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How to Move 401(K) to Gold Without a Penalty

Catherine Tramell
Catherine Tramell

Last updated 28. april 2022

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Gold is a repository of value and faith. People invariably find refuge in the precious metal when the stock market is down or there’s a political upheaval. Seasoned investors, who usually dabble with stocks, do not hesitate to hold their funds in gold until the economic situation gets better.

And after discovering how beneficial investing in physical gold was for their investment or retirement portfolio, some choose to keep the money in or not sell gold — with a few investors increasing the quota for gold in their portfolio.

How to Move 401(K) to Gold Without a Penalty

A 401(k), on the other hand, helps save money for retirement. The retirement account doesn’t look or work like gold, but it does share some similarities with the yellow metal when viewed from the investment angle.

For starters, it helps financially secure the period when you would no longer be gainfully employed. Though gold investors do not put their money in the metal with their retirement years in mind, their gold possessions inadvertently come in handy if they purchase gold and stay put in it for long.

Gold investing, thusly, shares some attributes with a 401(k). And if you’re contemplating a rollover from 401(k) to gold, we will certainly not judge your intelligence.

But how do you accomplish that? Most importantly, how do you carry out the IRA (individual retirement account) rollover without being damned by the IRS? Read on to find that out and more. This article covers the following:

  • A brief introduction to a 401(k)
  • Moving a 401(k) to gold — why, how, benefits, etc.
  • Creating a gold IRA and making good use of a gold IRA firm’s expertise, and more.

Continue reading to save money for retirement in a structured or organized way even after quitting your job and not paying the IRS (Internal Revenue Service) fines for the action.  

What is a 401(K)?

A 401(k) is an employer-provided retirement account. The funds get invested in an asset class – which typically includes bonds, stocks, mutual funds, treasury bills, commercial paper (unsecured promissory note), etc. – to boost the fund’s value. Employees typically contribute to their 401(k) from their before-tax earnings.

For the self-employed, there’s the solo or self-employed 401(k) plan. Only business owners and their spouses (if working in the company) are eligible for the retirement plan. Their employees would qualify for the regular 401(k) instead.

The solo 401(k) arrangement is a great retirement savings vehicle for independent contractors, sole proprietors, and other professionals who are not eligible for the traditional 401(k).  

The solo plan goes by a few other names, including “The Individual(k)”, “Uni-k Plan”, “Solo-k”, and “One-Participant k”. Based on the service provider you choose to work with, the plan’s name may vary.

401k

Why Would/Should You Move 401(K) to Gold?

A 401(k) is not required to invest in gold. With the necessary funds handy, anyone can buy gold. Gold doesn’t discriminate that way. However, buying physical gold with 401(k) funds or moving a 401(k) to a gold or precious metals IRA presents certain tax benefits.

In other words, you won’t be paying taxes on the money that goes into your gold IRA until you choose to liquidate the retirement account. (More on that later)

Can you move a portion (and not the entirety) of your 401(k) to gold? Yes, you can. But you need to transfer the remaining funds to a fresh 401(k) or a solo 401(k) or any other form of investment or savings plan that the IRS recognizes or approves. Else, the federal revenue department would construe the money as income and levy applicable taxes.

Moving a 401(K) to Gold and Not Incurring a Penalty

Most 401(k) plans do not let you hold money in gold. To do that, you’ll have to set up a separate (self-directed) IRA and invest in gold (physical gold, shares of gold mining firms, gold-backed ETFs, etc.).

Why a gold IRA? A gold IRA is a formalized retirement savings arrangement that the IRS acknowledges and legitimizes. The federal body doesn’t recognize physical ownership of gold by individuals as a proper retirement savings strategy. Because the concerned investor then has easy and quick access to the gold, or there isn’t any real impediment to turning the gold into cash for the owner.

For the IRS, the more critical thing is the gold that private individuals own is duly accounted for. Gold IRAs facilitate that. With every other form of individual gold ownership, it’s likely the gold would be hidden in a safe deposit trunk or buried in a private backyard.

Not to mention, there are stakeholders (IRA companies, custodians, depositories, etc.) and jobs dependent on how individuals invest in gold, and the state (through an institution like the IRS) would want to support that.

