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How Does a Gold IRA Work

How Does a Gold IRA Work?

Just when you thought having a Roth IRA or traditional IRA account was enough to secure your future, inflation has reared its ugly head forcing you to grab your retirement funds and run for cover. Mutual funds, stocks, EFTs, bonds, and other paper assets will not be able to help you this time. You need a more robust solution.

As a modern-day investor, one thing you should know by now is that you can never stop learning. You must try to educate yourself as much as possible on the various ways of diversifying one’s retirement accounts to minimize the risk posed by global economic uncertainty.

If you have been doing that all along, you have probably come to realize the value of investing in physical gold and other precious metals. That means the question that has probably brought you here is “How does a gold IRA work?”

Investors who already have a self-directed IRA (such as a Roth IRA or traditional IRA) will no doubt have a good idea of what a gold IRA account is. Nonetheless, this article will look at the different types of gold IRAs, how they work, and what you can do to become a gold IRA account holder in 2023.

When you think of investing in gold bullion or gold coins you probably assume that it means simply buying gold and keeping it somewhere safe, right? Although you are correct, there is another way to invest in gold that you may not know about.

I am, of course, talking about opening a gold IRA account through an IRS-approved custodian. This is an option open to anyone who has an individual retirement account and has access to funds for a gold IRA rollover or transfers to buy gold and other precious metals.

A gold IRA is simply a retirement account used to invest in a wide range of precious metals, such as gold, silver, platinum, and palladium coins and bars. It is a type of self-directed IRA that allows the holder to enjoy many tax benefits, similar to a Roth IRA or a traditional IRA.

You cannot talk about a gold IRA without mentioning IRS regulations because unlike simply buying gold and keeping it at home, a gold IRA is a type of retirement account that is subject to certain rules and restrictions.

The Three Types of Gold IRAs You Should Know

Types of Gold IRAs

Before you get carried away with the thought of not having to pay taxes when you buy gold and other precious metals, there are certain things about this self-directed IRA account that you should know.

The most important thing is that there is not one but at least three types of gold-based self-directed IRAs that you can choose from. These gold IRA accounts are as follows:

  • Traditional gold IRA

  • Roth gold IRA

  • SEP gold IRA

As you can see from the names, this is nothing more than a self-directed gold IRA that is specially managed to cater to precious metals.

SEP, Roth, and traditional gold IRAs all come with different considerations and tax implications as follows:

Traditional Gold IRA

You can fund your traditional gold IRA using pre-tax dollars, in the same way, you would a traditional IRA. This is the most common type of self-directed gold IRA account and is very easy to understand.

Tax on this account is only due when the investor decides to withdraw funds from the account, meaning that it is a tax-differed retirement account. Any deposits or gains on the account will also not be taxed because all contributions are tax-deductible.

There are annual contribution limits set by the IRS, as with any other self-directed IRA, which limit annual deposits to $5,500 with an extra $1,000 if you are above the age of 50.

Roth Gold IRA

Just like a normal Roth IRA is popular among investors because it grows tax-free, the same applies to a Roth gold IRA.

The account is funded using after-tax dollars, which means as long as you have reached retirement age, you do not have to pay taxes when you finally choose to withdraw funds.

However, rules on early distribution mean that you will be heavily penalized by the IRS on any withdrawn funds that are accessed before retirement. Therefore, a Roth gold IRA is only suitable for a long-term investment.

SEP Gold IRA

SEP stands for “Simplified Employee Pension,” and as the name suggests, a SEP gold IRA is a gold IRA that has been tailor-made for small business owners and other self-employed individuals who are already making contributions to their retirement accounts.

This type of gold IRA is funded with pre-tax dollars. In terms of contribution limits, you are allowed to contribute up to $53,000 or 25% of your income, whichever is less.

Normally, investing in a gold IRA would be difficult, if not impossible, for anyone without a 401(k) or other similar retirement savings plan.

However, with a SEP gold IRA, even people who are not employed by anyone can access the various benefits of gold IRAs.

If you own a business, you can set up SEP gold IRAs for your employees as part of their incentive package and job perks.

Benefits of a Precious Metals IRA Account

Investing in precious metals by opening a gold IRA account has many proven benefits to the investor, such as:

Demand and Growth Potential of Physical Gold

The demand for gold has never been as high as it is right now. If you look at some of the world’s leading economies in terms of gold reserves, you will be surprised to learn that even with the millions of tons of gold these countries have, they are still buying more!

China and Russia are two great examples that prove that gold demand is not about to decrease any time soon. These countries have set aside billions of dollars to buy more gold on top of what they already have.

Physical gold is also useful in industries, such as medicine and technology, so you can have no fear that your gold IRA will lose its value any time soon.

Hedge Against Inflation

Historically, at times of great economic strife, people have turned to precious metals like physical gold, silver, platinum, and palladium to safeguard their investments against the effects of inflation and deflation.

Some good examples include the Great Depression and the two World Wars. Now, as we recover from the Covid-19 pandemic, we are seeing a similar trend in the investment behavior of people across the globe.

If you have some excess funds in your retirement account, the time to buy gold coins and other precious metals using a gold IRA is right now!

Portfolio Diversification

One of the greatest advantages of gold IRAs is they allow you to diversify your portfolio. That is the mantra that gold IRA companies are built on because at the end of the day, it’s better to have your money spread out over different investments than to focus on one asset.

This way, if the funds held in paper assets are threatened, at least you will have the precious metals in your gold IRA to rely on.

Tax Benefits

Gold IRAs are all about tax benefits and that is what attracts most investors to this type of investment.

Many times it can seem like whichever way you turn, the IRS is there waiting for its share of your money.

However, if you invest in gold bars and coins through an IRS-approved gold IRA provider, you will be able to enjoy the same benefits as if you simply have your funds in an ordinary retirement account.

