When you change jobs, it is a common practice to roll over the funds and assets in the old 401 k plan to a traditional or Roth IRA. This is a simple technique to keep your retirement savings in one place and avoid the expenses and hassle of managing and maintaining multiple retirement accounts. However, if you are looking at balancing your retirement funds by diversifying them with assets that work differently from your present paper investments, you may want to do a Gold IRA rollover.

Read on to learn more about the benefits of a Gold IRA and how to open a Gold IRA and execute a 401 k to a Gold IRA rollover.

gold ira rollover guide

More on 401 k, IRA, and Gold IRA...

A 401 k is an IRS-approved tax-advantaged employer-sponsored defined-contribution retirement account. While the funding from the employee comes from automatic payroll withholding, the employer may match all or part of that contribution. It is available in two variants – traditional and Roth – the difference being in taxation rules.

An IRA or Individual Retirement Account is an IRS-approved self-directed tax-advantaged retirement plan for individuals to earmark funds for retirement savings. IRAs of various types are designed to meet the needs of individuals with different employment statuses. A self-directed IRA allows investors more freedom to make investment decisions and offers more investment choices including physical precious metals, real estate, and private placements.

A Gold IRA is a common name given to a Precious Metals IRA. This is a self-directed IRA made possible by the Taxpayer Relief Act of 1997 which expanded the investment selection in an IRA to include a limited selection of precious metals. The precious metals included are gold, silver, platinum, and palladium. The Internal Revenue Code has clearly specified the purity standards of each precious metal.

How to open a Precious Metals IRA?

The process of opening a Precious Metals IRA is fairly simple and straightforward. As is the case with all IRAs, the IRS mandates the presence of an IRA custodian for a Precious Metals IRA. The custodian is an IRS-approved financial institution such as a bank, credit union, or trust company. In a Precious Metals IRA, the investors are prohibited from handling the IRA assets or keeping them in personal possession. The role of an IRA custodian is to manage the transactions and assets in addition to maintaining records, filing reports with the IRA, and coordinating with gold dealers and depositories.

Finding a trustworthy IRS-approved IRA custodian with a strong track record may be considered as half the battle won. A Precious Metals IRA needs two more players to function – a gold dealer to buy the metals for the IRA and a depository for the safekeeping of the IRA assets. But before buying gold bullion for your Gold IRA, you need to have sufficient funds to pay for the purchase.

There are multiple ways to fund a Gold IRA. These are cash deposit, direct rollover, and indirect rollover. Depositing cash into the account is limited to $6,000 in a year for those under 50 years of age and $7,000 in a year for those above 50 years. The annual contribution limit is not for a single account. It applies across all IRAs. This means that to get more funds into your Gold IRA, you need to consider one of the remaining two options – direct rollover and indirect rollover.

Direct rollover and indirect rollover

In both options, funding in the new Gold IRA is done by fund transfer from existing IRAs and retirement plans like 401 k. The difference between the two processes is in the method of shifting funds and taxation rules.

Direct rollover or Direct transfer

A direct transfer is a simple relocation of funds or assets from one retirement account to another without the investor personally handling them. This is carried out as a custodian-to-custodian arrangement. All that the investor needs to do is put in the request for the fund transfer. This transfer is not treated as a disbursement by the IRS and there is no limit on the number of times an investor can execute a direct transfer. As a direct transfer doesn’t entail taxation, this transfer need not be mentioned in the tax returns.

Indirect rollover

An indirect rollover of IRA funds involves the investor taking personal possession of the disbursement from one IRA and depositing the same amount in another. As this is treated as a disbursement of funds, an indirect rollover comes with taxation liabilities. However, the IRS has allowed a 60-day window to complete this transaction without being taxed. Even if completed within the stipulated period, an indirect rollover needs to be shown in the tax returns. Moreover, an investor is allowed only one indirect rollover in a year.

