Inflation, volatile markets and economic uncertainty have caused some investors to think twice about stock-heavy portfolios. Gold, which rallied for much of last year, may seem like an attractive investment option.
The precious metal can help diversify a portfolio, but if most of your wealth is in a 401(k), it’s important to follow the IRS' rules as you move some of your funds to gold. Carefully rolling over investments from your 401(k) into gold involves multiple steps to avoid additional costs. Keep in mind that financial advisors typically recommend allocating no more than 5-10% of your overall portfolio to gold.
Must Read
Why consider gold in your 401(k)?
Gold can act as a hedge against inflation. While rising prices can hurt the economy and drag down the stock market, the same event sometimes results in higher gold prices. It can also help diversify your portfolio so that you're not too concentrated in stocks.
That doesn’t mean you should go all in on gold. Experts recommend sticking to traditional assets like stocks and bonds for the most part. But if you want some diversification, allocating a small amount of your money to gold can pay off.
Understand the rules
Traditional 401(k) plans, like the ones that let you buy stocks and mutual funds, typically do not allow you to buy physical gold. Instead, you can rollover the funds into a self-directed individual retirement account (IRA) that permits you to buy physical gold.
Not every employer-sponsored plan lets you roll over funds into a new account while you are fully employed. Another option is to buy an exchange-traded fund (ETF) that tracks the price of gold in your 401(k).
Where People Are Buying Gold Right Now
Rollover vs. transfer
A rollover involves moving funds from one account, like a 401(k), to a dissimilar account, like an IRA. A transfer involves shifting funds from one account to another of the same type, like from one IRA to another. A direct rollover is the most straightforward approach if you have a 401(k), as the funds can move directly from your 401(k) to your new gold IRA provider without incurring taxes or penalties. This approach is also available for IRAs.
401(k) plan holders can also do indirect rollovers, which results in the funds being sent to you. You must then deposit these funds into the new IRA within 60 days to avoid taxes and, if you’re under age 59 ½, a 10% early withdrawal penalty.
Setting up a self-directed gold IRA
Self-directed IRAs give investors access to alternative assets like gold and real estate. When choosing one, it’s important to review several trusted gold IRA custodians and decide which one has the most competitive fees and features for what you need. Once you open a self-directed IRA, you notify your 401(k) administration and ask them to send funds directly to your new IRA.
With a gold IRA, the custodian will store gold on your behalf in an IRS-approved depository. You cannot store this gold in your home. However, if you buy physical gold that is not a part of your self-directed IRA, you can store those particular precious metals in your home.
The IRS outlines its approved gold investments for self-directed IRAs, which includes gold that is 99.5% pure (though the American Gold Eagle coins are an exception). If you buy coins, you should be wary about straying beyond the options your self-directed IRA provides. Collectible coins and jewelry do not qualify.
