Where Can I Move a 401(k) Before the Possibility of a Recession?

With economic headwinds growing stronger every day, more and more people are looking into ways to help safeguard their hard-earned money in the event of an economic downturn. The 2008 financial crisis hasn’t been forgotten, and many people want to minimize their suffering during the next potential crisis.

But especially for those with tax-advantaged retirement accounts such as 401(k)s or IRAs, the question becomes how to help safeguard those assets, and where to possibly move those assets before a recession?

Trying to choose assets that gain value or minimize loss during a recession can be difficult, but it’s not impossible.

When it comes to thinking about where to possibly move a 401(k) before a recession, you also have to think about potential tax implications. Cashing out of a retirement account can bring with it potential tax liabilities or penalties that can hurt you financially, so that’s something that you’ll need to consult with your financial advisor about when making your decision.

With all that in mind, let’s take a look at some of the choices some people make to help safeguard their retirement savings.

For the sake of simplicity, let’s assume that you, like many other people, have a 401(k) or IRA that holds a mix of funds, whether they’re index funds or others, that mirror the popular 60/40 mix of stocks and bonds. That is to say, 60% of your holdings are stocks or other equities, while 40% are held in bonds or other debt instruments.

So what are some possible options for diversifying your 401(k) or IRA assets before a possible recession?

More Bonds

When financial conditions start to deteriorate, many people often engage in a flight to safety. They look to offload risky assets and choose assets that are considered safe.

One of the assets with the safest reputation is US Treasury bonds. Even though US Treasury debt is no longer AAA-rated, it’s still considered one of the safest assets there is.

When things start to turn south, many people decide to load up on Treasury bonds, assuming that they’re going to be safe holding them. But there are a few considerations that you need to think about, especially if you’re trying to safeguard a 401(k).

First, there’s the fact that US Treasury bonds aren’t 100% risk-free. No asset is. And even though the US hasn’t defaulted on a bond in decades doesn’t mean that it can’t happen in the future.

The US national debt is climbing, and is now over $36 trillion. Interest expense on that debt is climbing as well, reaching over $1 trillion a year.

At some point in the future the US government could face some real difficulties in servicing all of its debt. This may not be for a while, or it could be sooner than we realize. No one really knows, but that danger is there.

The second consideration is that bonds are often held as a hedge against stock market downturns. But in 2022 both stock and bond markets fell at the same time, something that could occur again during the next recession.

If you have a 401(k) plan, you may also have a limited range of bond fund options. Are the bond fund options available to you doing well, or do you want to explore the possibility of different options?

This brings up the possibility of cashing out your 401(k) and using the money to buy bonds, like short-term T-bills or even I-bonds. But that would mean that you would have to pay taxes on your distributions.

Depending on your existing income level and tax brackets, that could mean that you could end up paying 20% or more in taxes. You would need to decide if that is really worth it to buy assets that might only yield 4-5%.

Cash

Another option considered safe is holding cash. When we talk cash here we’re talking about physical cash or cash equivalents such as savings accounts or checking accounts. We’ll talk about money market funds later.

Cash has one big drawback, namely that it doesn’t yield anything, and so it loses value to inflation. The higher inflation rises, the lower cash’s purchasing power falls.

When inflation neared 10% a few years ago, that meant cash holdings were losing nearly 10% of their purchasing power each year to inflation. And even with lower inflation today, it’s still problematic and rising.

The other problem with cash is that in order to buy it with 401(k) funds, you would most likely have to take a distribution from your 401(k). Once again, you would be subject to taxes that could end up being over 20%, 30% or more, depending on your overall income.

Would you really want to pay that much in order to hold an asset that loses money to inflation?

Money Market Mutual Funds

The other cash-equivalent asset is a money market mutual fund. While they’re treated as similar to cash, they’re not actually a cash holding.

Instead, money market mutual funds hold short-term debt securities with minimal risk. Money market mutual funds generally try to keep their share prices at $1, which is why they’re often considered as a cash-equivalent holding.

