Gold IRA Tax Rules – Read This Before You Invest
Precious metals investing has been around for thousands of years in one way or another. Back then, gold and silver were made into coins and used as currency. More scarce metals became jewelry – and, at one point, the world leaned on the Gold Standard to determine the value of the currency.
While those days are far behind us, gold is still a very heavily traded commodity in global markets. It’s an asset class all by itself – and during the early 2000s, the price of gold shot up and created a buying frenzy that brought many new investors.
There was a time when gold provided better returns than the stock market. That trend came to a halt in 2010, and many gold investors started to see their investments decrease. As we sit in the year 2022, gold is still a sought-after commodity that many investors use to help fight inflation and diversify their investments.
Of course, with any investment comes the topic of taxation!
We’ve put together a guide that helps you understand gold investing, and further, how gold is taxed in an IRA. We’ll also share with you some hacks on how investors are effectively lowering the gold tax rate.
So, let’s get on it!
What Will I Learn?
The Different Types Of Gold Investments
There are several ways you can buy gold – and with a few of them, you can even do it from the comfort of your own home.
Gone are the times when you could only invest in gold in the form of coins and bars that needed to be stored in a safe. Holding physical inventory isn’t the most practical way to invest in gold. Thankfully, there are many more solutions out there – and people can invest without all the hassle of handling physical assets.
Of course, buying coins and bars is a very popular way people can invest in gold – and this can be done with the help of an authorized gold broker. Then you’ll have to decide on where to store your gold, be it in your home, in a safe deposit box, or even in an offshore vault. You can also pay your broker to store them for you.
In the past, investors would have to buy gold bars or gold coins. They’d need to hold onto their physical gold until they could sell them at a profit. These days, there are several ways to invest in gold, and here, we will cover all the ways you can make gold investments!
Gold bullion is, by far, one of the most common IRA investments out there. When thinking of a traditional IRA retirement account, it’s usually associated with purchasing gold bullion.
People still love to invest in precious metal coins because they are associated with a considerable advantage – they come with the country’s guarantee of purity and weight. The purity of the gold coin can vary from country to country, but the coins are typically weighing one ounce.
Another advantage is that selling gold coins and bullion is incredibly easy – and you can always get the current spot price of gold anywhere in the world. However, having physical gold bullion comes with storage costs.
Deposit boxes cost less than $100 per year, but for larger quantities, your broker can charge you up to 1% of the value of your IRA investments.
Next, there’s investing in gold bars. Gold bars by Credit Suisse are most famous, but there are plenty of other gold bars you can buy for traditional IRAs. You will save on the markup if you decide to invest in gold bars rather than gold coins. However, both are taxed as collectibles, so keep that in mind for your retirement account.
Physical ETFs & CEFs
There are also ways you can invest via the stock market. Physical gold ETFs – exchange-traded funds – are popular and can be traded during regular stock market hours.
ETFs are the alternative to buying physical gold bullion – and you can trade it just like anything else on the stock market. Buying shares of gold ETFs gets you into the game rather easily. CEF’s are similar to this – but under a different structure.
Generally, buying an ETF means you have acquired 10% of an ounce of gold. Investing in ETFs is convenient and smart because it’s associated with low costs, and it’s easy to buy and sell, just like stock. Holding ETFs comes with a great advantage since the owner is not responsible for the storage, but the low storage fees are accounted for in the price of the ETF.
ETFs are taxed as collectibles, the same way gold bars and gold coins are.
CEFs, closed-end funds, work similarly as ETFs – the owners trade it as stock, but the structure of these funds is the same as the structure of trusts. In essence, a CEF is an interest in the investment portfolio of the trust.
The taxes on the CEFs are different, though. They aren’t taxed as collectibles, but they are instead taxed as LTCGs. That is certainly an advantage compared to ETFs, as it can increase your return after-taxes. On the other hand, the federal report is very complex due to foreign trusts that hold the CEFs.
There are also alternative ways to get some skin in the gold game by investing in gold mining companies, ETFs, and even mutual funds. That way, you can have some investments in the gold sector without handling any physical assets.
One of those approaches is to invest in gold mining companies’ stocks. Those companies mine and sell gold – and making these gold investments for your individual retirement account is similar to investing in CEFs and ETFs.
