Estimated reading time: 8 minutes
Gold has long been considered a safe-haven investment, especially during times of economic uncertainty and market volatility.
For example, during the high-inflation period of the 1970s, gold prices surged from around under $300 per ounce in August 1970 to briefly cresting over $2,700 by January 1980, offering a strong hedge against rising prices. Similarly, during the 2008 financial crisis, when major stock indices like the S&P 500 plummeted, gold not only held its value but significantly appreciated, showcasing its resilience.
More investors are recognizing the importance of diversifying their portfolios with gold to reduce risks associated with traditional assets like stocks and bonds. However, most 401(k) plans don’t allow for direct investment in physical gold.
That’s why you might be considering rolling over your 401(k) funds into a Gold IRA.
In this article, we’ll walk you through the process of rolling over your 401(k) funds into a Gold IRA, explaining the potential benefits and the key steps to ensure a seamless transition.
A Gold IRA is a type of IRA that allows investors to hold physical gold, along with other precious metals like silver, platinum, and palladium, as a part of their retirement portfolio. Unlike most IRAs that are limited to stocks, bonds, and mutual funds, a Gold IRA provides a way to diversify retirement savings with tangible assets.
However, a “Gold IRA” is really a misnomer.
In fact, this account is simply a self-directed IRA (SDIRA) that allows for investment in physical gold and other precious metals, providing a way to diversify retirement portfolios with tangible assets. Most SDIRAs allow you to hold a wide variety of assets, including real estate, private equity, and yes, precious metals.
In general, it’s easiest to complete a 401(k) rollover to an IRA if the majority of your funds are inside a former employer’s 401(k) plan. This is because most 401(k) plans do not allow you to remove funds from the account while you’re still employed, unless you’ve reached retirement age.
However, some 401(k) plans offer "in-service withdrawals.” This feature allows you to roll over funds to an IRA while you are still with the employer. Often, you need to be at least 59½ years old to qualify for in-service withdrawals, although this age requirement can vary by plan. Check with your 401(k) plan administrator.
If you’re moving funds between account types, such as from an employer-sponsored 401(k) to an IRA you’ll need to complete a rollover. There are two main types of rollovers you can choose from – direct rollovers and indirect rollovers.
Here’s a brief comparison between the two:
In a direct rollover, the funds are transferred directly from your 401(k) plan to your new SDIRA without you taking possession of the money. Since the funds never come into your hands, this type of rollover is not subject to taxes or penalties. This method is straightforward and minimizes the risk of mistakes.
In an indirect rollover, the funds are first distributed to you, and then you are responsible for depositing them into your SDIRA within 60 days.
The distribution from your 401(k) is subject to a mandatory 20% federal tax withholding. You must then deposit the full amount of the distribution (including the 20% withheld) into your SDIRA to avoid taxes and penalties. This means that you must make up the 20% withheld from another funding source.
Indirect rollovers carry more risk due to the possibility of missing the 60-day deadline or failing to deposit the full amount, which could result in significant taxes and penalties.
Note: If the majority of your retirement funds are in an existing IRA, you can complete an IRA transfer instead. For a deeper dive into the difference between transfers and rollovers, check out our Transfers vs Rollovers blog post.
Here's a clear and detailed guide to help rollover funds from your 401(k) to your gold IRA (otherwise known as a self-directed IRA):
Before you invest in precious metals through an SDIRA, familiarize yourself with the IRS rules that govern these investments.
Only certain types of precious metals are allowed in an SDIRA. These include gold, silver, platinum, and palladium that meet the following purity standards:
The IRS has specific criteria for which metals qualify. Examples include American Gold Eagles, Canadian Gold Maple Leafs, and certain bars and rounds that meet minimum fineness requirements.
Precious metals must be stored in a depository that complies with the IRS rules. Home storage or personal possession of these metals is prohibited. Investors can choose between allocated storage or segregated storage.
Allocated storage (also known as non-segregated or commingled storage) involves storing your metals together with those of other investors. While you may not receive the exact metals you deposited, you are guaranteed to get metals of the same type, weight, and hallmark as your original deposit. This type of storage is more convenient for the depository and usually comes with lower costs.
In contrast, segregated storage keeps your metals separate from other investors’ assets. Although this option typically has higher fees, it ensures that you will receive the exact metals you initially deposited.
Certain transactions are prohibited within an IRA. The IRS levies the rules in order to limit conflicts of interest and ensure these tax-exempt accounts are used for their primary purpose: to make investments that provide income in retirement.
Here are a few common prohibited transactions:
When it comes to the different types of SDIRAs, there are two main types: traditional and Roth, each with its own unique features and benefits.
With a traditional SDIRA, contributions may be tax-deductible, meaning you don’t pay taxes on the money you contribute until you withdraw it during retirement. Earnings on investments grow tax-deferred.
Below, we’ve listed three of the main qualities of these accounts:
On the other hand, contributions to a Roth SDIRA are made with after-tax dollars (i.e., they are not tax-deductible), but earnings grow tax-free. Qualified withdrawals during retirement are also tax-free.
Here are three of the main characteristics of these accounts:
Gold’s proven track record as a safe-haven asset, its ability to hedge against inflation, low correlation with traditional investments, and resilience during geopolitical tensions make it a valuable component of a diversified retirement portfolio.
By incorporating gold through a self-directed IRA (sometimes referred to as a Gold IRA), investors could mitigate risks associated with economic instability and market volatility.
Interested in rolling over your 401(k) funds to an SDIRA?
Open your account and watch our Entrust Client Tutorial video, How to Submit a Cash Rollover Request. Or if you have questions about your specific situation, talk to one of our SDIRA experts.
If you’d like to learn more about precious metals first, watch a replay of our webinar, Protecting Your Portfolio with Precious Metals. In the session, we covered the fundamentals of risk and diversification, best practices for due diligence, and some red flags to be aware of before you choose a precious metals dealer or depository.