Generally, when people want to save for their retirement, they do so through a 401(k) or an individual retirement account (IRA). These accounts ensure that your contributions are tax-free. However, another method of diversifying your retirement investment is by investing a portion of your 401(k) funds in gold.
People invest in gold for various reasons. Since time immemorial, gold has been highly prized and continues to maintain its value. As a result, investors use it to protect their wealth.
Gold is not affected by the fluctuating nature of the stock market. Its spot price increases during inflation. Unlike corporations, gold doesn’t go bankrupt. Hence, your investment will remain safe even when the economy is badly affected.
What Is a 401(k) Plan?
It is a savings plan for retirement that most American employers offer. The name was coined from Title 26 of the United States Code, usually called the Internal Revenue Code.
Signing up for a 401(k) plan gives your employer the consent to pay a fraction of your paycheck into the account. Your employer might match all or a part of the contribution. Also, you can choose from the different investment options available.
In 2022, the most you can contribute to the account is $20500. But if you are above 50 years, you can top up an extra $6500.
Benefits of a 401(k) Plan
The benefits of a 401(k) plan are as follows:
1. Tax Benefits
Because your contributions are paid directly from your paycheck, you won’t have to pay income tax. Tax payment would be deferred until you want to withdraw your funds during retirement. This might put you within the low tax bracket.
2. Control Over Your Investment
You have the freedom to decide how much to invest but it should be in accordance with the IRS limit. Also, you can change the amount you contribute at any time.
3. Your Money Grows Quickly
Cultivating a savings culture early in life sets you up for sufficient wealth during retirement. But even if you didn’t start on time, saving money in a 401(k) plan attracts compound interest. This has a significant impact in the long run.
4. It Goes with You to Your New Workplace
If you get another job, you won’t lose all the money that you and/or your previous employer contributed. The earnings are all yours. You can contact the former financial service provider to know how to move your plan to the new workplace.
Steps to Transition from 401(K) to a Gold IRA
If you want to invest in gold but your 401(k) plan doesn’t offer that option, you need a plan that allows you to do so. A sure way of achieving this is by opening a gold IRA. But how do you move funds from your 401(k) to a gold IRA without penalties?
To avoid penalties during the transition, you need to do a 401(k) rollover. Below are steps to aid a smooth transition.
Step 1: Open a Gold Individual Retirement Account
A gold IRA gives you access to more investment opportunities. You can invest in not just gold but also other precious metals, cryptocurrency, real estate, and so on. To open the account, you need to find a custodian who will help you to purchase the physical metal. The custodian will also recommend secure storage for your bullion.
You can set up your account using a gold IRA kit or by seeking help from a broker online. These days, Robo-advisors assist investors in choosing investment options. You might want to explore this method if you are afraid of doing it alone or are a beginner.
An online broker can help you stay on top of your game using their experience in the industry. However, their commission and fees might add up too quickly, making it an expensive venture. Therefore, you need to look for a service provider that does not charge exorbitant fees. And ensure the provider specializes in gold and other precious metals.
Step 2: Discuss Your Plan to Rollover with Your 401(k) Provider
You need to discuss with your 401(k) provider about rolling over funds directly. No one is happy to lose a customer, so you should begin this step early enough to avoid delays. Your service provider may deliberately slow down the process and you do not want this to happen.
The provider should not address the check to you, rather, it should be in favor of the new account. Also, the funds must arrive in the account within sixty days. Else, you will be penalized for the withdrawal.
The procedure for rolling over funds from a 401(k) may vary. However, providers usually require account owners to fill out some forms before they can begin the process. When the paperwork is complete, you will receive a check or wire transfer to the new account.
On the other hand, you can roll over funds indirectly, but it is a more difficult route. When you do so, the money will go to your personal account. Afterward, you must send it to your gold IRA within the 60-day limit.
This option may complicate things for you because if the transaction is not completed in good time, you will be penalized. Also, many 401(k) providers automatically reserve 20% of the amount you withdraw as a penalty.
Step 3: Choose Your Investments
After completing the rollover, you need to decide the best way to use your funds. As mentioned earlier, a gold IRA gives you the opportunity to invest in different sectors. You can invest your money in physical precious metals like gold, silver, palladium, and platinum.
You can also look at ETFs, mutual funds, stocks from gold mining companies, cryptocurrency, and so on. You must not put all your eggs in one basket. Ensure your portfolio is balanced to protect you against market fluctuations.
Conclusion
A 401(k) plan is a good option for retirement savings. It offers various benefits, which were discussed in this article. However, it does not offer several investment options such as investing in gold. Gold is valuable and is used as a hedge against inflation and political and economic crises.
Therefore, to invest in gold, you need to switch to a gold IRA. We discussed how you can move funds from a 401(k) to your new account without attracting penalties.
The procedures for opening a gold IRA could be quite complex. But with an IRA kit, you can get all the necessary assistance. Click here to request your free kit.