Non-Physical Alternatives To Investing In Gold
Luckily, if you want to make gold investments without investing in physical gold, there are a few ways you can do just that. Gold mining stocks, ETFs, and CEFs, along with mutual funds, can help you invest in gold and other precious metals without the need to invest in actual physical gold.
All these alternative types of investments are related to the price of gold. The main advantage of other types of investing in gold is the after-tax returns if you decide to hold the assets for longer than a year – because then your holdings are taxed as LTCGs.
For example, a great alternative way is investing in ETNs – gold exchange-traded notes – which are essentially debt securities. These securities’ return is directly tied to the gold index.
It’s principal to remember that investing in ETNs does not equal investment in physical gold. ETNs are traded the same way another stock is, and the main benefit of them is being taxed as LTCG.
Moreover, we have the gold futures (ETF) – contracts that bind someone to sell or buy a specific amount of precious metals (gold), at a specified time in the future, at the specified price. The advantage of futures is to protect oneself from the fluctuating price of gold to cut losses or result in great profits.
The losses or gains from a gold future contract are taxed using the 60/40 rule – 60% LTCG and 40% STCG – resulting in a lower tax than regular income, but still higher than the desired 100% LTCG tax.
Whatever you decide to invest in, it’s essential to know how gold is taxed.
Why Are Gold IRAs So Popular?
Having a gold IRA has been popular ever since it came out – and it’s still one of the most popular ways to an IRA. People like having a gold IRA because they can easily get a diversified individual retirement account, which is very important for retirement planning.
So, what made gold so attractive to have is the fact that the gold prices move oppositely compared to other assets. That makes gold investments a smart idea since they are the best way to hedge against inflation – we can consider gold as insurance against the rapid growth of inflation.
Prices of gold eliminate or downsize the risk significantly for retirement accounts, especially if you consider investing in gold for longer periods.
All that made gold so popular to own – especially for retirement investments.
Gold IRAs were popular when they first came out, but not nearly as they are popular today. The thing is, investing in gold back then was purposefully made complicated to defer people from making a gold IRA.
Only a few people were up to the challenge to make those gold transactions, so they stuck to a Roth IRA instead.
Goldco Precious Metals will help educate you not only on the importance of using the most IRS friendly moves to help invest in precious metals, but they will also do so in a highly professional manner.
Goldco specializes in helping people protect their retirement accounts by allocating a portion of your IRA, 401k, or other retirement savings into precious metals backed holding. Get a free gold investing kit by clicking the link below.
In the late 1990s, you had to have a custodian to get a gold IRA, and when you’ve purchased the items, you needed to transfer them to a safe deposit box. The custodian or IRA trustee had to account for the deposit in the selected depository to store gold, making the whole deal even more complicated.
However, the global financial crisis in the late 2000s made it much easier to get a gold IRA – and it got more popular as the demand for them soared. More companies started to surface offering gold IRAs, advertising the process as a piece of cake.
All that resulted in a huge spike in interest for gold IRAs all over the US. Of course, we mustn’t forget how inflation affected the US and the fact that gold investments – such as gold mining stocks, gold mutual funds, and gold mining ETFs – are some of the easiest ways to protect one’s assets from the devastating inflation for most gold investors.
If you have questions about how to take advantage of this – penalty free – read our IRA gold transfer process. It shares more information on the various scenarios you run into. Or, if you want a company to walk you through it, we recommend GoldCo direct.
The Cost Of Investing In Gold
It’s essential to know the costs associated with investing in gold before we talk about gold taxation. Your returns will be affected by the fees involved, so you must understand what you are getting into here.
On top of that, the prices of gold have spiked, so you will have to set aside more money for your gold IRA. At the end of the 20th century, an ounce of gold cost about $250, while it cost around $2,000 in late 2020.
The price of gold suffered a drop in 2021 to $1,700 – so you might even experience some losses in this investment.
All that accounts for the cost of investing in gold – the prices of precious metals can grow, but they can also drop unexpectedly. However, what is so great about a gold IRA is that you don’t have to exclusively invest in gold – you can invest in other precious metals, too.
The traditional IRA, or a self-directed IRA, limits people to investments in stocks, bonds, and preferably cash – which is not something all people want to do. Ever since the late 1990s, investing in physical gold and other precious metals bullion – such as silver coins and palladium bars – was finally made possible by the US government.
