Gold IRA Rollover vs. Custodian-to-Custodian Transfer
If you are considering moving some of your financial assets from an existing IRA or other retirement account into a gold IRA, you must be clear on the mechanics of making the transfer of your funds from one account to another.
There are two distinct methods of moving your funds, and unfortunately, they are often both referred to in a generic sense as "rollovers." However, one of the methods is considerably less likely to cause you to run afoul of the IRS's technical rules pertaining to individual retirement accounts.
The two methods of transferring funds from one retirement account to another which will be discussed in this article are:
- The Gold IRA Rollover, and
- The Custodian-to-Custodian Transfer.
As mentioned, both methods of moving funds from one retirement account to another are sometimes referred to as "rollovers." And, this is more than a hyper-technical discussion of semantics.
If you want to avoid IRS penalties and the premature requirement to pay income taxes on your retirement funds, you must understand the difference between a "rollover" and a "transfer."
A Hypothetical Investor
To start from the beginning, here's the scenario. An investor has an existing retirement account (IRA or 401(k)), and for some reason (probably the money printing by the Federal Reserve) that investor has decided it would be prudent to reduce his or her exposure to dollar-based assets by moving some or all of the retirement account into precious metals such as gold and silver.
After all, the reason we have retirement accounts in the first place is because we want to set aside funds which will grow in value and be available to make our retirement years as secure as possible. With the constant devaluation of the dollar, the long-term prospects for our dollar-based retirement accounts are, well, less than optimistic.
So how does our hypothetical investor get the dollars out of the existing retirement account and into a gold or silver IRA without incurring IRS penalties and without having to pay income taxes on the funds moved from one account to the other?
Method I: The Gold IRA Rollover
The first method that can be used to transfer retirement funds from one account to another is a "rollover." In my opinion, the rollover to a gold or silver IRA is the more risky of the two potential methods of transferring your funds, and, therefore, the least desireable.
When our investor chooses to do an IRA rollover, here's what takes place. The investor requests a rollover distribution from the custodian of his or her existing retirement account, who then issues a check payable to the investor.
Under the IRS rules, our investor has sixty days to get the rollover distribution redeposited into another qualified retirement account, which in our example would be the gold IRA.
Risky Business: Part 1
Here's the risk involved, which makes the "rollover" my least favorite approach. If something happens and the investor fails to get the funds he or she withdrew from the existing account into the gold IRA within 60 days, unpleasant consequences will ensue.
The first unpleasant consequence is that the investor will be treated by the IRS as if a taxable withdrawal from the account has been made. Assuming we are discussing a traditional (not a Roth) IRA, that means the investor is going to owe income taxes on the amount withdrawn.
Risky Business: Part 2
The second unpleasant consequence is that if the investor is under 59½ years of age, he or she will almost certainly incur an additional early distribution tax of 10% of the amount withdrawn, in addition to the regular income tax owed on the withdrawn amount.
Risky Business: Part 3 (Hidden Trap)
There is yet another hidden trap for those who chose to undertake an IRA rollover. Here's what it is.
If the withdrawn funds are coming from a company sponsored retirement account such as a 401(k), the plan administrator is required to withhold 20% of the amount withdrawn and send it to the IRS to partially cover any income taxes which might be owed on the withdrawal. If the account is an IRA, in some circumstances the custodian is required to withhold 10% of the amount withdrawn.
So the check the investor will actually receive will be 20% (or perhaps 10%) less than the full amount involved in the transaction.
Here's the trap. To avoid being treated as having made a taxable withdrawal from his or her account, the investor must deposit into the new gold IRA not just the amount of the check the investor actually received from the existing account, but rather the amount of the check plus the amount of any tax that was withheld and sent to the IRS.
This means that the investor must come up with the additional 20% or 10%, whichever is applicable, out of other funds in order to avoid being taxed.
It's a hidden trap built into the "rollover" process, and many an investor has been snared and required to pay both income taxes and penalties because of a defective IRA rollover.
Method II: The Custodian-To-Custodian Transfer
The second and by far the safest method of moving funds from one IRA to another is called the "custodian-to-custodian transfer." This will be short and sweet.
With a custodian-to-custodian transfer, our investor simply requests the custodian of the existing account to transfer funds from the existing retirement account to the custodian of the new gold IRA.
Using this method, the investor never takes possession of any of the funds from the retirement account. Therefore, the 60 day rule for re-depositing the funds is inapplicable and no mandatory tax withholding is required.
So you see, this method is much simpler and doesn't carry with it the potential for be taxed on a distribution, unlike the rollover.
If you are one of the many investors who have decided to move retirement assets out of an existing dollar-based retirement account into to gold or silver IRA, it's probably a very smart investment move, given the $85 billion per month of quantitative easing (money printing) being done by the Federal Reserve.
Knowing the rules for rollovers and transfers is critical to making sure that the process goes smoothly and that you don't incur unexpected taxes and penalties.