Here’s the 101 on How to Move 401K To Gold Without Penalty

Many people are not satisfied with investing in only a simple 401(k)plan. A wise choice for your portfolio is to convert your retirement savings into precious metals such as gold. This type of investment is backed with a tangible asset instead of dollars, which yields higher returns and protects your wealth against inflation. 

Some say it’s impossible to transfer savings from 401(k) to precious metal investment, but in this guide, we’ll go over how to move 401(k) savings to gold without penalty as well as learn all about 401(k) plans, Gold IRA, and Rollovers.

What Is A 401(k) Plan? 

As per the IRC (Internal Revenue Code), section 401(k) allows an employee to contribute a portion of their pre-tax salary to a retirement account. In this company-sponsored and tax-advantaged pension plan, the employer can match the contribution to a specific number or percentage. 

These 401(k) contributions are converted into stocks, mutual funds, real estate investment trusts, and bonds. The choice of portfolio lies with the employee, and there are set contribution limits for both parties.

There are two main types of 401(k) plans: Traditional and Roth. 

  • In a traditional 401(k) plan, an employee’s contribution reduces their tax burden for the current year but counters tax withdrawal. 
  • Roth 401(k) employees can make a tax-free withdrawal as the contribution in their retirement account is with their post-tax earnings. 

The company managing the fund charges a fee to maintain your 401(k) account. Under a 401(k) account, the tax liability only occurs in the event of withdrawal–at the time of retirement, when you’re 59 ½ years of age or older. A standout feature of 401(k) retirement plans is it provides shelter from any claims from creditors. 

Other benefits of 401(k) include:

  • Tax-deferred contributions
  • Employee’s potential to borrow from the account in case of emergencies
  • Ability to rollover a 401(k) to alternative IRAs, especially a Gold IRA, is a blessing.

Under the CARES Act, withdrawal rules are relaxed for 401k account holders in 2020 and 2021.

What Is a Gold IRA?

Just like a common IRA, a gold IRA is a self-directed (SD) account that can be opened either by self-employed individuals or an employee who seeks additional retirement investments other than a 401(k) plan. 

For this specific IRA, physical bullions/coins or any approved precious metal are allowed to be held by an investor (account holder), but only with a gold broker/dealer as the trustee or custodian. 

These kinds of retirement accounts attract high charges as physical purchase and storing of metal is required. The gold IRA also resembles a self-directed 401(k) in many ways, as both prohibit the account owner from handling the gold. The only difference is that a solo 401(k) allows larger annual contributions than a SDIRA. 

What Is a Rollover?

A rollover is a procedure where you direct your funds/money from one eligible plan to another qualified one. A rollover is generally done when you leave your current employer, join a new job, or when the sponsor company changes its retirement plan or custodian. In a company-sponsored 401(k), 403(b), TSP, or something related, rollover is a term used for moving your money to an IRA or solo 401(k) account. It can be an enticing option if there are other IRAs that offer better investment prospects. 

Why Should You Do A 401(k) To Gold IRA Rollover?

With a 401(k), the investment decisions rest with the employees and the choices are limited compared to a SDIRA. A 401(k) plan doesn’t allow the purchase of precious metals as an investment option, so you need a Gold IRA to invest in gold and offset the volatility of the stock market. Gold prices are inversely proportional to the volatile stock market. If your securities are following a bearish trend, your gold investments are probably on a bullish run and vice versa. 

If you’re looking to diversify your retirement plan across asset classes with funds in your 401(k), then transferring your assets in 401(k) to gold without a penalty is a good option. This further minimizes tax liability, depending on the type of Gold IRA. Your portfolio must include several dissimilar asset classes as this will ensure protection from risk on all sides.

How To Move 401(k) To Gold Without Penalty?

No one wants to be hit with penalties by investing in things incorrectly. We will thoroughly guide you with all the rules and regulations pertaining to smoothly transferring your IRA/401(k) to gold, without incurring taxes and high fees from the IRS.

Pro Tip: It is advisable to keep track of updated rules and guidelines of the IRS for rollovers and withdrawals as they change from time to time.

Step 1: Research your investment options

After reviewing numerous options that fit your strategy and eligibility, make sure you choose the best one. Check with your tax analyst if all legal aspects are taken care of to avoid unnecessary costs in the form of penalties. Remember that you’re allowed one tax-free rollover annually, so take care of the direct and indirect rollovers. Direct rollovers are simple, but indirect rollovers are more complex as you need to withdraw the fund first and then deposit it in another IRA account. 

If the transaction from the date of withdrawal to depositing in a gold IRA is completed within 60 days, it will be tax-free like a direct rollover. Failing to do so will make the funds taxable and you might incur penalties.