Gold IRA And Taxes
Ever since IRAs were first allowed back in the 1970s, the US government has been figuring out ways to tax the traditional IRAs. Gold IRA didn’t even exist at first – investing in gold or other precious metal for the individual retirement account was prohibited until the 1990s.
Of course, over time, gold investors figured out alternative ways to a traditional IRA or a Roth IRA to save up on taxes. The principal thing regarding personal finance is to find the best way to invest in gold coins and bullion with maximized after-tax returns – and without losing too much on the income tax.
The first thing investors must do is to check out the tax treatment of different types of gold investments for retirement accounts – and each type of investment is classified.
The IRS considers gold IRAs as collectibles. So, a person that has a self-directed IRA to invest in gold has to pay taxes the same way as if they invested in an exquisite piece of art – and the tax treatment is not great on collectibles, especially if you take into account the annual fee of storing physical gold coins.
So, the main difference is whether a person decides to make a gold investment short-term or become a long-term gold IRA owner.
Short-term investments are investments where the investor invests in gold for capital gains and holds the asset for less than a year before they decide to sell it. So, short-term investments are taxed as ordinary income – specifically short-term capital gains.
On the other hand, gold funds that are held for over a year – like a traditional gold IRA – are taxed as collectibles. It does not have a long-term capital gain status; they are taxed as ordinary income, with a maximum collectibles tax rate of 28%.
For an investor with a Roth gold IRA, the marginal tax rate can be tremendous and affect the amount of ordinary income significantly. That’s why many investors have looked for other gold investment vehicles to spend less on tax and get better after-tax returns.
One of the highly recommended ways to lower the marginal tax rate and get more capital gains according to the current gold prices is to open up a gold IRA, among other things. On top of that, gold ETFs are not taxed as collectibles – which was one of the IRS rules introduced in 2007 regarding IRA investments.
Because of the sudden change, gold ETFs experienced a spike in interest. Today, they are still a popular way to make a gold investment as gold investors can save a lot on taxes.
On the other hand, each investor has to follow the strict set of rules set by the IRS about holding gold. One of the principal rules regarding gold is that the investor cannot possess any of the physical gold they bought and invested in:
The said gold has to be stored in a safe deposit box in a selected depository during the entire period of holding the gold. That means that the investors are required to pay an annual fee for the storage, along with an administration fee.
Despite this complication, people are still open to investing in gold IRAs because of the good after-tax returns and good tax treatment for these gold investment vehicles.
Things To Remember Before Opening An IRA
People fail to take into account everything before they open any kind of individual retirement account – and that leaves room for trouble. There are some key things each investor needs to remember before they open up an IRA.
First things first – if you aren’t sure what type of IRA is for you, stick to the traditional IRA. They offer better tax returns, and you can roll over most gold investments to your traditional IRA, compared to a Roth IRA.
Moreover, the taxes you are required to pay on gold investments come up when you want to cash in on your investment. IRAs have the same tax treatment as ordinary income, with the marginal tax rate – which is very favorable.
On the other hand, you must remember that you might have to pay other taxes or fees. The fee many people pay is the penalty for withdrawing funds early, usually before the age of 60.
Also read about how to rollover your 401k without penalty.
IRA gold investments don’t have a tax rate for collectibles as the marginal rate applies. However, high-income investors may lose a lot of money on taxes because of the marginal tax rate. The taxes for IRA investments are classified into brackets. So, in essence, the more you earn, the more you’re exponentially required to pay.
The last important thing is:
If you experience losses in your IRA, you won’t be able to deduct them on your tax form. That is one of the downsides to prepare for if you buy physical gold for IRA transfer.
Gold IRA Tax Rules – Bottom Line
Each gold IRA or gold investment comes down to the profits from fluctuating gold prices or the hefty after-tax returns. Investors investing in physical gold expect a higher maximum collectibles tax rate, while others expect LTCG treatment for their long-term investments.
Most gold investments out there are investments in a gold IRA due to the preferential tax treatment of gold IRAs, even with the storage fees. People with a traditional IRA or Roth IRAs can also invest in gold via mutual funds.
All in all, gold remains one of the main ways to start retirement funds for the future. The tax treatment is just a plus!