What Is A Gold IRA? Everything You Need to Know

Gold IRAs are becoming increasingly popular as investors look for ways to diversify their retirement assets.

Investing for retirement is a key part of staying on the road to financial health. Investors have a wide array of decisions to make with shaping their retirement portfolios – from choosing the right assets to using the best type of accounts.

If you are including gold in your retirement account, you may be surprised to learn that you can take advantage of the tax benefits of an Individual Retirement Account (IRA.) After all, not all IRAs allow you to include gold and precious metals.

In this article, we will detail the pros and cons of using a Gold IRA so you can determine if it’s the right way to reach your investing goals.

General Benefits of an IRA

IRAs have significant tax advantages because they are designed to encourage retirement savings, which leads to financial stability after your working years. Traditional IRAs allow investors to deduct the amount of money that they contribute from their taxable income for that year.

Essentially, contributions to traditional IRAs are not taxed when you make the deposit. However, when an investor later withdraws those funds in their retirement years, that income is subject to income tax. Although the investor in retirement years may be in a different tax bracket with lower taxation rates.

Roth IRAs also have tax advantages, but in a different way. Contributions toward Roth IRA accounts are taxed before they are deposited, so they do not offer immediate tax advantages.

Instead, Roth IRAs give investors the advantage of withdrawing their funds in retirement years with no income tax at that time. This can be a significant benefit if your portfolio has made substantial gains because those gains would not be taxed as they would with a traditional IRA.

Investors do have a limit to how much they can contribute annually to receive the tax advantages of an IRA. For 2021, you can contribute up to $6,000 if you are younger than 50, or $7,000 if you are 50 or over. The extra $1,000 is considered a “catchup” contribution to encourage more saving to help you prepare for retirement.

Gold’s Role in a Retirement Portfolio

Precious metals like gold can be a key part of a well-diversified investing portfolio account for retirement for several reasons.

Gold offers a way to diversify against the significant rises and falls of the stock market and can serve as a hedge against inflation. Gold prices often move in the opposite direction of paper assets like stocks and bonds. Including gold in a portfolio is a way to lower risk over the long-term with more diversification.

Gold prices often rise during times of turmoil because investors consider this asset a “safe haven” asset as its backed by a physical commodity.

Like any asset, however, the price of gold can fluctuate. There are no guarantees for how it will perform. Still, as a precious metal in finite amounts, this asset will never be worth nothing – it will always have some value.

Gold Price Trends

Gold prices tend to rise during times of uncertainty and decline during healthier bull markets. However, the value of gold over the long-term has generally risen over the long term.

In 1915, gold traded near $500 per ounce, and as of late March 2021, gold was trading near $1,745 per ounce.

However, the more than a century of gold prices between those two price points includes lows near $250 per ounce in 1970 and highs near $2,200 per ounce in 1980.

Rising Popularity of Gold IRAs

Gold IRAs allow investors to include gold and other precious metals like silver, palladium or platinum in a tax advantaged IRA account.

Using gold in retirement accounts is a fairly new idea. It was only about 20 years ago that the U.S. began allowing gold and other materials to be included in an IRA thanks to the Taxpayer Relief Act of 1997. Those assets must be physical assets like coins or bars. At the investor’s retirement age, they can be liquidated for cash or withdrawn as the physical metal.

Since IRAs started accepting gold, investors have been exploring ways to take advantage of this opportunity to get the benefits of gold in their tax-advantaged portfolios.

At first, investing in gold via an IRA was complicated, so many investors were put off. The process involved finding a trustee, an appropriate account and then arranging to transfer the physical gold (or other precious metals) for keeping in an IRA.

However, since the 2008 financial crisis, the market is now seeing an increasing number of choices in gold IRAs that make investing in this way much more efficient. More companies are offering ways to simplify the gold investing process for IRAs by creating IRAs specifically designed to hold the asset.

As gold prices have seen increases recently, investors have become even more interested in taking advantage of gold IRAs.

Plus, many investors fear that as the government continues to create economic stimulus packages, the result may be inflation. Again, gold is viewed as a good hedge against inflation.

What to Know About Using a Gold IRA

Just like with a typical IRA, you can choose to use either a traditional or Roth IRA for your gold IRA. But again, the precious metal investments in an IRA must by physical. If you’re investing gold you must either have gold coins or bullion.

You can also use a gold IRA if you want to include assets related to gold in your portfolio like gold mining companies or mutual funds with gold stocks, or even indexes that follow gold. However, most gold IRAs hold only physical precious metals.  you won’t be able to use a gold Investors who prefer gold stocks and Exchange-Traded Funds can invest in those assets via a typical IRA or another investing account.

The gold you keep in a gold IRA must meet certain standards for purity. Specifically, gold must be 0.9950 pure. Those standards, as well as standards for the depository that stores the gold, are set by the IRS. The gold needs to be under the supervision of an IRA trustee owner, and not stored in, say, the IRA account holder’s safety deposit box or closet, for example.  

