In today’s economy, hedging against inflation and economic uncertainty is vital in securing the value of your retirement plan. After all, you wouldn't want to deal with a stock market crash and have your portfolio cut in half in just a few days, right?
A great way to protect yourself from market crashes is by adding gold to your holdings. In this case, you may need to move your 401K into a Gold IRA. To help you with this endeavor, we'll share everything you need to know about rolling over a 401k into a Gold IRA, including its benefits and drawbacks, and tax implications.
But first, let’s get to know how these two types of accounts work.
A 401k account is an employer-sponsored retirement savings plan that allows you to save and invest part of your income (subject to annual limitations). With this plan, your employer can match a portion of your contributions, either partially or on a dollar-for-dollar basis.
A partial match allows your employer to contribute a fraction of your salary. The typical match offered is $0.50 on the first 6% of your pay. On the other hand, with a dollar-per-dollar match, your employer’s contribution equals 100% of your contributions, on the condition, however, that it does not exceed 3% of your total compensation.
Among its many benefits is tax savings. You can go with a traditional or a Roth account, each having distinct advantages. Contributions are deducted from your gross income in a traditional 401k. As a result, you can get tax savings from having your taxable income reduced from contributions made for the year. No taxes are paid until the money is withdrawn, usually in retirement.
With the Roth option, contributions come from your pay after taxes have been charged. That means, the money you contribute will not be deducted from your taxable income, and as a result, you'll still have to pay taxes upfront. But the good part is; your future withdrawals will be completely tax-free.
You’ll be responsible for the type of investments you hold within your 401k account. You can choose from an assortment of stock and bond mutual funds that your employer offers. If available, you can even invest in your employer’s own stock or in a guaranteed investment contract (GIS).Introduced to the investment market by the Tax Relief Act of 1997, a gold IRA is a self-directed individual retirement account that lets you invest in precious metals. Although it’s called a gold IRA, it doesn’t actually mean you can only buy gold with the plan. You can also invest in specific types of silver, palladium, and platinum.
One thing to remember about Gold IRAs is that you can’t simply purchase anything made out of those four metals. They’ll have to meet fineness requirements specified by the IRS before you can put them in your gold IRA.
When you invest in Gold, you’ll have to prepare yourself for a more complex transaction and some additional fees involved. If you want to learn more about Gold IRAs, check out our Gold IRA Ultimate Guide.Here are some benefits you’ll get to enjoy for rolling over your 401k into a Gold IRA:
Diversification: It’s never a great idea to put your money inside a single pot. By taking a portion of your portfolio out of the stock market, you get to balance out your holdings with assets, like gold, which is generally not affected by the market movement.
Control: With 401ks, your options can be pretty limited. But with Gold IRAs, you’ll have more freedom in making your investment decisions since they are self-directed.
Inflation & Market Hedge: The Federal Reserve has increased the money supply for the last decade. With the surge of the pandemic, things only got worse as the central bank’s emergency remedies increased it by 40%. This entails one thing: inflation. And guess what comes after? The rising prices of commodities like groceries and fuel. Gold has long been a proven way to protect your purchasing power as its value never reduces to zero regardless of the economy's performance.
Growth Potential: The price of gold has considerably risen over the past decade (over $1,900 per ounce today). If the trend maintains its increase, it could mean greater savings potential by the time you retire.Moving your 401k to Gold IRA does not only come with benefits, it also comes with certain drawbacks you need to take note of. Here are a few:
401k offers ease of merging with another plan: It’s common to merge your old plan with a new one, but this may not be as easy with Gold IRAs.
More legal protection with 401k: Since 401ks are ERISA plans, they are considered more secure than most IRAs. That means you’ll be protected under threat in bankruptcy, creditor demands, or civil cases. If you opt to move all your funds, it entails letting go of this advantage.
No exemption for separation of service: With Gold IRAs, you'll be discouraged from making withdrawals before turning 59 ½ – the typical rule for many IRA plans. But with 401k, it’s actually a lot easier. The 10% penalty rule is waived for early withdrawals of employees who leave the company upon turning 55 or older. This is how the separation service rule for 401ks work, but with Gold IRAs, you won’t have such an exemption.So, what do you need to do to roll over your 401k into a Gold IRA? Here’s how the process works:
The tax implications on contributions and withdrawals depend on the type of self-directed account you’ve opted for. If you choose a traditional IRA, you won't have to pay taxes on contributions, but only on withdrawals made in retirement. It’s the opposite with the Roth IRA, you’ll pay taxes for the money you contribute, but all your withdrawals will be tax-free.
Important: You only have 60 days to roll over your funds upon receiving them from your 401k provider/administrator. If you fail to meet the deadline, you may have to face a 10% financial penalty.Investing in gold can be a good way to diversify your retirement plan across asset classes. By following the steps in this article, you can execute a 401(k) to Gold IRA rollover and ensure that your hard-earned money is safe and secure. That said, it’s always best to work with a qualified Gold IRA company to get started on your rollover.
Be sure to consult with a qualified expert if you’re confused about the process. Or you can reach out to us if you want. We’ll be more than happy to answer any of your questions.
We hope you find this guide well worth your time. Invest wisely!
Gold’s low correlation with stocks and bonds can make it a useful diversifier in some portfolios. However, it’s important to consider costs and risks carefully before adding any gold to your investments. Physical gold is expensive to ship, challenging to store and may require costly insurance coverage. Backing mining companies is a less expensive alternative,
Read MoreA gold IRA allows you to invest in actual physical precious metals, including coins and bullion. These investments can be made in traditional or Roth options. A good gold IRA company will offer a wide selection of precious metals and a simple process for IRA account openings. It should also be transparent about fees and
Read MoreGoldco has built a reputation as an expert in the precious metals industry, offering clients a variety of investment opportunities. They offer competitive rates, comprehensive education tools and exceptional customer service. They specialize in IRA-approved precious metals, helping customers diversify their retirement portfolio with tangible assets that provide protection against economic volatility. They also provide
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