The Internal Revenue Service (IRS) permits certain types of precious metals, i.e., palladium, silver, gold, and platinum, to be acquired by individual retirement accounts. A Gold IRA (Individual Retirement Account) is a generic term used to define self-directed IRAs that hold any of the precious metals mentioned above.
When an individual retirement account is self-directed, it means that the custodian has the freedom to hold more than one type of asset in their account. Gold IRAs are generally set up with precious metal agents or companies who can sell, buy, or store your physical bars and coins.
Since the rules relating to penalties and taxes on individual retirement account withdrawals apply to Gold IRAs too, here is a look at some of the tax rules that apply to Gold Individual Retirement Accounts.
The only way to be compliant with the various gold IRA tax rules in place is to ensure that you limit your precious metal purchases to bars and coins accepted by the IRS. Otherwise, you might end up having excise taxes imposed on your investment and your account may lose its status as an individual retirement account.
In most cases, the precious metals you put in your Gold IRA account have to be 99.9% pure; although there are a few exceptions for some types of coins. It is worth noting that the only coins accepted are some proofs and bullions – you cannot use your individual retirement account to store rare numismatic coins.
Though individual retirement accounts once only held American Eagle silver coins and gold, today people thinking of opening an IRA can invest in a variety of IRS-permitted precious metal coins and bullions. These include:
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Gold and Taxes
If you are currently thinking of investing in gold, take a moment to consider which gold investment option will yield you the highest returns without imposing a huge tax bill on you. To understand how gold taxation works, you need to look at gold classification and tax treatment.
The Internal Revenue Service considers investments in gold as an investment in collectibles. That means that when you invest in gold, you receive the same treatment as someone investing in comic books, art, or baseball cards. Such investments have their fair share of challenges, which include unfavorable tax rates.
If you plan on investing in gold, you will most likely use one of two main scenarios. The first involves you, the investor, buying gold, holding onto it for a few months, then selling it. Such transactions get the same tax treatment as short-term capital gains.
The other scenario involves you buying gold and holding it for one year or more before selling. Unfortunately, since gold is a collectible, it is not considered a long-term capital gain investment. As such, gains from your golf investment are taxed like normal income, except for a 28 percent tax rate cap.
This tax hit is quite massive for people investing in gold. For years now, gold investors have sought other means of investing in gold to improve after-tax returns and lower tax bills on their investments. At the moment, the most affordable and popular option is investing in gold through an IRA.
To learn more about gold IRAs and how they can help you improve after-tax returns, read on.
How is Gold Taxed in an IRA?
Individual retirement accounts came into the scene in 1974 and offered investors a long-term solution through which they could invest for their retirement. One of the benefits of using IRAs was that investments made in an individual retirement account would only be taxed once the investor made a withdrawal.
This presented investors with the perfect opportunity to delay tax payments and lower capital gains for the year.
At first, individual retirement accounts didn’t allow collectibles to be used as investment options. However, this changed in 1986 when the Internal Revenue Service allowed investment in US silver and gold coins. Then in 1998, the IRS expanded the list of collectibles by accepting precious metal bullions with a minimum purity of 99.5%.
The most significant change, however, was made in 2007 when the agency announced that individual retirement account investments in gold ETFs are no longer investments in collectible. This led to more people investing in Gold IRAs, and the option has remained popular to this day.
However, it’s worth noting that the IRS has a few restrictions in place for people who choose to invest in gold using an IRA, with the most substantial one being that anyone investing in gold must not physically possess the gold they’re investing in.
That means that the gold must be in storage at registered and accepted intermediaries, who charge an annual fee for storage and administration, throughout the life of the investment. Irrespective of these restrictions, precious metal IRAs remain a practical solution for investing in gold.
If you are thinking of opening an individual retirement account for investing in gold, there are a couple of factors that you need to keep in mind. They include:
Traditional IRA vs Roth IRA Withdrawal Tax Rules
Traditional individual retirement account contributions are all tax-deductible. However, you are required to pay taxes once you withdraw precious metals or money from your IRA.
The amount withdrawn is added to your overall income and is subject to the standard income tax. It is worth noting that withdrawing from your IRA before reaching 59 and a half years will attract a 10% early withdrawal penalty.
However, it’s possible to avoid the penalty as long as your withdrawal is for specific, acceptable circumstances like paying for medical insurance if you’re unemployed or if you need money to buy your first home.
Another way to avoid paying the penalty is by creating an annuity based on your life expectancy. However, you are still required to start taking distributions or making withdrawals by age 70 and a half or risk having a 50% excise tax imposed on the amount you fail to withdraw with each passing year.
Even though Roth individual retirement account contributions aren’t deductible, they are free of tax when withdrawn. Nevertheless, your gains are subject to penalties and taxation under two circumstances:
The latter applies irrespective of your age. The arising penalty can be waived through the same conditions that apply to traditional individual retirement accounts. All other distributions of a Roth IRA are penalty and tax-free. Unlike traditional individual retirement accounts, Roth IRAs don’t require a minimum distribution at age 70 and a half, or any other age for that matter.
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You avoid all penalties and taxes on your remaining individual retirement account balance when you die. Those listed as beneficiaries will be the ones to pay taxes on the precious metals or money, they withdraw from the traditional individual retirement account they inherit; though inherited Roth individual retirement accounts are tax-free.
The 10% penalty is waived on individual retirement accounts inherited from someone who dies before they’ve reached the age of 59 and a half. However, the five-year rule for Roth individual retirement accounts still applies. If you’d like to reduce the amount you pay in taxes annually for your inherited IRA, then consider spacing out your withdrawals.
Fortunately, you, as an inheritor, are entitled to what's known as the "5-year rule", where you can withdraw money without tax, and could even qualify for even longer withdrawal periods, depending on various factors, including:
Gold IRA investors can either withdraw their precious metals directly or cash them in before withdrawing. If you opt to withdraw your precious metals without cashing them in, the amount you pay in taxes will be determined by the existing fair market value of the metals you are withdrawing.
Before getting started, make sure you consult your accountant for advice and ensure that the gold dealer you choose to work with is familiar with gold individual retirement account tax rules.