A gold IRA is a specific type of individual retirement account in which you have control over your investment decisions. An Roth IRA is an investment account that is similar to a traditional IRA but can hold stocks, bonds, or mutual funds. A traditional IRA allows you to hold precious metals and other alternative assets in compliance with IRS regulations, but does not confer the same tax benefits.
Gold IRA: What It Is and How Does It Work
You may be surprised to learn that a gold IRA doesn’t necessarily have to involve gold. In fact, you don’t need to hold any gold in one. A more accurate term for an IRA that can hold gold, silver, platinum, and palladium would be “precious metals IRA.”
The term “gold IRA” is generally used to refer to a self-directed IRA in which investments are made in gold. You gold investments in a traditional IRA are purchased with pre-tax dollars. The tax deferralafforded by a traditional or self-directed IRA can be achieved with a Roth IRA by funding it with money that has already been taxed.
Precious Metals Allowed in Your IRA
The IRS permits IRA investors to keep gold, silver, platinum, and palladium in their accounts. The tax rules are the same for all four metals.
When Congress first authorized the Individual Retirement Arrangement, or IRA, in 1974, Sec. 401(m)(1) prohibited IRAs from holding any kind of collectibles. After 1986, it became possible to use IRAs to purchase and hold certain types of gold and silver coins from the United States.
The rules for IRAs investing in gold changed again in 1998, now allowing investment in gold bullion with a purity of at least 99.5%.
Gold IRA owners may not take the gold out of the IRA. An IRS-authorized custodian or trustee must hold the metal on your behalf.
You cannot make “in kind” contributions to an IRA. This means that you cannot put physical gold into your gold IRA. You have to put money into an IRA and then use the funds in your IRA to invest in gold. ((However), you can roll over gold you hold in one IRA to another IRA.)
How to Set up a Gold IRA
A gold IRA company can help you create a self-directed retirement account. Not all banks will let you open an account online.
The company also sells gold bars and coins to customers who want to put them in a gold IRA.
The company will also help choose an IRS-approved custodian, as all self-directed IRAs must have one to avoid illegal self-dealing. A custodian is a financial service provider that manages your investments. Gold IRA’s are subject to a number of IRS regulations. The company you choose to set up your gold IRA with will handle all of the necessary administrative functions to ensure compliance.
Aside from the account custodian, the gold IRA company will also take charge of the functions performed by the depository. The depository is where precious metals from your IRA are physically stored.
You are usually required to pick a custodian and depository when you set up a gold IRA, although some companies give you a choice of two or more. Some things to think about when you are picking a custodian and depository for your gold include the fees they charge for their various services, such as management, storage, and insurance. Another thing to consider is how much these fees add up to.
Gold IRA Rollover
In order to fund a new gold IRA account, many people use money that is already in another retirement account. This is allowed by the IRS, as long as the funds come from an IRA, 401(k), 403(b), 457(b), or Thrift Savings Plan. Choose a gold IRA company that will help you transfer your funds into a new gold IRA by contacting your plan administrator.
If you roll over your fund yourself, you have to be 59 1/2 years old or younger, or else you will have to pay income tax and a 10% penalty.
Many people avoid the risk of losing their gold by letting their gold IRA company transfer it to another institution. If you let them handle your transfer, the money is never in your hands, which means you won’t have to pay an early withdrawal penalty or income taxes.
Before you transfer your retirement savings into a gold IRA, it’s important to calculate how much of the value you want to place in it. Financial planners typically recommend having no more than 5% to 10% of your investment portfolio in precious metals as a way to diversify.
A traditional IRA, 401(k), or other retirement account is designed to help you build a diverse portfolio to reduce risk. A precious metals IRA, on the other hand, invests only in one asset class. The metals in the account can grow in value without being taxed, but you won’t get the extra benefit of dividends.
Taxation of Gold IRAs
There are two types of gold IRA: Traditional IRAs and Roth IRAs.
Traditional IRAs generally grow tax deferred. This type of deduction allows taxpayers to subtract amounts contributed to traditional IRAs from their income, as long as they meet certain income criteria. You don’t need to use Schedule A to make pre-tax contributions to a traditional IRA.
money in an IRA usually increases without having to pay capital gains tax, and there is no tax on interest or dividends while the money stays in the account
Withdrawals from the account are taxed as ordinary income at your marginal tax rate. Instead of receiving the favorable long-term capital gains tax rates, they pay the higher short-term capital gains tax rates. What this means is that if you have gold in an IRA account, you will be taxed on it as if it were income, at the rate of 28%.
