How is a gold ira taxed? What if my gold IRA made losses, will I still be taxed? Are there different tax implications for different versions of gold IRAs (i.e. Roth versions and traditional versions)? You are about to find out about all that and more, if you read on till the end, so sit tight and let’s get right into it.
Investors turn to gold and other precious metals such as silver, platinum, and palladium to diversify their retirement portfolios, and to hedge against negative forces of the market such as inflation. The rules governing the way IRAs work mainly highlight what is allowed and what is prohibited. We know, for instance, that the IRS is against the holding of collectibles in one’s precious metal IRA. It is also well-stipulated that the purchasing and selling of gold in an IRA has a couple of tax implications, which every investor who is out to get started with gold IRA investments should know about.
Traditional gold IRA tax treatment
A traditional gold IRA is just like a traditional IRA, with the difference being the type of assets one is allowed to hold in their account, as well as the type of custodian they are required to work with. Most of the other rules, including those pertaining to taxes, are quite similar in both accounts (traditional IRA and traditional Gold IRA).
Traditional IRAs provide tax deductions on contributions, and the investors’ distributions are taxed later as ordinary income at the established marginal tax rate. If you decide to withdraw the money held in your traditional IRA before hitting 59 ½ years, then the IRS will require that you pay a 10% early withdrawal penalty, unless you in one way or another qualify for an exception. It is also required that you begin taking the required minimum distributions (RMDs) upon hitting 72 years. The RMDs are usually determined by the IRS and are based on an investor’s life expectancy. The failure to take your RMDs will often lead to the IRS hitting you with a 50% tax penalty on the amount you were supposed to withdraw.
Roth gold IRA tax treatment
You can hold gold in a Roth gold IRA and have an easy time if you stick to the set rules. The Roth IRA rules do not differ so much from the traditional IRA rules, but there are a few exceptions. Contributions made to a Roth gold IRA are not tax-deductible, meaning that you make your contributions using post-tax dollars. The total contributions that an investor makes to their Roth IRA form a number referred to as the “IRA basis”, which they ought to remember when they are thinking about liquidating their IRA for a deductible loss.
If you opt to open this type of IRA for the purposes of investment, then the earnings on your contributions will grow tax-free, and the Roth IRA distributions will remain tax-free, so you can do the following:
- Withdraw the contributions from the Roth IRA at any time you please without any taxes or penalties.
- Not withdraw the earnings from your account in the first five years after making the contributions, lest you get hit with a 10% penalty.
- Not withdraw the earnings on your contributions before you hit 59 ½ years unless you confirm that your reason for the withdrawal qualifies for an exception.
- Hold on to your account without taking the required minimum distributions even after hitting 72 years ( this makes a Roth Gold IRA a suitable option for investors who would like to leave some inheritance/estate for their loved ones.
Tax-loss on Roth Gold IRAs
The IRS allows you to take a tax-deductible loss on your Roth IRA investments, but this can only happen after you have distributed all of the amounts in your accounts. If the distributions end up being smaller than the contributions made ( i.e. they are smaller than the tax basis), you can proceed to take a loss subject to the set 2% limit on your adjusted gross income for some miscellaneous losses reported on Schedule A of Form 1040.
The losses highlighted here are deductible to the extent that they exceed the 2% limit. Such is a strategy that would not work with traditional IRAs, since they typically have no basis, owing to the fact that contributions are usually tax-deductible. This means that the losses you make will not in any case be greater than your account’s basis.
Taxes on gold IRA bequests
Investors avoid paying taxes and penalties on their account balances when they die. Their beneficiaries will, however, have to pay all due taxes on the money in their accounts or the precious that they inherited and withdrew from inherited traditional gold IRAs ( note that inherited gold IRAs are tax-free).
The IRS waives the 10% penalty on an inherited IRA if the owner of the account dies before they are 59 ½ years old. Unfortunately, the 5-year rule for the taxes on earnings for Roth IRAs still applies.
It is common for beneficiaries to space out their withdrawals from inherited IRAs to put a cap on the annual tax bite. The good thing is that you are always are entitled to a five-year span, and you may qualify for an even greater withdrawal period, although this depends on several factors, including:
- Your association/ relationship to the deceased.
- Current age
- Age of the oldest beneficiary
- Age of the owner of the account at their time of death.
- Whether the beneficiaries exist as an entity e.g. as a charity or trust.
You can opt to cash in your precious metal holdings before withdrawing them, or you can withdraw the precious metals directly. If you opt to go with the latter option, then your taxes will be determined by the fair market value of the assets at the time of withdrawal.
As you can see, there are many complex rules pertaining to the taxation of gold IRAs that you ought to know, hence the need for you to consult with an accountant or tax expert before getting started.
Frequently asked questions on “ How a gold IRA is taxed”
1. Does the 28% collectible tax rate apply to gold in gold IRAs?
No. The collectible tax rate does not apply to the gold held in gold IRAs, but the investor has to pay the marginal tax rate on their gains. This, unfortunately, means that investors in high-income brackets may end up paying more than 28% in the form of taxes.
2. Does my income bracket determine the taxes I pay?
Yes. The amount you pay to the taxman is dependent on your income bracket. It is common for those in the high-income bracket to pay more taxes. The IRS usually adds the amount the investors withdraw from their individual retirement accounts to their gross income, then taxes them accordingly.
3. I made losses on my gold IRA investments, will I be allowed to deduct the losses on my tax filings?
No. If you open a gold IRA and end up making losses by the end of the investment term, then the IRS will not allow you to deduct losses from the tax filings. This is why you should be very strategic about how you allocate your funds to the assets in your retirement investment portfolio.
4. I want to open a home storage gold IRA. Will I still be taxed like depository-storage gold IRA owners?
First of all, you should reconsider the decision to open a home storage gold IRA, since there are rules that prohibit the opening of such IRAs. If you open such an account, you will in fact be hit with a 10% penalty on the amount of gold you own, since the IRS treats this process as a withdrawal (there will be many other taxes and penalties since opening a home storage gold IRA attracts an IRA audit by the IRS).
That will be all for today’s post in which we have looked at how a gold IRA is taxed. I hope you learned a thing or two about how the IRS collects its dues from gold IRA investors. If you have, let me know what your thoughts about it are in the comments section, and you can also throw in a question about today’s topic while you are at it as I would more than like to answer it!
I wish you well,
Eric, Investor and Team Member at Gold Retired!