How to Open a Gold IRA or 401(k) Account?

The good news is that opening a new IRA or 401(k) account that provides gold investment options is easy. And when doing so, it’s possible to choose to either rollover the contents of an existing qualifying retirement account into it or opt to fund it separately. But investors must be able to answer the question of what is a gold IRA before they can make an informed decision.

The simple answer is that it’s a specialized version of a traditional IRA that focuses on gold and other precious metals investing. Because of the regulations surrounding tax-advantaged retirement accounts, they exist as a separate class of IRA. This means investors need to have multiple IRA accounts (or 401(k) accounts) if they wish to invest in gold and traditional retirement investment assets at the same time.

The catch is that all tax-advantaged retirement accounts have maximum annual contribution amounts – and the limit applies to all of an individual’s accounts in total, not separately. This means investors have to determine how to split their contributions across multiple accounts. And that can affect their overall diversification strategy.

For those planning to initiate a rollover into a new account, it’s important to be aware that the funds must be moved to the new account within 60 days. Otherwise, the IRS will consider the move an early funds withdrawal and will levy taxes and penalties on the money. For that reason, it’s a good idea to alert the custodian of an existing account as early as possible that you plan to initiate a rollover. Then stay on top of them to make sure they don’t drag their feet.

In general, the process of getting your new gold IRA or 401(k) account looks like this:

  • Find a provider that offers a gold IRA or 401(k) account that meets your needs
  • Go through the process of opening the new account
  • Instruct your original account custodian to initiate a rollover into your new account, or make plans to make an initial funds deposit (within the yearly contribution limit)
  • Choose the gold investments that best suit your long-term retirement goals

Options for a New Retirement Investment Account

The first important decision in the process is about what type of tax-advantaged retirement account to choose and which provider to go with. And the available accounts have different advantages and disadvantages. The first thing to consider is the fee structure of the potential new account.

In many cases, employer-sponsored 401(k) accounts won’t offer the lowest fees because the companies that use them don’t always look for the best deal for their employees. For that reason, it should be possible to save some extra money by finding a new provider with lower fees. So take the time to shop around.

Then there’s the matter of what type of tax-advantaged account to open. Here are the three main options and how they differ:

  • Traditional IRA

This is the main type of investment account that individuals can open on their own without an employer as a sponsor. The money contributed to an IRA won’t be taxed, nor will the interest or earnings those funds generate until withdrawals begin in retirement.

  • Roth IRA

This is another type of individual retirement account that offers tax advantages – but it’s distinctly different from a traditional IRA. The money contributed to a Roth IRA gets taxed at the time of the deposit – but the account’s earnings aren’t subject to taxation, nor are withdrawals.

  • Traditional 401(k)

This is a type of retirement account typically provided by an employer, which may offer matching contributions to help employees save for retirement. Self-employed individuals may also have their own solo 401(k) account under certain circumstances. They function like a traditional IRA in that contributions and earnings aren’t taxed but withdrawals are.

Again, it’s important to note that individuals can have as many retirement accounts as they wish. The only limits pertain to the total contribution amount for each tax year. So it’s possible to combine a traditional retirement account with a gold IRA or 401(k) to achieve maximum diversification. It’s not an either/or proposition.

Choosing the Right Gold Investment Vehicles

After opening a new retirement account that allows for gold investment, the next step is to decide how to add gold to the account portfolio. Of course, purchasing physical gold is an option. But doing that can come with high broker and storage fees that can eat away at the value of the investment. Fortunately, buying physical gold isn’t the only way to go.

Several alternative gold investment vehicles don’t require you to hold the assets directly, while still allowing you to use gold as an inflation hedge. Some of those options include:

  • Gold Futures

Gold futures are a unique investment product that allows for speculation on the price of gold at a defined point in the future. Buying them means agreeing to buy or sell a specified amount of gold for a specified price on a specific date. The investment opportunity is simple. If the price of gold on the buy date is higher than the contract price, the investor pockets the difference in cost. The opposite is true on a sell contract.

  • Gold Options

Gold options are similar to futures in that they involve an agreement to buy or sell gold at a fixed price in the future. The difference is that an option doesn’t require the holder to buy or sell, but gives them the right to do so if they wish.

  • Gold ETFs

Another way to invest in gold within a retirement account is to purchase gold exchange-traded funds (ETFs). These funds track the price of gold but trade on the stock exchange just like any other type of share. The funds may hold physical gold as their underlying assets, gold options, futures, or any combination of the three.

  • Shares in Gold Mining Firms

Investors may also opt to purchase shares in publicly traded gold mining firms as a way of adding gold to their portfolios. Those firms tend to rise and fall in value relative to the price of gold, making them a great way to use gold as an inflation hedge without actually owning any.

After figuring out which asset type suits their needs and investment goals, there’s only one question left to answer: how much gold should you own? But the answer to that will vary from investor to investor, so it’s always a good idea to consult a financial planner to develop a long-term retirement strategy.

Avoiding Withdrawal Penalties

When deciding to roll over existing retirement accounts or open new ones to add gold to a retirement portfolio, avoiding penalties is essential. This is because IRAs and 401(k) accounts come with some strict rules on their use, as well as on the conditions of moving or withdrawing the funds they contain. This is because their purpose is to incentivize saving for retirement. If account holders could move tax-free funds in and out of their accounts at will, they’d be little more than a convenient way to dodge tax bills.

As mentioned earlier, the IRS will impose a stiff penalty on any rollover between accounts that takes longer than 60 days. And although that seems like plenty of time to transfer some money between accounts, there are plenty of things that can go wrong. The first is that the original account custodian might send the account holder a check rather than forward the money straight into their new account. To avoid that, the account holder must specify in advance that they want a direct rollover into their new account.

But that’s not all that can go wrong. Companies that manage 401(k) accounts, in particular, don’t like losing deposits to other firms. So they won’t all be eager to help an account holder to complete a rollover. If they don’t act fast, the 60-day window may lapse, leaving the account holder on the hook for the penalty.

On top of all of that, retirees may pay a penalty for early withdrawal if they start taking distributions before a certain age. The earliest that retirees can draw on their accounts without a penalty is when they reach 59 ½ years old. If they don’t wait, the IRS will levy a 10% penalty in addition to the normal income tax rate they’d otherwise pay.

Wrapping Up

By now, it should be obvious why so many retirement investors choose gold to diversify their holdings. But there’s no one-size-fits-all approach that will work for every person. Gold, however, does make for a great hedge against inflation and should be at the top of every retirement investor’s list of assets to consider. And when it’s used in the right way, it can help make sure that their retirement years are spent in comfort, which is a just reward for years and years of hard work.

About Aditi Singh 143 Articles
Aditi Singh is an independent content creator and money finance advisor for 5 years. She is recently added with Investment Pedia. Internet users are always welcome to put comments on her contributions.

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