Inflation, volatile markets and economic uncertainty have made some investors think twice about stock-heavy portfolios. Gold, which has performed long over the past year, may appear to be an attractive investment option.
Precious metals can help diversify a portfolio, but if most of your wealth is in a 401(k), it’s important to follow IRS rules as you move some of your money into gold. Carefully switching investments from your 401(k) to gold involves several steps to avoid additional costs. Remember that financial advisors generally recommend that you don’t put more than 5-10% of your total portfolio in gold.
Why consider gold in your 401(k)?
Gold can act as a hedge against inflation. While inflation can hurt the economy and drag down the stock market, the same phenomenon sometimes leads to higher gold prices. It can also help to diversify your portfolio so you don’t over-concentrate on stocks.
That doesn’t mean you have to go all in with 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, such as those that allow you to buy stocks and mutual funds, generally do not allow you to buy physical gold. Instead, you can put funds into a self-directed retirement account (IRA) that allows you to buy physical gold.
Not all employer-sponsored schemes allow you to withdraw funds into a new account while still employed. Another option is to buy an exchange-traded fund (ETF) that tracks the price of gold in your 401(k).
Rollover vs. to transfer
A rollover involves moving funds from one account, such as a 401(k), to a different account, such as an IRA. A transfer involves moving funds from one account to another of the same type, such as from an IRA to another. A direct rollover is the most straightforward option if you have a 401(k), as funds can go directly from your 401(k) to your IRA gold provider without incurring taxes or penalties. This option is also available for IRAs.
401(k) plan owners can also do indirect rollovers, which result in funds being sent to you. You must then roll these funds into the new IRA within 60 days to avoid taxes and, if you’re under 59 ½, a 10% early withdrawal penalty.
Setting up a self-directed gold IRA
Self-directed IRAs give investors access to other assets such as gold and real estate. When choosing one, it’s important to review several gold IRA custodians and decide which one has the most competitive costs and features for what you need. Once you’ve opened a self-directed IRA, notify your 401(k) administrator and ask them to send the funds directly to your new IRA.
With a gold IRA, the custodian will store the gold in your estate at an IRS-approved facility. You cannot keep this gold in your house. However, if you buy physical gold that is not part of a self-directed IRA, you can keep those precious metals in your home.
The IRS lists its approved gold investments for self-directed IRAs, which include 99.5% pure gold (although American Gold Eagle coins are an exception). When buying coins, you should be careful to stray beyond the options offered by a self-directed IRA. Collected coins and jewelry are not eligible.
