Gold is a commodity that the IRS allows Individual Retirement Accounts to hold gold. But before embarking on a buying spree in bullion, it is important to gain a thorough understanding of what a gold IRA is.
It is understandable why gold holds so much appeal. It is a durable, tangible asset that has historically increased or kept its value over periods of political upheavals, inflation, and plummeting stock markets.
Even if you do not feel that these calamities are going to happen anytime soon, most investors that are interested in diversifying their IRAs (Individual Retirement Accounts) beyond the standard suspects such as mutual funds, bonds, and stocks, may want to include physical gold in their investment portfolio.
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What Is A Gold IRA?
A gold IRA is a term that references a specialized IRA that will allow you to hold a precious metal such as gold as one of your qualified investments. Investors that have a gold IRA can hold different types of precious metals including coins and bullion, and precious metal-related securities in their portfolios.
However, a gold IRA must be separately held from traditional retirement accounts, even though rules that involve things such as distributions and limits will stay the same. You can open your gold IRA through a custodian or a broker-dealer.
Gold IRAs are a type of retirement account that permits investors to buy gold bullion, coins, or other IRS-approved precious metals and store them for investment purposes. Your gold IRA can be set up with after-tax or pre-tax dollars through a broker or a custodian who deals with these accounts.
The IRS allows self-directed IRA holders to buy silver, gold, palladium, or platinum coins, bars, or any other approved "physical form". These are accounts that typically carry fees that are higher when compared to traditional IRAs since the process involves buying and storing actual metals. There is also an annual contribution limit set by the IRS.
How Do Gold IRAs Work?
The Gold IRAs work in the same way as other retirement accounts but they do come with an added benefit that provides more control when it comes to your investments including tangible gold bars and coins, along with other IRS-approved platinum, palladium, and silver metals.
Similar to other retirement accounts, the Precious Metal IRA or Gold IRA will mean that you will invest funds into the account for your retirement according to a tax treatment (after-tax or pre-tax), where you will start taking distributions once you have retired.
With a Precious Metals IRA or Gold IRA, you will still receive statements quarterly, have beneficiaries, and can log into your account online if you would like to check in on your balance.
What Are The Steps Involved In Setting Up A Gold IRA?
#1 Find A Custodian
Most of the brokers and custodians that open the mainstream IRAs that involve investments in "traditional assets" are not allowed to operate or open an SDIRA (Self Directed Individual Retirement Account), including gold IRAs.
For this reason, your first step will involve looking for a trustee or custodian that offers gold IRAs, which means the account allows for investments in precious metals such as gold.
Even though there are fewer of these types of trustees and custodians when compared to those that work with the mainstream IRAs, there are still lots to choose from. Some of the well-known gold IRA dealers include Goldco, Birch Gold Group, Oxford Gold Group, Gold Alliance, Red Rock Secured, Orion Metal Exchange, and many more.
These are the precious metal companies that will allow investors to open gold IRA accounts. However, there are a few considerations that you need to know about before deciding on the right IRA company. These include customer support, track record, fees, accountability, and transparency, among others.
#2 Fund Your Gold IRA
You can fund your gold IRA by adding contributions (within the annual contribution limits). This will be a maximum of $6,000 for anyone younger than 50 or $7,000 for anyone over the age of 50.
You can also choose to roll your traditional IRA or 401(k) into your gold IRA. Any gold IRA rollover follows the same rules and regulations that apply to rolling over into a Roth IRA or traditional IRA. For instance, funds that are pre-taxed and rolled into your Roth IRA are taxed before these funds are converted into the Roth IRA.
For after-tax funds, your money will not be taxed. When rolling over pre-taxed funds into one of the traditional IRAs, your funds will not be taxed until you decide to withdraw them.
#3 Purchase IRS-Approved Gold
The IRS has stringent rules and regulations when it comes to physical gold along with other tangible precious metals. For instance, to ensure a gold bar is IRS-eligible it has to have a 99.5% purity, palladium and platinum must have a 99.95% purity, and silver must have a 99.9% purity.
Some of the other conditions for eligibility will include:
The producer of the precious metals has to be a refiner, assayer, or manufacturer certified by ISO 9000, NYSE, COMEX, NYMEX, or the government mint (national).
Proof coins are required to be in immaculate condition. They should also be accompanied by a "certificate of authenticity" and come in their original mint package.
The smaller bullion bars (other than 400-ounce and 100-ounce gold, 50-ounce platinum, 100-ounce palladium, and 1000-ounce silver bars) require precise weight specifications.
Bullion coins have to be in uncirculated brilliant condition and free from damage.
To add to this, even though the IRS permits the gold coins such as the American Buffalo, American Gold Eagle, Australian Gold Nugget, and the Canadian Maple Leaf, it does not permit investments in British Sovereign or the South African Krugerrand gold coins. The IRS also does not allow investments in any gold collectibles.
Once your gold purchase has been approved, you can then complete your transaction through your broker or custodian.
While your trustee or custodian oversees all the accounting relating to your account, the SEC states that they aren't responsible for the broker or gold seller that you decide to use. Even though they can usually make a recommendation, they cannot be held accountable when it comes to the broker or gold seller that you have chosen.
#4 Use A Depository That Is IRS-Approved
Silver, gold, palladium, and platinum need to be stored in a special facility. The depository that you have chosen needs to be approved by the IRS for these explicit purposes. Most importantly, you won't be allowed to store your gold at home.
The IRS regards home storage as a "withdrawal" which means you will be subjected to taxes (if it is a traditional Gold IRA) or/and penalties (if your withdrawal has taken place before you have turned 59 and 1/2).
