How do gold IRAs work? What does it take to open one? Are there different types of gold IRAs? What benefits do the different types of gold IRAs have? Today’s article is for the curious investor who has been looking for information about how gold IRAs work. It will cover several aspects related to how these accounts work, in a bid to help you collect sufficient information for the purposes of educating yourself. Read on to find out more.
What is a Gold IRA, exactly?
If you are thinking about adding physical gold to your IRA, then you cannot use your regular account. It must be a separate, unique account known as a Gold IRA. A Gold IRA, often referred to as a precious metal IRA, works similarly to a traditional individual retirement account, and has the same contribution limitations and distribution requirements. The Gold IRA, on the other hand, is designed to store physical bullion, such as gold coins or bars and other recognized precious metals like silver, platinum, and palladium, rather than paper assets like equities and bonds.
Gold equities (stocks of gold mining/production businesses), gold mutual funds that invest in bullion or stocks (or both), and gold ETFs that track gold indexes can also all be used for the purpose of investing in gold IRAs.
Which are the different types of Gold IRA Accounts?
As with traditional retirement accounts, there are a few different types of Gold IRA accounts, each with its own set of tax advantages. The three types of Gold IRA Accounts are as follows:
Traditional Gold IRA
A traditional gold IRA is a tax-deferred retirement savings account that operates in the same way as pre-tax traditional IRAs in terms of taxes. Your contributions and any gains are not taxed, and in most cases, contributions are also tax-deductible. The IRS establishes annual contribution limits, which are currently at $6,000 for those under the age of 50 and 7000 for those over the age of 50. You will have to pay taxes on your distributions during retirement if you have a pre-tax IRA.
Roth Gold IRA
A Roth Gold IRA is an after-tax retirement savings account that works in the same manner as any other Roth IRA. While there is no upfront tax deduction for Roth IRA contributions, the main benefit of a Roth IRA is that you will not have to pay any taxes when you begin taking distributions during retirement.
SEP Gold IRA
SEP gold IRAs are available to self-employed individuals and business owners. The SEP Gold IRA works in the same way as a pre-tax traditional IRA in that contributions are not taxed, but it has higher contribution limits. Instead of the $5,500 contribution limit, you can contribute up to 25% of your income or $53,000, whichever is less.
How to Invest in a Gold IRA
The first step in holding actual gold in an IRA is to open a self-directed IRA (SDIRA) with a custodian. Although the custodian is an IRS-approved financial institution (bank, trust firm, brokerage), many financial services and mutual fund providers that handle traditional IRAs do not offer the self-directed option.
You’ll also need to choose a precious metals dealer to handle your IRA’s gold purchases (your custodian may be able to recommend one). Keep in mind that not every self-directed IRA custodian offers the same investment options, so double-check before opening an account to make sure actual gold is one of them.
The SDIRA can be set up as a regular IRA (contributions are tax-deductible) or a Roth IRA (contributions are not tax-deductible) (tax-free distributions).
The next step is to fund the account with a contribution, a transfer, or a rollover from a qualified plan, such as a 401(k), 403(b), or 457 plan ( this is subject to contribution restrictions, of course). After that, you can choose investments for the account, and your custodian and metals dealer will take care of the rest.
You can’t just go out and buy any bar or ingot. Physical metals must meet IRS “fineness” standards for purity and weight, as well as be stored in an IRS-approved depository that is insured. You may only buy bullion coins from specified government mints when it comes to Gold IRA investments.
What are the advantages of Gold IRAs?
Gold IRAs, like any other investment, have advantages and disadvantages. Some of the benefits are as follows:
Gold IRAs have some of the same tax advantages as standard IRAs: Traditional self-directed IRA contributions are tax-deductible. Qualified withdrawals from Roth accounts are also tax-free.
Physical gold isn’t particularly liquid, but neither are IRA holdings. Because gold is a long-term, buy-and-hold investment, it is well-suited to an IRA, the assets of which you often don’t touch for decades – usually until you retire.
Gold IRAs are always self-directed, which means you manage your holdings and make all investment decisions on your own.
Are there any risks of investing using Gold IRAs
If you’re thinking about getting a gold IRA, keep these disadvantages in mind.
There is no tax-advantaged income
Gold bullion does not provide interest, dividends, or other types of returns. As a result, it does not benefit from the tax-free growth aspect of IRA investing. You’d only be eligible for a tax break if you sold your gold for a profit.
You may pay higher fees
Gold cannot be kept at home or in a bank’s safe deposit box. Instead, you must pay a custodian to store and insure the precious metals in your IRA, as well as to buy, ship, and transport them. Gold IRA custodial fees are typically higher than regular IRA management fees.
You are not permitted to transfer any precious metals that you already own into your Gold IRA. You are also not permitted to purchase precious metals and transfer them to your IRA on your own. A custodian must handle all transactions on your behalf.
Possible Alternatives to investing in a Gold IRA
There are other ways to invest in gold if you don’t want to use a Gold IRA. Among the most important factors to consider are:
- Investing in gold stocks or funds that can be held in a traditional IRA or brokerage account
- In the commodities market, you can trade gold options (again, through a broker or trading platform)
- Buying and storing bullion or coins on your own (though you should pay to insure them)
Frequently asked questions on “How do gold IRAs work?”
Which coins can I hold in my Gold IRA?
A gold IRA or a custom precious metals IRA cannot hold any physical gold or precious metals. The IRS approved the following four main precious metals to be invested in an IRA with the Taxpayer Relief Act of 1997: gold, silver, platinum, and palladium. The IRS only permitted a few types of bullion, coins, rounds, and bars for each metal.
The IRS issued fineness requirements for precious metals products in an effort to focus on investment-grade liquid products and limit collectibles of older types of coins. One reason for being selective is to ensure that gold and other precious metal products meet minimum requirements that are likely to result in better long-term value.
What is commingled storage?
Commingled storage in a Gold IRA or a Custom Precious Metals IRA essentially means that your gold and silver will be held in a segregated storage area based on the trustee, but will be mixed in with other customers within the storage facility. When you chose to sell, exchange, or receive an in-kind distribution of your physical gold, you will receive “like” precious metals instead of the exact metals that you purchased.
What is segregated storage?
Segregated storage in a Gold IRA or a Custom Precious Metals IRA ensures that your gold and silver are segregated, labeled, and stored with your name and IRA account information. When you decide to sell, exchange, or receive an in-kind distribution of your gold bullion, you will receive the actual metals that you bought.
Is a gold IRA a good investment?
A gold IRA has numerous advantages. Some of these are tax advantages that are available with just about any type of individual retirement account. Other advantages stem from gold’s perceived investment properties and the ease of storing gold in an IRA. However, all investments involve some level of risk. Consider your situation and seek the advice of a financial consultant to determine whether a gold IRA is a smart buy for you.
That will be all for today’s post in which we have addressed the question “how do gold IRAs work?” I hope that you found this post valuable and that you are now better informed about how these accounts work. Let me know if you have any questions with regards to today’s article, as well as whether you need any help opening a gold IRA.
I wish you well,
Eric, Investor and Team Member at Gold Retired!