Long story short, if you want to move 401(k) funds to gold and not incur IRS penalties at the same time, moving 401(k) funds to a gold IRA is the correct course of action. If you’re still at the fence or have doubts about gold being a legitimate asset to hold money in, the following positives would propel you forward.

moving 401k to gold

The Benefits of Moving 401(k) to Gold

Portfolio diversification is one of the major reasons a gold investment is worth it. Another is the tangibility or the inherent value the metal possesses. The precious metal, unlike a corporation, doesn’t go bankrupt. Irrespective of the fate of the company handling your gold, physical gold will always stay put. In other words, gold investments keep their value.

And gold prices also do not fluctuate volatilely. Even if their value goes down considerably, they tend to bounce back fairly quickly. In other words, gold keeps up with the financial trends or is never affected by inflation. If prices go up, the gold value increases too.

Are tax savings the only reason gold IRAs are recommended?

Gold IRAs are more than just tax-advantaged retirement accounts. Besides offering the same tax benefits as a 401(k), other benefits are attached to them.

Perhaps, the biggest of them all is the mental peace that gold investments carried out via a gold IRA afford. Knowing your assets are safe in a highly guarded depository can be extremely reassuring.

Another aspect is the purity of the metal itself. If you were to buy physical gold yourself, you have different forms, shapes, and sizes of gold to choose from. With that, there are high possibilities of the gold not being up to snuff or outright impure. Gold jewelry is not an ideal form of investment.

The gold eligible for a gold IRA are gold coins or bars and must meet specific purity standards — for instance, the gold should be 99.5 percent pure. White gold and rose gold are, therefore, not in contention.

Another requirement to be met is a duly accredited or certified gold manufacturer, refiner, or assayer should have produced the coin. The entities providing the certification include NYMEX, COMEX, LPPM, LME, ISO 9000, etc.

The packaging, condition of the bullion, etc., also ascertain the eligibility of the coins for the self-directed IRA. Not to mention, the gold coins or bars must come with a certificate of authenticity from the manufacturer.

Also, since 99.5 percent purity is something every gold coin or bar produced cannot boast of, many gold coins don’t make the cut, including the famed South African Krugerrand. The gold coins eligible for a gold IRA include American Eagle bullion or proof coins, Canadian Maple Leaf gold coins, Australian Nugget or Kangaroo bullion coins, U.S. Buffalo coins, etc.

Why not move a 401(k) to an IRA invested in other precious metals, such as silver?

It’s certainly possible to move a 401(k) to other precious metals IRA, such as silver or platinum IRA. There are four precious metals in total, and, therefore, a palladium IRA is also possible. And since we are discussing “self-directed IRA”, the IRA could be invested in assets other than precious metals — such as real estate, private equity, non-precious or physical metals, etc.

However, there are caveats attached to each of those assets. Property, for instance, is “local” or interests people living in or near the region. For example, Chicago real estate is something that would not have crossed the mind of a potential investor in Stuttgart (Germany), let alone grabbing their attention.

On the other hand, private equity is a relatively complicated subject that’s easy to define but not that straightforward to dabble with. Even seasoned investors steer clear of the investing domain for that reason.  

Commodities such as coffee, cotton, livestock, etc., could also be a part of a self-directed IRA but are perishable or not worth investing in for the long term. Other precious metals such as silver and platinum have no perishability concerns, but they are not as popular as gold.

Silver, for starters, doesn’t have the allure that gold carries. Although you could burnish silver to catch the eye, the sheen of the precious metal is still no match to gold’s luster. Second, it’s not as symbolically valuable as gold — thanks in part to gold’s relative scarcity and extraction difficulties. Most importantly, silver prices do not go up as the value of gold does during rising inflation because silver is a much more industrial metal than gold is.

Platinum, on the other hand, is pricier than both gold and silver. Platinum supply is lower than gold, and extracting it is also way more challenging. However, unlike gold, the precious white metal doesn’t have much trading history.

Also, when the economy is strong or the industry is thriving, the demand for platinum is relatively high. But when the market is in a lull, platinum prices go down due to poor demand. In other words, platinum prices can be volatile. In February 2008, platinum was more than $2,100 per ounce. In October (the same year), the price went down to $800 an ounce.

Such erratic price swings are unheard of with gold. And because the value of platinum is so dependent on the manufacturing industry, it’s not rare for gold to trade at a higher price than platinum. That has been the trend since 2011 — gold prices being higher than platinum.