Pros and cons

Direct transfer is a simple hassle-free method to shift funds/assets to a new Gold IRA. In addition to no taxation and no mention in tax returns, this method of transfer doesn’t necessitate liquidation of assets for fund transfer and consequent losses. Assets can also be transferred between IRAs without cashing out. With no taxes, no penalties, and unlimited transfers allowed, a direct transfer is the easiest method to add funds to your Gold IRA.

An indirect rollover is a tricky method to transfer funds between IRAs, but it comes with some advantages. This method involves using the distribution from one IRA to fund another. Missing the 60-day window means the amount will be treated as a distribution and taxed. If this happens when the investor is below 59½ years, an early withdrawal penalty of 10% is also levied.

The main attraction of an indirect rollover is that it acts as a short-term loan. The account owner gets to utilize the amount for short-term needs before depositing it in the new Gold IRA within the stipulated period.

Why do a Gold IRA rollover?

Funding your Gold IRA

Paper gold vs physical gold

Stock markets are prone to bear runs at the first signs of economic turmoil or even a hint of it and it may take years to recover and recuperate the losses. Again, inflation and devaluation of currency are triggers for market losses. History has proved that whenever the economy is performing below par, the price of gold display bullish trends. This makes gold an ideal component in the retirement portfolio to perform the balancing act.

Investing in gold in the paper format such as gold stocks, gold bonds, gold futures, or gold ETFs carries what is called counterparty risk. That means your asset is someone else’s liability. In other words, you have to rely on the other party remaining solvent for your investment to have any value.

In times of economic uncertainties such as the one we are witnessing now induced by the COVID-19 pandemic, businesses coming under financial duress and shutting down is not uncommon. With a paper gold investment, you have to rely on the trustee to make good on your investment. And in most cases, your investment is not insured against loss, theft, damage, or fraud.

Some paper investments in gold like mining stocks are swayed more by the happenings in the stock market than the movement of gold prices. This means these investments in gold do not enjoy the same advantage of physical gold as a hedge against economic upheavals.

Contribution vs rollover

The administration fee of a Gold IRA is higher when compared to other IRAs and retirement plans like 401k. The IRA companies are not allowed to profit in any way from the funds and assets in a Gold IRA. This necessitates charging reasonable fees for the services rendered. Moreover, a Gold IRA requires the services of a depository and insurance, thus adding to the aggregate fees. On average, a Gold IRA will have annual fees totaling in the range of $200 – $250.

To make the account profitable, it should have sufficiently large assets to cover the fees and leave a surplus. This is not possible with direct contribution alone, as the cap is too low and it will take years to build up enough funds to have large assets. This means investors should take the route of rollovers – both direct and indirect – to make the account profitable from the beginning.

How to execute a Gold IRA rollover?

Once you have set up a Gold IRA with one of the IRS-approved IRA companies, you can initiate the Gold IRA rollover from one or multiple retirement accounts including a 401 k. For a direct transfer of funds/assets to the newly-opened Gold IRA, you just need to contact the custodian/custodians of the retirement accounts from which you want to execute the rollover and put in a request for the same. The direct transfer is done as a custodian-to-custodian arrangement and there is nothing more for the investor to do.

When using the indirect rollover method to transfer funds from an existing retirement account to the new Gold IRA, more participation is required from the investor’s end. This method involves the account owner requesting a distribution from the existing retirement account, taking personal possession of the disbursement check, encashing the check and depositing it in a bank account, issuing a check for the same amount to the Gold IRA at a later date, and depositing the check with the Gold IRA custodian. All these maneuvers need to be completed within a 60-day window to escape the tax implications of the disbursement. Exceeding the time limit may also lead to a 10% early withdrawal penalty for those aged 59½ years or less.

401 k to Gold IRA rollover

Rolling over the retirement savings in your 401 k to a self-directed IRA such as a Gold IRA can be a risky and life-changing decision. It can be a make or break move that can make your retired life easier and comfortable if you get it right. Unfortunately, it can also lead you downhill.

