The value of gold as an investment tool is proven over time. Its intrinsic value, excellent liquidity, and its use as a hedge against inflation and currency devaluation are beyond doubt. Gold is considered a haven for investment because of the way it balances a portfolio during economic turbulence.
Retirement accounts approved by the Internal Revenue Service offer immense tax benefits to account owners including tax deferment and deductions on the tax return.
A Gold IRA combines all these advantages to help save money for the retirement years.
Read on to know more about Gold IRA investing.
What is a Gold IRA?
Gold IRA is a Precious Metals IRA specializing in gold investment. It is a self-directed IRA, meaning, it allows more freedom in investment choices to the account owner. Gold IRAs allow account owners to invest their retirement funds in buying physical gold, which is not possible with a regular retirement account such as 401k, which allows only ‘paper investments’.
As Gold IRAs involve buying and storing physical gold, this necessitates a custodian, a dealer, and a depository to carry out account activities. The role of a custodian company is that of a manager or a trustee of the account. Precious metals can be bought for the account only from an IRS-approved precious metal dealer. The metals in Gold IRAs are not allowed to be stored in personal possession. It needs to be kept in an authorized depository.
Read our Gold IRA Guide here
Getting started with Gold IRA investment
If you are a wage earner or a spouse of a wage earner, you are allowed to open Precious Metals IRAs. There is no limit on the number of accounts an individual can have.
Opening Gold IRAs can be approached from two different angles. You can search and find a company directly and get started. Or, you can find a dealer of your choice and take their help in finding a company. Whichever way you go about it, you need to make sure that the company and the dealer can manage the bullion purchase for your Gold IRA smoothly.
Another decision is regarding the choice of depository for the metals in your Gold IRA. A custodian, which is typically a financial institution, offers a choice of depositories for safekeeping.
Finalizing these main players involved in the functioning of Gold IRAs require a good understanding of the choices available, thorough research on the pros and cons of each, and taking an informed decision.
The information given here along with some useful suggestions can help you make the right choice.
More info and helpful tips
Funding your Gold IRA
Your retirement account should have sufficient funds before you can start investing in gold bullion and other precious metals. There are three methods to fund Precious Metals IRAs.
The IRA can be funded by online transfer, by check, or wire transfer. However, there is a limit to the amount that can be added to an IRA in a year. From 2019, an individual is allowed to contribute $6,000 annually to an IRA or 100% of income whichever is less. Those 50 years or older are allowed to save an additional $1,000 (a total of $7,000).
The annual contribution limit is across all IRAs and not for each. This limit is increased periodically to keep up with inflation.
You can transfer part or whole of your funds or assets from another IRA or a qualified retirement plan like a 401k to your Precious Metals IRA on a custodian-to-custodian basis. There is no limit on the amount for such transfers from an existing retirement account.
As the funds/assets are moved from one account to another without the account owner being involved, a direct rollover is not treated as a disbursement and hence not taxed. An individual is allowed an unlimited number of direct rollovers in a year.
You can deposit your disbursement from another IRA or a qualified retirement plan like 401k into your Precious Metals IRA without tax implication. For this, the transfer has to be completed within the stipulated 60-day window. In an indirect rollover, the account owner takes personal possession of the disbursement and deposits it in the Gold IRA with an own check.
Failing to meet the 60-day deadline will result in the amount being treated as a disbursement and taxed accordingly. An individual is allowed only one indirect rollover in a year.
In addition to coming under the purview of income tax, an indirect rollover also entails an early withdrawal penalty if done before the age of 59½ years.
Despite the limitations and the threat of taxation and penalties, direct and indirect rollover are essential for the cost-effectiveness of Gold IRAs. Being a retirement account with special provisions, Gold IRAs have higher annual fees than a regular IRA with storage fees, insurance fees, and management fees adding up to a minimum of $200-$250. The account is profitable only when the funds in it are sufficiently high. This cannot be achieved in a short time with annual contributions alone as there is a cap on it.
Buying Gold with Gold IRAs
Precious Metals IRAs allow account owners to buy physical gold, silver, platinum, and palladium using the IRA funds. Precious Metals retirement accounts are the only option for a retirement account owner to invest in these metals in physical form without losing out on the tax advantage offered by an IRA.
There are clear-cut rules as to what qualifies for purchase in Gold IRAs. This is not surprising as the account offers immense freedom in investment choices at the same time retaining the advantages of a retirement plan. Until the Taxpayer Relief Act of 1997 was passed, investors did not have the option to include physical gold in their retirement portfolios.
Not all precious metals available for sale in the market are allowed to be included in a Precious Metals IRA. Gold coins and bullion with IRS-specified minimum purity standards are eligible; the Gold American Eagle coin is an exception. However, most of the numismatic coins are excluded from the eligible list.
The minimum purity requirement for gold is 99.5%, for silver 99.9%, and platinum and palladium 99.95%.
