Many adults in the United States use Individual Retirement Accounts (IRAs) to save money for their sunset years. Figures published by the Employee Benefit Research Institute (EBRI) show that 11 million Americans have opened nearly 15 million IRA accounts. These retirement accounts hold an average of $91,864 while the average contribution is about $3,335. Unlike other retirement plans, money in an IRA benefits from tax-free growth. In addition, one can carry out an 401(k) rollover and invest in precious metals such as gold.
IRA Rollover Overview
The term rollover IRA refers to the act of moving money in a retirement account from its current custodian to another. In most cases, people rollover assets accumulated in employer sponsored retirement plans such as a 401(k) after changing jobs or retiring. The assets involved in such transfers maintain their tax deferred status and there is no limit to the amount of money one can rollover. In addition, you can decide how to invest the money you have been saving. There are various ways of carrying out an IRA rollover including:
Direct 401(k) Rollover
In a direct 401k gold rollover, you must directly transfer funds in your current retirement plan to a new IRA. The custodian or administrator of your account transfers accumulated savings directly to the trustee of the new Individual Retirement Account that you have set up. The beauty of this approach is it does not trigger income tax liability or early distribution penalties.
A direct rollover occurs when you take distribution of funds in your retirement account. However, 20% of your savings will go towards paying federal taxes. In addition, you have 60 days to rollover the funds you have received to a new retirement savings account. Take note that the IRS treats a distribution that you do not rollover within 60 days as ordinary income. This means ordinary tax rate applies and you have to include it in your tax return.
If you opt to roll the entire distribution amount, you have to cover the 20% federal tax amount with your own money. In case you do not have cash to cover the 20% difference, you can still go ahead and rollover the remaining amount of money. However, the IRS considers withholdings as distributions meaning they are subject to taxes.
It is worth noting that the rules for partial rollovers are different. Funds that remain in your old retirement account including any withholdings are subject to income tax and a 10% penalty if one is under age 59 ½.
Basic Rollover IRA Rules That an Investor Should Know
To start with, you can only rollover a retirement account once per year. Nevertheless, this rule does not apply to distributions that one rolls over from employer sponsored retirement plans. It also does not apply to Roth conversions.
Secondly, you can sell non-cash assets such as stocks that you receive in a distribution and then rollover the proceeds. Alternatively, you can leave the assets in their current form. Nevertheless, ordinary income taxes apply on the cost basis of any stocks you hold, not their current market value. Furthermore, taxes come into effect when you sell securities you own.
Professionals in the finance industry as well as the IRS refer to the difference between cost basis and current market value of a stock as Net Unrealized Appreciation (NUA). To understand how NUA works, consider a person who owns 1,000 company shares with a market value of $100,000. If that person bought the shares at $10, the cost basis is $10,000. This means his or her NUA is $90,000 ($100,000 – $10,000).
If the same person decides to take a lump sum distribution, he or she will pay income tax based on cost basis ($10,000) and a 10% penalty if under the age of 59 ½. The remaining $90,000 will not attract tax until the owner sells the underlying shares.
Investing in Gold
After an IRA rollover, you can use the money in your account to buy gold. While other investment options such as stocks decline in value over time, the value of gold tends to increase. According to the Philadelphia Gold & Silver Index, the value of gold has risen by more than 423% since 2003.
Even during times when inflation is high, gold retains its value. Statistics from Blanchard show that this precious metal had an average return of about 130.4% during years when inflation was high such as 1946, 1974, 1979, and 1980. In comparison, stocks fell in value by -12.33%. For this reason, savvy investors use gold as an inflation hedge. You should do the same to protect the value of your retirement nest egg.
You could buy bullion or coins from reputable and licensed dealers. Gold bars range in size from one gram to as much as 400 troy ounces. On the coin front, you could buy Canadian Maple Leaf, Australian Gold Kangaroo, American eagle, or South African Krugerrand. Historic coins are also valuable and you should buy some. When buying gold IRA coins, one should consider factors such as their rarity, design, and finish.
You should also buy coins or bullion with minimum purity of 99.9%. The IRS does not allow gold IRA account owners to buy bullion or coins that do not meet this purity threshold. According to Morgan Stanley, historic coins tend to offer better returns than bullion.
Be careful when buying coins from online dealers. Be wary of any precious metals business with a low Better Business Bureau (BBB) rating. Chances are past clients were not satisfied with the products they bought. It is also wise to keep an eye on the spot price of gold. Just like any other investment, you should buy low and sell high.
All said, whether you are working or not, you should set aside some money for use during your sunset years. The good news is a 401k rollover makes it possible for one to invest retirement savings in precious metals such as gold. To undertake such a rollover, open a new gold IRA account, move your savings into it, and then choose your investments.