A few reasons to consider 401 k to Gold IRA rollover are:

  • Low performance of investments in 401 k
  • Limited options and no control over investment choices in 401 k
  • High fees, lack of a good fiduciary advisor in 401 k
  • Freedom to make decisions regarding investments offered by an IRA
  • An array of investment choices for diversification of your portfolio
  • To take advantage of the investment potential of physical precious metals
  • Hedge against economic uncertainties and inflation

Despite the lure of gold, it would be wise to think hard and do some serious research before making the move. If necessary, take advice from a financial advisor who is a fiduciary. A fiduciary is someone who will act solely in your best interest.

FAQs on Gold IRA rollover

The financial crisis of 2008 was an important event in the history of the Gold IRA. The market lost 50% of its value in a year and a half, with this significantly reflecting in the retirement portfolios of investors. In the same period, gold prices scaled never before seen heights, making Gold IRAs an attractive hedge against economic turmoil, devaluation, and inflation. It offers investors more control over investment selection, making it ideal for portfolio diversification.

The obvious answer would be when the price of gold is at the lowest. The point of rolling over funds from retirement plans such as 401 k to a Gold IRA is to purchase physical precious metals. Buying is always profitable when the price is low.

A direct rollover is simple and easy to execute. And comes with no tax complications and unlimited transfer attempts. Whereas, an indirect rollover is a much more complicated process, requiring thinking, planning, and perfect implementation to avoid taxation and penalties. Despite the clear advantages of a direct rollover, an indirect rollover is popular among investors as it works as a short-term loan.

An indirect rollover involves the account owner requesting a disbursement, accepting the disbursement check, depositing it in their own account, writing out a check for the same amount from the personal account, and depositing it in the IRA. If this process is carried out within a 60-day period, the disbursement will not be taxed or the 10% early withdrawal penalty levied. For this short period, the disbursement amount remains in the hands of the account owner. For all practical purposes, this is like a short-term loan.

After you change jobs or retire, your contributions, and a matching contribution from your employer to the 401k plan stops. The IRS has kept the fiduciary protection higher for a 401k than for an IRA. The 401k plan trustees are expected to act solely in the best interest of the account owners and choose investments for their maximum benefit. However, the options for portfolio diversification are limited in a 401k. Many 401ks come with high annual fees. In addition to these drawbacks, when you change jobs frequently, you may end up with multiple retirement accounts that are expensive to maintain and hard to keep track of. Weigh these pros and cons before deciding to roll over 401k funds to an IRA. - Learn How To Move 401k To Gold Without Penalty

Most account owners use the rollover option to move funds from a 401 k to an IRA after they change jobs or retire. This is to consolidate the retirement savings in one place. Rolling over funds from a 401 k is permitted while still working in most 401 k plans. Usually, this maneuver is done for diversification of portfolio and more control over investment choices.

The CARES Act was passed in March 2020 as a relief to those who are affected by the COVID-19 pandemic. It extends special exemptions to the withdrawal amounts, repayment rules, early withdrawal penalties, and RMD waiver for 401 k and IRAs.

Yes. The Act allows already disbursed RMD to be repaid into the distributing retirement account. If done before August 31, 2020, the repayment would not be counted as a rollover. The account owner would have the one rollover allowed for 12 months remaining. However, if repaid after the August deadline, it will be treated as a rollover. This applies to the deferred RMD for 2019 as well.

Bottom line

Investing in physical precious metals is a bold step in diversifying your retirement savings. This is more relevant when the economic outlook is not rosy and you are anxious about an imminent market crash, devaluation, and/or inflation. The gold price has a history of moving in the opposite direction as the stock market. This makes gold an excellent choice for diversification and balancing the retirement portfolio.

If you have funds sitting idle in your 401 k or assets whose performance is anything but positive, then a 401 k to a Gold IRA rollover may be a good choice for you. But before you dive in, you need to assess whether physical gold has a place in your retirement portfolio and if yes, how much. You may do your own research or take the help of a financial adviser for this.

That said, investing in gold is not everyone’s cup of tea. It comes with all the inherent market risks, irrespective of what others may say or promise. Guarantees of quick profits and high returns should be treated as scams and you should stay clear of those making these promises. Gold is usually considered as rewarding as a long-term investment.

Tread with caution to make the most of the investment potential of gold.

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