Some of the popular and reputable IRS-approved depositories include:
How To Make A Withdrawal
The rules that guide withdrawals (selling the gold off for cash) will depend on if the Gold IRA is Roth or traditional:
For Traditional Gold IRAs:
- The RMDs (required minimum distributions) will kick in once you reach the age of 72
- Each withdrawal, voluntary or required, will be taxed
- If you withdraw before the age of 59 and a half, this will attract a 10% penalty charge
For Roth Gold IRAs:
- There will be no RMDs
- You will not be taxed on your withdrawals
- If you withdraw from a ROTH before the account is 5 years old or before the age of 59 and a half, this will also attract a 10% penalty
Gold IRA Account Types
Like the conventional retirement account types, some types offer distinctive tax benefits. Here are the three main types of Gold IRA Accounts:
Traditional Gold IRA
These are tax-deferred retirement accounts that work like the pre-tax traditional IRAs concerning how taxes are treated. Your gains and contributions are not taxed, and in many cases, your contributions will also be tax-deductible. The IRS has set an annual contribution limit of $5,500 for those under 50 or $6,500 for those over 50.
With any of the pre-tax IRAs, you will be required to pay tax on all your withdrawals during retirement.
ROTH Gold IRA
The Roth Gold IRAs are after-tax retirement accounts that work in the same way as any other Roth IRA. While there are no upfront tax deductions with ROTH IRA contributions, one of the main benefits of the Roth IRA has to do with not having to pay taxes on your distributions once you have retired.
SEP Gold IRA
The SEP Gold IRAs are made available to self-employed individuals and business owners. The SEP Gold IRA works in a similar way to the traditional pre-tax IRA, where your contributions will not be taxed. These accounts also provide higher contribution limits. Rather than the $5,500 limit, you can contribute a maximum of $53,000 or 25% of your annual income (whichever is less).
Is It Safe To Invest In Gold In An IRA?
When you retire, you will be needing an investment that will either generate what you are currently earning or something that should reasonably appreciate so that it can be sold when you retire so that you can start living off these funds. You are wasting a lot of tax-deferred space when something is not generating an income, which means it is not saving you any money when it comes to your taxes.
Similar to other traditional IRA accounts, the account's value is subjected to taxes when you start withdrawing. Unlike owning ETFs, mutual funds, stocks, and bonds, physical precious metals will not generate interest, capital-gains distributions, or any dividends, and this is all tax-sheltered in an IRA.
What Are The Advantages and Disadvantages of a Gold-Backed IRA?
Similar to any other type of investment, there are drawbacks and benefits to IRAs that contain gold, or other IRS-approved precious metals. Understanding these can assist you in making a more informed decision when it comes to your investments.
- Tax Benefits
Like the traditional IRAs, a Gold IRA provides tax incentives, along with the bonus of protecting your savings through something known as portfolio diversification
- More Control
Even though the IRS has rules in place when it comes to what type of precious metal products you can purchase, a gold IRA provides more control and freedom when compared to standard IRAs. You can also choose between Silver Canadian Maple Leaves, Gold American Eagles, and various other bars and coins.
A precious metals IRA allows you to gain more leverage when it comes to the market by allowing you to buy low and then sell higher. If the prices of gold are about to dip, you can also choose to sell your bars and coins to avoid losses. From here you can hold your proceeds (in a money market fund) until the right time to purchase comes around again.
- Portfolio Protection:
Gold is something that has proven to hold its value and has been one of the units of exchange for centuries. The ability of this yellow metal to stand throughout the ages has proven that it is one of the safe-haven investments. It also has a negative correlation to the dollar, bonds, and stocks, which makes it one of the best portfolio diversification tools.
Owning gold and including it in your portfolio for retirement minimizes risks relating to inflation, and political, economic, and financial crises.
Sure, lauding the performance of gold across the last 5,000 years may appear to be one of the abstract forms of proof for most investors. Yet the previous financial crises occurred only one decade ago. Anyone that lost their savings for retirement during the Great Recession can clearly remember how painful and real the consequences were of betting their entire life savings on the stock markets.
- No Yields, Dividends, or Interest:
Unlike paper-backed assets, precious metals such as gold don't pay yields, dividends, or interest, However, these advantages of bonds and stocks are associated with risks, such as losing all your savings or very small gains from the interest. It has happened in the past to older Americans and this could happen again to you.
- Expenses And Fees
There are a few expenses and fees involved when you set up and hold gold in your IRA. Typical fees include annual custodian fees, one-time initiation fees, storage fees, etc. The fees will also vary according to the Trust company you have chosen.
Today you can also take advantage of a market that is more mature for these types of investment vehicles. In 1997 when Congress created the Gold IRA and in 2008 when the financial crisis hit, these account types were still fairly novel. This meant that only a few companies were offering these accounts, which made the expenses steeper when compared to traditional IRAs.
During the Great Recession, the overall demand for Gold IRAs exploded, and so did the gold prices. The process started to streamline with a lot more companies starting to offer precious metal IRAs, which lowered the costs significantly.
- Fraud And Theft
Theft and fraud are risks relating to investing in tangible precious metals such as gold. However, the depositories that are qualified to hold metals like gold for IRA accounts have to be insured. There is also a risk that custodians may steal from their clients, but once again, this is something you can mitigate by making sure you are using a custodian that will insure each financial transaction.
How Will I Know If A Gold IRA Is Right For Me?
Gold investments do come with a few risks which you need to keep in mind before you make a decision. However, a Gold IRA is one of the best options if you are wanting to diversify your retirement account and safeguard your savings. gold can offer these advantages when you compare it to other types of financial assets such as stocks and paper currency.
Most financial experts suggest keeping 5% to 10% of gold in your portfolio. It is very advantageous to think about and weigh up the options of acquiring silver, gold, or any other precious metal, to serve you well in a well-rounded, and diversified investment portfolio.