How to Make the Transition from 401(k) to Gold Seamless?

As mentioned above, self-directed IRAs can hold or accommodate a variety of investible commodities — for instance, real estate, private equity, private bonds, and precious metals. A gold IRA is a form of self-directed IRA.

Since self-directed IRAs are not as strictly regulated as a traditional IRA, you, the account holder, has to play a more active role in the gold IRA rollover. In other words, choose your gold IRA service provider wisely — which could be a bank, credit union, a gold IRA company, or other financial institutions such as Fidelity Investments.

Peruse their profile (online and offline). Check their ratings, reviews, etc. Look for complaints against the firm (if any) specifically. A solid BBB (Better Business Bureau) rating is a good sign, but it’s not the end-all, be-all. For instance, if a gold IRA firm has complaints against it, an A+ BBB rating cannot be its redemption.

Learn about the company’s track record. The track record or how long the service provider has been in business is perhaps more important than the high ratings and glowing reviews. If you know how online reviews work, it isn’t that difficult and doesn’t take too long to solicit positive reviews from customers. The assessments could also be fake.

However, the number of years a business has been operational is a qualification that cannot be forged or bought. Only time can bestow that upon a company. Not to mention, a business’ pedigree is a strong indication of its commitment to the industry and the stakeholders.

Creating a Gold IRA Account

Once the gold IRA entity from a filtered list of best gold IRA companies has been zeroed in, get on with the account setup and IRA rollover process. The following are the steps involved:

  • Create the gold IRA account with your the IRA company.
  • Once done, fund the IRA with the 401(k) money with, of course, the guidance and assistance of the IRA company. The transfer will be direct, which means the funds will not transit via your bank account.
  • Use the funds to procure gold bullion (coins or bars) for your gold IRA. The self-directed IRA would mandate a minimum purchase (for the transaction to be financially viable for the IRA firm), alongside an account opening fee and administration costs.
  • Look for a custodian to store the gold you purchase. Though some gold IRA companies offer custodianship services, the caretaker of your gold is primarily a separate entity.
  • Once the custodian has been selected and the amount of gold to be purchased decided, the paperwork needed to execute the process would be underway.

The gold IRA setup formalities won’t take more than a day (usually a few hours), but the physical gold will take its time to reach your vault with the gold IRA custodian. Shipping and transportation take time. Based on the distance between the gold dealer and the custodian, the trustee to trustee transfer could take upto a week.

The gold IRA firm would be more than willing to assist you with your account setup and every other aspect of operating the IRA. For instance, it will help you find an IRS-approved gold dealer and custodian if you cannot find one for yourself. Also, the assignment to procure the gold would be handled by your IRA company, and it will also see through the entire process.

Pre-Existing Gold IRA Company and Custodian Associations

Most gold IRA companies also have pre-established relationships with custodians and could recommend their services to you. You are not obligated to ink the deal with the suggested depository, but having businesses that already have a good working relationship working in tandem would be advantageous to you.

The IRS Rule Overseeing the Gold IRA Rollover

To ensure a smooth and proper flow of funds from a 401(k) to a gold IRA, the IRS mandates the money from your 401(k) to move to your newly set up gold IRA in 60 days from the date of rollover initiation. If the process takes more than 60 days, the federal agency will consider the transaction a “withdrawal” and apply relevant taxes and penalties.

The fine is usually 10 percent of the money withdrawn if you are 59.5 years old or younger. If you are older, the penalty would not be levied. The age limit applies to gold IRA distribution too. However, the 10 percent penalty could be exempted if you withdraw money for college fees or finance a maiden home purchase.

Conclusion

Funds from a 401(k) can be used to buy gold in any of its different avatars. But if you are particular about not having to pay taxes on the action and continue to enjoy the benefits of a tax-deferred retirement account or savings plan with gold in it, a self-directed gold IRA is your answer.

The key to a smooth and successful transition from a 401(k) to gold is associating with the right service providers. You cannot do the gold IRA rollover process yourself since multiple stakeholders are involved in setting up and operating a self-directed IRA.

It’s, therefore, imperative you associate with the right gold IRA businesses and not side with firms that lure you with their unrealistically low fees and misleading marketing. We recommend you do your research or check out the article where we’ve discussed the best gold IRA companies in tremendous detail.