Step 2: Find a competent gold IRA specialist or company

There are some excellent custodian firms in the financial arena, choose one and contact them so they can assist you with filling out the necessary forms to open a Gold IRA. Remember that a gold IRA can be initiated with both traditional and Roth 401(k) funds. These firms have expertise in dealing with approved precious metals and will help you process the rollover.

Step 3: Shop for precious metal

Look for qualified precious metal expert dealers. Purchase the IRA approved metal of your choice through a broker. The dealer will then send an invoice to your selected custodian firm for payment.

Step 4: Asset will be sent to a storage facility

The custodian will transfer the purchased metal to a depository. You will be updated about your holdings via their regular statements.

Advantages of Moving 401k To Gold IRA Disadvantages of Moving 401k To Gold IRA Common Rollover Mistakes To Avoid
  • Full control
  • Complicated and time-consuming process
  • Non-compliance with the 60-day rule
  • Reduces risk of inflation
  • No tax relief in case of early withdrawals
  • Mishandling the “Same Property Rule”
  • Facility to choose a custodian
  • Less legal protection in Gold IRA than 401(k) plans
  • Using RMDs for rollovers
  • Lots of investment options
  • Control your charges/fees
  • Tax benefits

Advantages of Moving 401k To Gold IRA

There are numerous benefits of moving your 401k to a gold IRA. We’ll explain the advantages in the table in further detail.

Full control

Unlike 401(k), holding a Gold IRA account offers you more control over your investments. A company-sponsored 401(k) account is managed by someone else. With an expert custodian to assist, you have full control over your account and its contributions. 

Less risk of inflation

An investment in gold can be a savior in recessions or economic downturns. The purchasing power of your money remains intact even if there is a rise in currency inflation. This is because gold tends to run in the opposite direction of the stock markets. A standard 401(k) is directly affected by the rise and fall of securities thereby increasing your risk percentage.

Ability to choose custodian

With a gold IRA, you can choose your custodian or trustee. You’ll be given 24/7 assistance, and their guidance and personalized service will help you learn more about investing. 

Investment decisions

With 401(k)s, the investment options are limited. Employees must select pre-conceptualized options by the companies. In SDIRAs such as the Gold IRA, an investor is open to a plethora of choices such as bonds, options, real estate, stocks, and precious metals. 

Control over charges/fees

In company-sponsored 401k plans, you are charged with fees whether you contribute to the account or not. If fees are accumulated over a long period of time, these charges can burn a hole in your pocket. Although the service of a custodian or trustee tags comes with a fee when investing in an IRA, it’s cost-effective in the long run. Using a Robo-adviser to handle your portfolio is also a reasonable choice.

Tax benefits

The tax benefits for both retirement plans are relatively the same. These plans are tax-deferred unless you withdraw the funds too early. Try not to withdraw funds from your IRAs before the stipulated period. Overall, Gold IRA is a perfect retirement tool that offers protection in any financial, economic, and political crisis.

Disadvantages of Rollover 401k To Gold IRA

Rolling over your 401(k) savings to Gold IRA collects many benefits and top-of-the-line options for your retirement funds, but there are some drawbacks to be mindful of. 

We advise you to consider both advantages and disadvantages before zeroing in on a decision.

Complicated process

The process of purchasing gold IRA rollovers is a tad cumbersome and complicated and may be a tough task for novice investors. One must search for eligible metals based on purity, provenance, and reliable depository. Although many financial platforms offer a simpler process for this core asset management, the charges may not fit all pockets.

No waiver from tax penalty

Gold IRAs don’t facilitate any waiver from tax penalty due to early withdrawals. For 401(k)s, there is however a clause to waive the tax penalty that allows for 10% relief for withdrawals at a certain age, like 55 years old or so due to the separation from service exemption. 

In comparison to the Gold IRA, 401(k) plans enjoy significant legal protections.

Time Consuming 

It’s a time-consuming method and requires due diligence on the part of the account holder.

Common Rollover Mistakes to Avoid

It’s always a good idea to learn from other people’s mishaps and mistakes. Steer clear of the following mistakes to enjoy a smooth rollover process from your 401(k) to Gold IRA.

Non-compliance with the 60-day rule

The “60-day rule” set by the IRS refers to the maximum period you’re allowed to hold your withdrawal money from all 401(k) accounts. The rule essentially sets a 60-day deadline to transfer or roll over your funds from one retirement account to another before any penalties or taxes start to accrue. Missing this deadline is the most common mistake an investor can make. This happens when you’re either engrossed in shifting your job, settling, or readjusting your schedule. Add the countdown to the bureaucratic process that comes with rolling over accounts and that comes out to nearly 30 days, thereby cutting your time in half.

The IRS puts a stiff penalty in such cases. You will be taxed on the full amount, which includes the standard income rate plus an extra 10% as a penalty in case the account owner is not older than 59½ years of age. The worst part is that in some scenarios, the custodian or administrator who represents your 401(k) plan also withholds 20% of the total for taxes. 

