How to Convert a 401(k) to Gold Investment

Gold has enchanted humanity from time immemorial, and it is used today for investment, coinage, jewelry and industrial applications. If you belong to a 401(k) plan at work, you have very little chance of owning physical gold in your account, although you might be able to hold different types of gold derivatives, such as gold mutual funds, gold exchange-traded funds, gold-related stocks and gold futures and option contracts. If you are determined to own the physical metal in your retirement account, you can use a 401(k) rollover to move money to an IRA or a Solo 401(k) and purchase permitted forms of gold in the account.

The Role of the Trustee

The trustee of your 401(k) or IRA enforces the rules concerning assets you can purchase in your account. The rules for retirement accounts are set forth in federal regulations and in the plan documents drawn up by the sponsor. Generally, workplace plans offer limited investment options, such as selected stock and bond funds, CDs and money market accounts. Self-directed workplace 401(k)s are sometimes available, giving the account holder more leeway in choosing investment vehicles. However, those choices seldom include physical gold, because few trustees are set up to buy and sell gold – you need a trustee who is also a gold broker or dealer to handle these transactions.

One-Participant 401(k)s

A one-participant, or Solo, 401(k) is used by self-employed individuals and owners of a one-person company. With just a few variations, it operates just like a workplace 401(k). If you open a self-directed Solo 401(k), you can choose a gold broker/dealer as trustee and hold physical gold in the account. The trustee is responsible for storing the actual gold coins or slabs in a depositary – you are not allowed to take physical possession of the gold. You can’t purchase gold and then put it into the 401(k), but you can contribute money to the account and then purchase gold via the trustee.

The Gold IRA

A gold IRA is a self-directed account with a gold broker/dealer as trustee. You can buy or sell gold and other precious metals in the IRA as long as the metals meet government standards. In this regard, the gold IRA resembles a self-directed 401(k), with the same rules prohibiting the account owner from holding the gold. A 401(k) allows larger annual contributions than does an IRA, but in most other respects, self-directed IRAs and Solo 401(k)s are very similar.

Government Standards for Gold

Gold in a retirement account must meet the quality specification set forth in Chapter 26, Section 408(m) of the U.S. tax code. The rules state that collectibles, including art, antiques, metals, gems, stamps, coins and other tangible personal property, cannot be held in a retirement account. However, the rules offer exceptions for four precious metals – gold, silver, platinum and palladium. You can hold these metals as coins or slabs in your account as long as they meet certain requirements for purity and size, as set forth in 51 USC 5112(a). The U.S. Gold Eagle and the Canadian Maple Leaf are two popular gold coins that qualify for retirement accounts, whereas the South African Krugerrand does not. Gold slabs and bars of 0.995 percent purity can also be held.

The Rollover Maneuver

You might be wondering: how do I convert my 401(k) to gold? The simplest way to partially or fully convert your 401(k) to gold is set up a self-directed Solo 401(k) or IRA with a precious metals broker/dealer serving as trustee. You can then request a trustee-to-trustee transfer from your current 401(k) to the new account. This kind of rollover doesn’t require a 20 percent withholding or risk triggering taxes and penalties that can arise from failing to roll over a distribution within the 60-day deadline.

You can also roll your 401(k) into a Roth IRA. This requires that the rollover amount be added to your current taxable income, but the money can grow tax-free and you can later withdraw it with no taxes or penalties as long as you follow the rules.

Strategies for Gold Accounts

You are permitted to own multiple 401(k)s and IRA. That’s important, because it means you can set up a self-directed IRA or Solo 401(k) dedicated to your precious metal holdings. The trustee will most likely be a precious metals broker/dealer who will serve as custodian for the physical metals. The internet is replete with gold IRA reviews and lists of the best gold IRA companies, making it easier than ever to find a good trustee. You can use other retirement accounts for your other investments. For example, you can establish both a gold IRA and an IRA with a brokerage firm to access a wide variety of assets.

The Private Storage Controversy

Federal regulations require that the gold held in a retirement account be physically maintained by a third-party, such as a depositary. The trustee is responsible for overseeing the gold’s storage and to maintain inventory records chronicling what you own. In the last decade, a controversy has developed that identifies a potential fact pattern in which you can physically hold your retirement account gold at home. This scheme involves the use of a limited liability corporation in conjunction with your IRA. Many commentators who have studied this type of arrangement urge caution, as the IRS has never taken a definitive stance on it. The problem for the IRS is that it must wait for you to withdraw money from your non-Roth retirement accounts before it can collect taxes, and home storage makes it hard to detect whether you’ve sold gold without reporting it.

Alternative Gold Investments

Holding gold coins or bullion in a retirement account has certain drawbacks. It doesn’t generate dividends or interest, and you face fees for physical storage, broker commissions and insurance. In addition, the buy/sell spread on gold is high. You buy gold at the retail price but sell it for wholesale, so you need prices to rise as much as the spread just to break even. In other words, physical gold is a slow drain on your wealth unless and until you sell it for a profit. You might want to consider a self-directed retirement account that allows you to hold one or more of these gold alternatives:

• Gold-mining stocks: You can hold the shares of gold mining and refining companies. These shares generally move in conjunction with gold prices, but you must be careful about company-specific risks that might overwhelm the price linkage between gold and shares. You can minimize company-specific risk by purchasing shares in a gold-mining mutual fund which holds a portfolio of stock from many mining and refining companies.
  
• Gold futures and options: These are contracts that provide for the purchase or sale of gold at a fixed price. These standardized contracts trade on commodity exchanges and have strict requirements for the quality and amount of gold, as well as a well-defined delivery date.
  
• Gold exchange-traded funds: ETFs hold baskets of assets, and a gold ETF might own physical gold, futures, options and shares. Unlike mutual funds that trade only after the market closes, you can sell an ETF any time the exchange is open, so your trading can be nimbler.