Starting in 2022, you will be able to contribute up to $6,000 to a traditional gold IRA account. If you are age 50 or older, you can contribute an additional $1,000 in contributions. However, to deduct contributions to traditional IRAs, you must meet specific income criteria:
- Single filers covered under a workplace retirement plan: Your allowable deduction phases out gradually starting at an income level of $68,000, and phases out completely at $78,000 (up from $66,000 to $76,000 in 2021);
- Married couples filing jointly who are covered under a workplace retirement plan: You can deduct your entire contribution if your AGI is $109,000 or less. Once you reach that threshold, your allowable deduction gradually falls, and is phased out entirely at an income level of $129,000 (up from $105,000 to $125,000 in 2021);
- Married couples not covered under a workplace retirement plan: The deduction starts to phase out at $204,000 and phases out completely at $214,000 (up from $198,000 and $208,000 in 2021);
- Married but filing a separate return, and covered under a workplace retirement plan your allowable deduction phases out gradually at income levels from $0 to $10,000.
You can contribute the full amount to a traditional gold IRA no matter what your income level is. You may not be able to deduct all of your contributions. You cannot get a tax deduction for non-deductible contributions in the current year. But you still get the benefit of tax-deferred growth.
Early Withdrawal Penalties
You typically have to keep assets in your IRA until you turn 59 1/2 years old. If you withdraw money from your retirement account before you turn 59 1/2, you will have to pay a 10% excise tax. The excise tax for traditional IRAs generally applies to the entire RMD. If you have a Roth IRA and you sell an asset for a profit, you will only have to pay the 10% excise tax on the profit if the asset has been in the Roth IRA for at least five years.
The IRS makes some exceptions to the 10% early withdrawal tax penalty for IRAs under certain ‘hardship’ conditions:
- Withdrawals to avoid eviction or foreclosure;
- Withdrawals to pay medical expenses in excess of 10% of your adjusted gross income;
- Withdrawals to pay a former spouse under a QDRO;
- Withdrawals to pay higher education expenses;
- Withdrawals for a down payment for a first-time homebuyer
- To pay health insurance premiums while unemployed.
Tax Rules for Roth IRAs
If you hold assets in a Roth IRA for at least five years, they will grow tax free.
Contributions. You can contribute up to $6,000 to a Roth IRA in any given year if your income is below the IRS income threshold for that year. In order to be eligible for this program, your modified adjusted gross income must be below $129,000 for single taxpayers, or $204,000 for married taxpayers by the year 2022. If your MAGI is above $124,000, your allowable contribution falls off gradually and reaches zero at MAGI of $144,000. If your MAGI is above $194,000, your allowable contribution falls off gradually and reaches zero at MAGI of $214,000.
Because Roth IRA contributions are made with after-tax dollars, there is no requirement to take minimum distributions from Roth IRA accounts.
Before 2020, people who inherited non-spousal IRAs could distribute them over the rest of their life expectancy. However, the SECURE Act revoked that favorable arrangement. Now, those who inherit an IRA, including a gold IRA, must empty the entire account within 10 years of the original owner’s death. There are just a few exceptions to the rule:
- The deceased IRA owner’s surviving spouse;
- The employee’s children (not grandchildren) who are under the age of majority (age 21). Once they reach the age of majority, they are no longer exempt, and the 10-Year Rule kicks in from that point.
- Disabled beneficiaries;
- Chronically ill beneficiaries;
- Individuals not more than ten years younger than the decedent.
How to Hold Physical Gold in an IRA
Mint, including gold, platinum and silver American Eagle coins. The following are some approved precious metals by the US Mint: gold, platinum, and silver American Eagle coins. Mint, some other government mints, and some private mints make IRA-compliant bars and coins.
An IRS-approved depository must hold your precious metals. There are many regulations around gold IRAs, so you can’t store your gold at home or in a safe deposit box at a bank. If you would like to purchase gold that is not part of a retirement account, you can do so by learning more about the process. This will allow you to keep the gold in your possession, rather than in an IRA.
One of the main benefits that gold IRA companies advertise is that investors get to hold onto the physical precious metals. If you don’t consider this a priority, there are other ways to invest in precious metals besides a gold IRA. With a traditional IRA, you can invest in gold by buying shares of mining companies or mutual funds that hold those stocks. An ETF that tracks the performance of gold is another alternative. This guide will teach you how to buy a gold ETF.
Although a gold IRA may make you feel more secure, it is important to keep in mind that it is more expensive than a traditional retirement account. Be aware of the following costs:
- Account setup fees: Not all gold IRA companies charge this, but some do, so be sure to ask what they charge.
- Seller fees: Most gold IRA companies tack on markups to the price of the precious metal coins and bullion they sell. These markups can vary considerably depending on the type of asset — say, a bullion coin versus a proof coin — so make sure you know what kind of markup is being assessed on your purchases.
- Maintenance fees: This annual fee might be charged by the gold IRA company or by the custodian. It can be a flat fee or it can vary based on the size of your account.
- Storage fees: This is what you pay the depository to store your gold. Sometimes it includes the cost of insuring your gold. If not, insurance will be a separate expense you have to budget for.
- Shipping fees: If you elect to take your required minimum distributions (RMDs) in kind — meaning, you will get the actual coins or bars you purchased — expect to pay both for shipping and for insuring those shipments.
- Buyback fees: Some gold IRA companies charge buyback fees. Others say they don’t, but be aware that the price they pay you when they buy back gold is likely to be lower than the price they set for gold they sell.