Keeping your gold safe in Gold IRAs
The rules and regulations do not permit storage of gold purchased in Gold IRAs to be kept in your personal possession. This is where the role of custodian comes into play. The bullion products you have selected for purchase from the dealer of your choice will be delivered to the custodian/depository directly as soon as the custodian transfers the payment for the same on your behalf from your IRA.
You cannot buy gold for your IRA with the intention of handing it over to the company. Not even for a single day or an hour, the gold is allowed to be in your possession. In case you do that, the monetary equivalent of the gold is considered as a distribution, and taxes and penalties are levied. Another point to remember is that any existing gold in your possession, even if it satisfies all the purity and other requirements, cannot be included in your Gold Individual Retirement Account.
The IRS-approved depositories are specifically set up to store gold from self-directed IRAs. Their annual fee may be flat-rate or varied based on the value of the gold stored. Many custodians offer an all-inclusive annual fee for the IRA management services which includes depository fees.
The storage options at a depository are segregated or aggregated (non-segregated). Investors can choose the location of depositories as well; the choices available are onshore and offshore.
Read more about Gold IRA custodian in details.
IRS rules and regulations for investing in Gold IRA
Strict and specific rules are in place for a Gold IRA. Awareness of these rules will help in getting the maximum benefit from it and avoid penalties and taxation.
To open a Gold IRA, the IRS has mandated a custodian. The role of a custodian is that of a manager and a trustee of your funds and assets. The custodian is usually a financial institution. The function of a custodian is to conduct the transactions on your behalf.
A Gold IRA should have funds in it before the purchase. Exceeding the annual contribution limit invites a 6% penalty each year until it is rectified. Indirect rollover should be completed within 60 days for a tax-free transaction. Taking personal possession of the gold under the Gold IRA is treated as a distribution. It will result in penalties and double taxation.
Taking funds/assets out of IRA before the age of 59½ years is considered an early withdrawal and penalized. Exceptions are allowed for this 10% penalty rule for early distribution. Once the fund owner crosses the age of 70 years, the Internal Revenue Service has stipulated a Required Minimum Distribution (RMD). However, the investor is given the choice to take out RMD from any of the retirement accounts.
When buying gold for a Gold IRA, an investor needs to be cautious about IRS rules. Not all precious metals are eligible. In addition to purity standards set by the IRS, the bullion must be issued by the U.S. Mint or an approved foreign mint. Collectibles and historic coins that are classified as numismatic coins are not eligible for purchase in a Gold IRA.
Both dealer and depository must be IRS-approved.
Frequently asked questions
With a Gold IRA, the chosen custodian holds the physical bullion on your behalf in a depository. While in a gold ETF (Exchange Traded Fund), all you have is a document showing your interest in gold. ETF is a commodity-specific mutual fund backed by physical gold which remains with the fund manager. More about Gold ETF investment.
The gold in a Gold IRA is stored in an IRS-certified depository for safekeeping. As this facility is not available for a regular IRA, investing in physical gold is not an option.
A Gold IRA has the additional expense of a storage fee when compared to a regular IRA. It comes in the range of $200 - $250 in a year. More assets a Gold IRA has, the more profitable it will be. As there is a limit on the annual contribution to a Gold IRA, more funds can be added to it by rollover from existing IRAs and retirement accounts.
No. In addition to gold, a Gold IRA or a Precious Metals IRA allows investing in silver, platinum, and palladium in physical form. It also allows investment in stocks, bonds, mutual funds, ETFs, treasury securities, annuities, and many more investments.
It varies from custodian to custodian. The average minimum amount for opening a Gold IRA is in the range of $5,000 - $10,000.
The account owner is offered the choice of cash by liquidating the assets or the physical gold stored in the depository. Whichever method is opted for distribution, it will be treated as income and taxed according to income tax rules.
The account owners are permitted to visit the depository and review their holdings, though this is not realistically possible logistics-wise due to the location of the depository. Check the reputation of the depository through ratings and reviews before choosing it. Ensure that the gold bullion is insured by a reputable insurer. And, check how frequently the depository is conducting audits. For better accountability, choose the segregated storage option for the bullion, though it entails additional fees.
No. When the gold is sold within the IRA and the proceeds are paid out as distribution, there is no capital gains tax to be paid. The distribution is counted as income and tax levied. However, if the gold in an IRA is taken out as the actual bullion, it is known as 'in-kind' distribution. Once the bullion product is taken out of the IRA, the gains are no longer tax-deferred.
Gold investment is usually profitable in the long run. As such it has a rightful place in a retirement portfolio. Even as it is possible to invest in gold through ‘paper investments’ such as gold ETFs, gold stocks, gold bonds, and gold mutual funds, none of them provides as much control over your investment as physical gold affords.
Gold has been the most trusted investment tool throughout the ages. It offers the perfect balance to an investment portfolio, as any tremor in the financial world leads to the collapse of ‘paper investments’ but gold shines the brightest in troubled times.
It is easy to be blinded by the luster of gold and fall prey to scams and deceits abounding in the bullion market. Doing your homework and staying informed of the stringent rules and regulations set by the IRS will help you reap rich dividends.