A gold IRA is a type of retirement account that allows you to invest in precious metals, including gold, silver, platinum, and palladium. These accounts work by first setting up the account, which is done through a custodian. Then, you will choose and purchase IRS-approved metals and store them in a depository.
Precious metals IRAs work similarly to conventional IRAs concerning tax advantages.
Here, I want to cover everything I can think of to show how gold IRAs work, which includes benefits, cons, how to set one up, and even frequently asked questions.
What Is a Gold IRA?
A gold IRA is a type of retirement account. It is self-directed, and it allows you to invest physical metals into that account.
While a conventional IRA holds stocks, bonds, mutual funds, etc, a gold IRA account actually holds physical metals, which might be anything from gold bars and gold coins to different types of silver, platinum, and palladium.
The Different Types of Gold IRAs
There are three difference types of gold IRAs:
Traditional Gold IRAs
A traditional gold IRA is similar to the conventional IRA you may be familiar with. It is funded with income that is pre-taxed, which make the contributions to the account tax-deductible. You are not taxed on any gains you earn through the account, but you do pay taxes when you take a distribution.
Roth Gold IRAs
A Roth gold IRA is a little different, just like a Roth IRA is different. It's funded with post-tax income. This means that you don't pay taxes when you retire and take withdrawals.
SEP Gold IRAs
SEP gold IRAs cater to self-employed individuals. Contributions are tax deductible and these accounts have higher contribution limits.
How Gold IRAs Work
Gold IRAs allow you to hold physical gold and other metals in a retirement account, and they give you more flexibility when compared to conventional IRAs. A gold IRA also generally gives you more security, serves as a hedge against inflation, and has great potential for long-term growth.
Steps for Setting Up a Gold IRA
Setting up a gold IRA is pretty simple:
- First, choose a custodian. These are gold IRA companies like Goldco, Noble Gold, or American Hartford Gold, which I've reviewed previously.
- Next, you will open your new account and fund it via contributions or rolling over other retirement accounts.
- Finally, you can purchase your metals. Your custodian/precious metals dealer will work with you to choose the best metals for your account. All of the physical precious metals must be IRS-approved, and are often gold and silver, but many people also include platinum and palladium. Once you buy the metals, they are stored in an IRS-approved depository. This is a storage facility that stores your metals. You cannot store them at home and you can't store them in a safety deposit box at the bank; they must be stored in a depository because of IRS rules.
IRS Regulations for Gold IRAs
If you have a gold IRA, you have to follow specific rules set by the IRS. These include:
- Metal Purity - The IRS requires specific purity for the precious metals included. Gold, for instance, must be a minimum of 99.5% pure. Silver must be 99.9% pure. Both platinum and palladium must be a minimum of 99.5% pure.
- Eligibility - Only certain bars and coins are eligible for gold IRAs. Collectibles are not allowed, though coins like American Gold Eagle and Canadian Maple Leaf are allowed.
- Storing - You cannot store your metals at home if you have a gold IRA. Instead, they must be stored in an IRS-approved depository.
Advantages and Disadvantages of Gold IRAs
There are number of advantages and disadvantages to using a gold IRA as your retirement savings.
Here are some of the advantages:
Better Diversification
The best portfolios are those that have more diversity. With a gold IRA, you can add physical gold to your portfolio and have less dependency on stocks and bonds.
Inflation Hedge
Historically, precious metals, including gold, have performed well against inflation. During times of high inflation, the value of cash falls. However, this doesn't have the same affect on gold.
Tax Benefits
Gold IRAs have tax advantages including pre-tax growth and at retirement age, cash can be withdrawn tax free. I also outline additional gold IRA benefits in addition to the tax benefits.
Here are some of the disadvantages:
Costs and Fees
When compared to a conventional IRA, a gold IRA comes with higher fees. You need to consider setup fees, account maintenance fees, storage fees, and transaction fees.