To include gold in an IRA, you need a self-directed IRA (SDIRA), which is slightly different than a traditional or Roth IRA.

A self-directed IRA requires that you manage the account with a custodian to hold the assets. Those assets may include a wider variety of asset types like real estate, promissory notes, cryptocurrency – and precious metals.

You will also need to find a company that is a qualified broker to purchase and hold your physical gold or precious metal.

Finally, if you already have an IRA or 401(k), you do have the option of rolling over some of those funds into a gold IRA. You cannot, however, move any gold that you already own into a gold IRA account because the buying and storing of the gold must be made by your dealer and custodian.

How to Choose the Best Gold IRA Custodian

Finding a good custodian for your gold IRA is like finding a good financial institution for any product. Custodians need to meet federal and state standards for offering financial services, so they are typically banks, brokerage firms, trust companies or credit unions.

You will want a custodian with a good reputation and a good track record, so read customer reviews and check with your Better Business Bureau as you shop around.

Good custodians demonstrate transparency by making information easily available and sharing all their costs and fees before you invest. Verify that your custodian has all appropriate licenses and insurance they’ll need to hold your precious metal assets.

Custodians can recommend dealers for you, but they don’t choose your dealer. You do that yourself.

Rules that Apply to both Gold IRAs and Typical IRAs

Gold IRAs do have separate standards. They also follow many of the same standards as your typical IRA when it comes to how you can contribute and how you can withdraw the funds, as well as how the assets are taxed.

As mentioned above, the maximum you can contribute for 2021 is $6,000, or $7,000 if you are 50 or over. There is no minimum contribution.

Taxation with gold IRAs is similar to taxation with other IRAs. Precious metals in a traditional gold IRA are taxed as they are deposited, but you can deduct the amount you deposit from your taxable income the year you deposit it.

With a Roth gold IRA, you can’t deduct the amount you contribute from your annual taxable income, however you can withdraw those funds without income tax obligations during your retirement years. A Roth gold IRA allows your gold investment to grow in value without you having to pay taxes on any increase in value.

As far as withdrawing the funds, you must wait until you are 59½ before you can withdraw the money with no penalty from a traditional IRA or a traditional gold IRA. Otherwise, you will have to pay an early withdrawal fees, including potentially an extra 10% tax in addition to income tax.

You can withdraw funds from a Roth IRA or Roth gold IRA at any time, but any earnings on your investments will be subject to a 10% income tax if you withdraw your money early.

With the traditional IRA or traditional gold IRA, you need to start taking payments called Required Minimum Distributions (RMD) from your retirement account by age 72. There is no requirement to withdraw funds by a certain age from your Roth IRA or Roth gold IRA because, remember, those funds are taxed as they are deposited, not when you with them.

There are some exceptions to the withdrawal rule. You won’t have to pay early withdrawal fees if, for example, you are going to withdraw the funds for unreimbursed medical expenses, certain college costs, health insurance premiums if you are unemployed, or if you become permanently disabled.

Are Gold IRAs Right for You?

Gold IRAs offer the significant advantage of allowing you to invest retirement funds in precious metals while getting the tax advantages of an IRA. However, there are a few downsides to consider.

First, gold IRAs tend to have higher fees than IRAs that invest in other assets like stocks and bonds. Those fees might include the seller’s fee, which is a one-time markup on the specific gold you purchase. These fees vary from seller to seller.

You may also have to pay custodian fees, storage fees and fees to setup your account.

Unlike investments in other IRAs, you might have to sell your gold at below-market value if you want to cash it out from your IRA. That’s because many dealers pay less for gold from gold IRA accounts than they do buying gold on the market.

Another potential downside to gold IRAs is that they do restrict investors to a single asset of precious metals – you cannot include other stocks and bonds.

Investors who want to invest their funds for more diversity with stocks and bonds would need to open another IRA in tandem with a gold IRA.

Most financial advisors would recommend against putting all your eggs in one basket and only investing in gold, even if gold does offer several benefits to a well-balanced portfolio. However, if you would rather have exposure to gold companies or an Exchange Traded Fund (ETF) that follows gold prices, than a gold IRA may not be ideal for you because it’s designed for physical gold.

The Bottom Line

Gold IRAs have unique advantages that are leading to their rising popularity. Investors who want to include exposure to precious metals in their portfolios can consider using a gold IRA for these alternative assets.

As a rule of thumb, consider allotting no more than one-third of your retirement portfolio to gold – and ideally 5% to 15% – to maintain good diversity and lower risk for your portfolio. This retirement account can offer hedging benefits by allowing tax-advantaged investing in gold, which is prohibited by many traditional IRA accounts.

Weigh the pros and cons of using gold IRAs, perhaps with the help of a financial advisor. That way, you can determine if this innovative retirement account can help you achieve your goals. Chances are, holding physical gold can bring some balance to your portfolio and help keep your nest egg more secure.

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