A 401(k) plan provides a simple vehicle for company employees to save a portion of their earnings. In addition, many 401(k) plans are eligible for a company “match” up to a specified amount and/or percentage. These plans can be an extremely convenient way for employees to save money on a regular, ongoing basis.
401(k) plans, however, may be somewhat limited in the investment choices available. Many investors today are looking for added diversification and peace of mind. In an ever changing world with geopolitical, currency, stock market and inflation risks, among others, many investors are looking for ways to own physical precious metals, such as gold or silver. This brief guide will outline how a 401(k) program from a previous employer may be rolled over into a gold or silver IRA.
A 401(k) plan is a qualified, tax-deferred account that is defined in subsection 401(k) of the Internal Revenue Code. In a 401(k) plan, employees are permitted to contribute a defined portion of their earnings on a pre-tax basis to their account. These earnings are withdrawn from the employees pay prior to taxation, and tax on the earnings is deferred until retirement withdrawals are made.
In addition, employers may contribute to the employees plan in the form of a company match. The company match can vary, and a percentage match up to a specified percent is common. These plans do have annual contribution limits. As of 2015, the maximum pre-tax contribution is $18,000. Additionally, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.
A 401(k) plan comes with numerous potential benefits. Some of these benefits may include:
While investment choices within a 401(k) plan may be limited, many plans offer numerous ways to invest money within the account. Some of these products may include mutual funds, money market funds, stable value accounts, bond funds and company stock. Given multiple choices within a fund, one may be able to diversify their 401(k) holdings. In addition, account holders can move money between funds as time passes or market conditions change.
A company match on contributions can be a huge perk for many employees. Many companies no longer offer pensions for their employees, but now rather offer some type of company match on funds the employee contributes. These matching funds can add up quickly, and can help one reach their retirement objectives faster. Company matches on funds can vary, as well as the amount of time before those funds are considered vested.
One has the ability to borrow funds from his or her 401(k) account under many plans and under certain circumstances. These circumstances may include purchasing a home, education or medical expenses or economic hardship. These loans must generally be paid back within five years, and the interest that you pay on the loan goes right back into your account. It is important to note, however, that should one leave the company with a 401(k) loan outstanding, he or she will have a limited amount of time to repay the loan. If this does not occur, they may be liable for taxes on the funds, as well as early withdrawal penalties if under the age of 59 ½.
While 401(k) plans may offer several choices of for investments, the total amount of asset classes available to invest in may be limited. Standard 401(k) plans do not have the option of physical gold or silver ownership. The closest one can come would be owning precious metals funds, gold or silver mining stocks or other similar paper products.
Of course, many buyers of physical precious metals desire to own the physical, tangible metals for their inherent benefits. While specific circumstances may allow for physical metals ownership within a 401(k), such as in a self-directed 401(k), most people with a standard 401(k) account may have to look for other options in order to own physical gold or silver. This is where a gold or silver 401(k) rollover may come into play.
A gold or silver IRA rollover is simply the transferring, or “rolling over” of a 401(k) account from a former employer into a precious metals IRA account. There are several issues worth noting and exploring about this possible option:
For the purposes of this guide, we will focus on rolling over a 401(k) plan from a former employer. The process of rolling over an old 401(k) account into a gold or silver IRA is relatively simple and can be accomplished in a short period of time. In a nutshell, the process goes like this:
There are several things to consider when rolling over an old 401(k) plan into a self-directed precious metals IRA account. Some issues to consider are:
There are many gold and silver IRA custodians to choose from. When comparing IRA custodians, some things one may want to compare include length of time in business, customer reviews and fees and expenses. Custodians may be compared online from the comfort of your home or office.
The same can be said for choosing a depository. There are numerous approved depositories to choose from in various locations. You may want to compare fees and expenses, as well as security and/or any insurance provided.
When it comes to choosing gold or silver products, there are regulations in place dictating what can be purchased within an IRA account. These regulations are very specific. If looking to buy gold, some of the approved products are:
If looking to buy physical silver, there are also restrictions on what may be purchased within an IRA account. Some of the approved silver products include:
Generally speaking, the gold and silver products eligible to be purchased within an IRA account are very liquid and carry lower premiums compared to many other products.
There are many possible reasons to invest in a gold or silver 401(k) rollover. No two investors are exactly the same, and investors may have different goals or concerns. Some of the potential reasons may include:
INFLATION CONCERNS: Investors often buy gold, silver or other precious metals to try to hedge against inflation. Inflation is a sustained increase in the costs of goods and services — in other words things are getting more expensive. As inflation accelerates, one’s purchasing power is eroded. A dollar today buys less than a dollar did 10 years ago for example. As inflation increases, one’s real returns on investments may be less, as well. Some investors believe that precious metals like gold and silver may not lose value like other assets during times of high inflation. In fact, many investors believe that the value of gold or silver could potentially rise during periods of high inflation thus providing a hedge against rising prices.
DOLLAR DEVALUATION: Some investors buy precious metals to hedge against dollar devaluation. Like inflation, as the value of paper currency is eroded goods and services become relatively more expensive. Gold and silver are denominated in U.S. dollars and often times exhibit an inverse correlation to the dollar. In other words, often times when the dollar falls, gold and silver rise. Conversely, the value of gold and silver may decline when the dollar is rising.
PORTFOLIO DIVERSIFICATION: Many investors today are looking for ways to further diversify their portfolios. Today’s investors are looking for additional asset classes beyond just stocks and bonds. Precious metals, like gold and silver, may provide an additional layer of diversification. Precious metals often exhibit little correlation to stocks or bonds and, thus, may be an effective way to add diversification.
GOLD AND SILVER HAVE A LONG HISTORY AS A RELIABLE STORE OF VALUE: Precious metals, like gold and silver, have been used for transactions for thousands of years. They have proven to be a reliable store of value over that time and are still recognized today for their value. These metals are transacted all over the globe. An ounce of gold in the U.S. is the same as an ounce of Gold in Japan.
GOLD AND SILVER CARRY NO COUNTERPARTY RISK: Unlike paper investments, physical gold and silver cannot go bankrupt or default on an obligation.
PEACE OF MIND: Physical gold or silver ownership can provide significant peace of mind. Because of their history, characteristics, lack of counterparty risk and liquidity, precious metals ownership may provide a degree of comfort in an ever changing world.
Of course, this list could go on and on, but these are just a few reasons that many investors turn to gold and silver.
This guide is meant to be a brief introduction into rolling over a 401(k) account from a previous employer into a precious metals IRA that owns physical gold or silver. That being said, there are very specific guidelines that must be adhered to. If you have a 401(k) account with your current employer, we recommend that you discuss your desire for physical gold or silver ownership with your plan sponsor to see what, if any, options may be available to you.
If your 401(k) is from a previous employer, the process to roll it over is fairly straightforward and simple. One should always, however, consult their tax professional before doing anything tax related or that may have tax consequences. In order for your rollover to go smooth, all regulations must be adhered to. Your tax professional can guide you through the process and answer any tax related questions that you may have. While this guide is meant to be for informational purposes only, no investment advice is being given or implied.