Less Liquid
Gold IRAs are less liquid than other assets, like owning physical gold. You can't simply start selling the precious metals that are held in your IRA like you can if you own physical gold.
No Interest Nor Dividends
Unlike stocks and bonds, which are held in conventional IRAs, gold doesn't pay out any interest or dividends. So, this means that the only way to grow your investment is to rely on the rising value of the assets.
The Best Gold IRAs?
You should do a lot of research before choosing the best gold IRA. I've reviewed several of them including:
Executing a Gold IRA Rollover or Transfer
You can rollover or transfer an existing IRA into a gold IRA without having any penalties or paying additional taxes. Though, you have to make sure that you stay compliant with IRS rules.
Gold IRA Rollover vs. Transfer
When you rollover one account into another, it simply means that you are withdrawing funds from your current retirement savings into the gold IRA.
To avoid any taxes, you must complete all of this within 60 days.
You can also do a direct transfer. This means you are transferring the funds between two custodians. In this case, you never hold the funds, and you don't incur any penalties.
Doing a Rollover Into a Gold IRA
Here are the basic steps to doing a rollover from you existing IRA into a gold IRA:
Step #1 - First, you have to request a distribution from your existing retirement account.
Step #2 - Once you make that request, you have 60 days to deposit those funds into your gold IRA.
Step #3 - Work with the IRA custodian you chose to buy the precious metals for your new IRA.
Don't Make These Mistakes!
In most cases, the process of rolling over an existing IRA into a gold IRA is fairly simple. There are, however, common mistakes that people make.
The most common mistake that people make is missing the 60-day deadline. If you miss this deadline, you can incur penalties and have to pay extra taxes.
Another mistake people make is trying to do more than one rollover per year. This is totally prohibited.
People also sometimes try to add non-eligible metals to a gold IRA. The metals that you can choose must all be IRS-approved. Your custodian should be able to help you with this, and they can give you more information about metals that meet purity standards.
FAQs About Gold IRAs
Can You Only Hold Gold in a Gold IRA?
You can hold more than gold in a gold IRA. As long as the precious metals meet IRS standards, they can be included. Many people choose to add other precious metals like silver, platinum, and palladium in addition to gold.
You can also add coins and bars, as long as they are IRS-approved.
What Should I Know About Taxes and Gold IRAs?
There are tax benefits that you get with gold IRAs. These are similar to traditional IRA benefits.
When you have a traditional gold IRA, the contributions may be tax deductible, and the taxes owed are deferred until you retire.
With a Roth gold IRA, any contributions you make are done with after tax dollars. However, when you start taking withdrawals at retirement age, they are tax free. Just keep in mind that early withdrawals are still charged taxes and a penalty.
Can I Take the Gold from My IRA and Store it at Home?
You cannot take any type of physical possession of the metals that are part of your gold IRA. Due to IRS requirements, the gold has to be stored in an IRS-approved depository.
Once you reach retirement age, however, you can take distributions of the gold.
Can I Sell the Gold in My Gold IRA?
You can sell the gold in your gold IRA. You must contact your custodian, and they will help you to stay within IRS regulations.
Your custodian will deal with the sale through an approved precious metals dealer, and the cash will be deposited back into your account. Keep in mind that there might be penalties or fees associated with selling your gold in this manner.
What Happens to my Gold IRA After I Retire?
You can begin to take distributions from your gold IRA when you retire. These can come in cash by selling the gold, or in-kind, which means you get the actual gold.
If you want a cash distribution, the custodian sells the gold, and then transfers the money to you, minus taxes owed. If you choose in-kind distributions, you get the physical gold, but you may owe taxes on it's fair market value.
About Tim Schmidt Sr.
Tim Schmidt is an Entrepreneur and Serial Investor. Since 2012 he's been an advocate of alternative investments using a Self Directed IRA. His work has been featured in Yahoo! Finance, USA Today, Business Insider, and Tech Times, among others.