Mishandling the “Same Property Rule”

According to the “same property rule”, an account owner cannot buy stocks or assets on his own even if he’s holding a self-directed IRA. The rule clearly states that you have the right to choose the type and kind of assets you’d like, but the process of buying and transferring the funds should be monitored by a trustee or professional like a custodian firm or bank.

If anybody were to conduct the transaction independently or purchase the assets and hold them to transfer into their retirement account later, this is considered a taxable event thus nullifying the tax-deferred status of the funds by the IRS. As a result, the IRS will penalize you for the amount invested and further levy tax if you are younger than 59½ years. This mistake is more common among young people.

Using RMDs for rollovers

As per the IRS ruling, one must begin to withdraw the minimum amount of money from his retirement account as soon as he hits 72 years. RMDs or Required Minimum Distributions are subject to normal income tax. People commit mistakes by rolling over these RMDs to SDIRAs when they don’t need those funds, but you mustn’t do that! The IRS specifically states that RMDs are excluded from any rollovers. The only exception to this rule is when you’re holding a Roth account. 

How To Prevent These Mistakes?

A simple way to avoid these penalty-driven situations is to use a direct transfer while moving funds around. Most of the crisis arises when you opt for an indirect transfer/rollovers. As discussed earlier, indirect rollovers consist of taking possession of assets from your old 401(k) account and then placing them into fresh IRAs such as a gold IRA. 

Direct transfers simplify the issues as there is no possession of those funds, and therefore:

  • The 60-day rule doesn’t apply 
  • No mandatory 20% withholding attached to the administrator/custodian
  • Likewise, you can’t break the “same property rule”

For mistakes related to RMDs, one must be cautious as a direct transfer doesn’t help in such cases.

Which Types of Gold and Precious Metals Are Allowed By The IRS?

According to the rule laid down by the IRS in Chapter 26, Section 408(m) of the U.S. tax code, only approved gold, platinum, silver coins, and other listed precious metals such as silver, platinum, and palladium are allowed in a retirement account. The coins or slabs of these listed metals should meet the applicable purity, fineness, and size set forth as eligible standards in 51 USC 5112(a). For example, the weight of coins minted by the U.S treasury can be in the form of a coin weighed at 1 ounce, ½ ounce, 1/4th ounce, and 1/10th ounce.

  • Gold slabs and bars should 0.995% purity
  • Silver must be 99.9% pure 
  • Both platinum and palladium should be 99.95% pure
  • Bullions coins should be 99.9% fine
  • Non-U.S Mint bars and coins must be accredited by an assayer, refiner, and should meet all the standard purity levels mentioned above.

Conversely, the rules debar any art collectibles, antiques, coins, medals, gems, stamps, and other physical personal property to be held in any retirement account. The U.S. Gold, Silver, Platinum Eagle coins, Canadian Gold, Silver, Platinum Maple Leaf, Austrian gold and silver, Vienna Philharmonic, and more are some examples that qualify for retirement accounts. 

What Are the Contribution Limits For An IRA?

The IRS has predefined contribution limits to all IRAs, including traditional and self-directed IRAs. In the case of rollovers such as 401(k) to Gold IRA, contribution limits set by IRS for 2020-21 are:

  • $6,000 in contributions per year for ages 49 years and younger
  • $1,000 as a catch-up contribution if you’re over 50 years of age

If you are over the age of 50, your total contribution is $7000. It is crucial to note that the limit of $6000 stands collectively for all your contributions across all your IRAs. Additionally, these rulings state that contributions are subject to per person and not per account.

Conclusion

It can be inferred from the above discussion that there are several key aspects to keep in mind before moving out your funds from 401(k) to gold. All in all, it is a safe rollover option.

The main takeaways include, but are not limited to:

  • 401(k) plans are tax-advantaged retirement accounts for employees that work on a defined contribution scheme
  • The account owner of a 401k has the liberty to rollover these funds to new SDIRAs, cash out the 401(k), or rollover the old 401(k) to a new 401(k) account while changing jobs
  • It’s better to open an IRA as a person gets a wider array of investment options, which is absent in most 401(k) plans
  • Gold IRA rollovers are a safe bet for people who want to do some extra retirement planning in addition to their 401(k) plan
  • Gold IRAs offset the volatility of the stock market, offer financial stability, and keep the purchasing power of your money intact
  • Full control over investment, selecting your trustee, and lower fees
  • Avoid common pitfalls that may lead to penalties by making sure you indulge in direct transfer rollovers involving precious metals IRAs and choose the right custodian to manage your IRA
  • Don’t use RMDs for any rollovers

The addition of gold IRAs to your retirement portfolio has its own benefits and drawbacks, but it is recommended to go by the insights from experts to avoid any kind of penalties.