Gains in a money market mutual fund could be minimal, as they’re intended to be a loss-free cash equivalent for short-term purposes. As such, they could lose value to inflation just like cash.

The assets held by money market mutual funds are also not risk-free, even if they’re of high quality, and they are subject to loss. During the 2008 financial crisis, the Reserve Primary Fund “broke the buck,” meaning that the net asset value of its shares fell below $1.

Many people panicked and sought to pull out their money, and the fund was unable to make them whole and was forced to liquidate.

Breaking the buck is a rare occurrence, but it can happen. And when it does it can really shake confidence in assets that are supposed to be some of the safest out there.

Money market mutual funds are also permitted under SEC regulations to impose liquidity fees during times of high redemption, defined as whenever daily redemptions exceed 5% of the fund’s assets. That means that during times of financial panic, you may need to pay a fee to withdraw your money.

Unlike savings and checking accounts, money market mutual funds aren’t insured by the Federal Deposit Insurance Corporation (FDIC). That’s an additional risk that you’ll have to consider.

If you participate in a 401(k) plan, you may have access to a money market mutual fund through your plan. You may find that those funds are the only ones in your plan that provide you with any sort of cash equivalent, or even offer some small amount of interest each year.

That can help safeguard you against loss, but you also need to consider all the possible disadvantages of money market mutual funds too, especially the fact that money market funds could lose value to inflation.

Precious Metals

Precious metals may be derided as rocks that just sit there, but even while “just sitting there” they could be gaining value. Gold and silver are highly traded commodities that move up and down in value depending on market conditions.

These precious metals also have a history of performing well during times of recession and economic turmoil, which makes them popular safe haven assets to which many people turn at the first sign of trouble.

During the stagflation of the 1970s, for instance, gold and silver both made annualized gains of over 30% over the course of the decade. And during the 2008 financial crisis, gold gained 25% during the same period markets lost over 50%.

That kind of performance has helped bolster gold and silver’s reputation as safe haven assets, leading more and more people to look into buying gold and silver to help safeguard their assets today. And one way they’re doing that is through a precious metals IRA.

What Is a Precious Metals IRA?

A precious metals IRA is an IRA account that holds precious metals coins or bars. It is exactly like any other IRA in every other respect, and is subject to the same rules and regulations as any other IRA.

Precious metals IRA owners often choose to set up a gold IRA that holds gold and silver coins and bars, or a silver IRA that holds silver coins and bars. Some often choose to buy both gold and silver for their precious metals IRA.

One of the advantages to a precious metals IRA is that it can be funded with a tax-free rollover or transfer from an existing 401(k), 403(b), TSP, IRA, or similar retirement account. That allows you to help safeguard your existing retirement savings by rolling them over into a precious metals IRA.

You get the benefit of owning gold or silver, the tax advantages of an IRA, and don’t have to take a tax hit from distributing your tax-advantaged retirement assets.

The assets in your precious metals IRA accrue gains tax-free, just like with any other IRA account. And you only pay taxes when it comes time to take a distribution or, if you set up a Roth precious metals IRA, your qualified distributions are made tax-free.

Which Safe Haven Is Right for You?

The decision about where to move a 401(k) before a recession is a personal one that you will have to make, taking into account your own financial situation, your financial goals, and your appetite for risk. There’s no right or wrong decision, and each potential safe haven asset has advantages and disadvantages that you’ll have to judge for yourself.

If you decide that a precious metals IRA is the safe haven for you and your hard-earned wealth, Goldco’s representatives are ready to help you. With over $3 billion in precious metals placements, Goldco has the expertise available to help you safeguard your financial well-being with precious metals, and a reputation for outstanding customer service.

When the next recession comes, don’t ignore the assets you’ve worked years to accumulate. Call Goldco today and start taking the first steps toward safeguarding your assets with gold and silver.

This article was originally published in November 2022 and was updated in January 2025.