How Does a Gold IRA Work?

To establish a gold IRA account, you have to do so through a reputable gold IRA custodian.

These gold IRA companies will assist you in opening an account, funding your precious metals, finding a reliable storage facility, and making sure you comply with IRS rules and regulations.

Strict rules by the IRS dictate which types of gold and other precious metals you can buy as part of your gold IRA.

You should expect to pay a wide range of custodial and storage fees associated with the running of gold IRAs. In most cases, you can fund your account by taking from your traditional IRA or by buying gold directly using cash or bank transfer.

A gold IRA account works by basing its value on that of precious metals, such as gold, silver, platinum, and palladium coins. Gold IRAs, therefore, provide a hedge against inflation meaning that, no matter what happens to the economy, your money grows tax-free and is safe and secure.

Who Benefits From Gold IRAs

Who Benefits From Gold IRAs

There are three main ways that the investor can benefit from a gold IRA, which are:

  • Tax Deductible

The tax benefits are the major advantage of opening a gold IRA. Depending on which type of account you have opened, you can enjoy lowered annual taxes through traditional gold IRAs or you can have your tax-deferred using Roth gold IRAs.

  • Long-term Investment

We have already mentioned how the growth and demand for gold will continue to increase. Now imagine having a substantial amount of precious metals stored away in a secure depository for a few decades while you wait for retirement! The gains you will have over that period are astronomical.

  • More Control

If you are tired of having your every investment decision monitored and approved by the IRS, the freedom you crave may be found when you open a gold IRA. As a self-directed IRA account, you have a lot more say in how the account is managed and the precious metals you invest in.

The downside of Gold IRA Investments

It’s not all sunshine and roses when it comes to investing in precious metal coins and similar assets. There are a few downsides to opening a gold IRA that you need to be aware of, such as:

  • Higher Costs

You should expect to pay a lot more money than you would if you had decided to buy the physical gold yourself and store it somewhere of your choosing.

Depending on the custodian you choose, the following costs are applicable when investing in a gold IRA:

  • Account activation and setup fees

  • Custodial, annual, and brokerage fees

  • Storage fees

  • Transportation costs

  • IRS Regulations

While there is a lot more freedom than you would get with a 401(k) account, there are still a lot of IRS regulations that you need to contend with, such as the rule against buying any precious metals that are not IRS- approved gold and silver.

You are also not allowed to keep your gold, which is a major sticking point for many investors. However, given the value of gold and the risk of being robbed or scammed, keeping your gold, silver, palladium, and platinum bullion in a secure depository is not such as bad thing.

  • Fraudulent Gold IRA Companies

There is nothing worse for a gold IRA investor than falling for the wrong gold IRA company. Your custodian has a lot of power and influence over your gold IRA account, and if you make the wrong choice, it means you would have put the entire investment at risk of failure before it even begins.

How To Open a Gold IRA Account

Opening a gold IRA account is very easy as long as you follow a few simple steps and keep in mind the various IRS rules and regulations. Follow these simple steps:

  • Find an IRS-approved Custodian

You will have to spend many hours carefully researching all potential gold IRA companies. Find one that best suits your need and has a proven track record.

In that regard, look out for the following signs of the right gold IRA company to invest with:

  • Works with reliable and affordable IRS-approved depositories

  • IRS licensing and insurance for all its precious metals

  • A good reputation for honesty, integrity, and excellent customer service

  • A wide range of precious metals to choose from

  • Many years of experience working with physical precious metals

  • Affordable account setup fees and other associated costs

  • Knowledge of IRS rules and regulations

  • Fund Your Account

Next, you will have to fund your account. There are various ways of doing this, but I will mention the three most common options, which are a gold IRA rollover, direct IRA transfers, or making cash contributions.

You can approach financial advisors to assist you if you are not sure which method is best suited to your needs. The rollover will be the fastest way to fund your account but it has a lot of IRS regulations.

If you find that your account is ineligible for a rollover, you will have to make do with either paying cash or conducting an IRA transfer.

  • Choose IRA-approved Gold

You can invest in any metal you want, as long as it meets the IRS standard for purity, which is 99.9% for silver and 99.5% for gold, platinum, and palladium.

There is also a rule that says all the coins and bars you buy must come from an IRS-approved mint, such as the Royal Canadian Mint, for example.

Consider the following examples:

  • American Eagle and American Eagle Proof coins

  • American Eagle platinum coins or bars

  • Credit Suisse bars made by an NYMEX or COMEX-approved refinery

  • Platinum or palladium Canadian Maple Leaf coins

  • Platinum and Palladium bars minted by an NYMEX or COMEX-approved refinery

  • Canadian Maple Leaf coins

  • Austrian Philharmonic coins

  • Canadian Polar Bear & Cub coins

  • British Britannia (2013 and newer)

  • Australian Kookaburra coins

  • Australian Kangaroo coins

  • Chinese Panda coins

  • Find an IRS-approved Depository

Since you cannot keep your physical gold and precious metals, you will have to rely on your custodian to help you find an IRS-approved depository that is fully licensed and insured.

Most custodians already work with specific depositories, so finding one should not be a problem. However, if the suggested depository is not to your liking, you can always find your own, although this will mean paying for transportation on top of the storage fees.

The Best Gold IRA Companies

When you invest in gold stocks and silver coins through a reputable precious metal custodian, the entire process becomes easy and you will be able to enjoy the full benefits of opening a gold IRA.

Keep in mind the custodial fees, hidden costs, and minimum requirements of each of these gold IRA companies as this will determine how well your investment does, and whether you can afford to open an account with the company.

The following is a list of some of the best gold IRA company options for you to consider in 2023:

You can also see how we ranked them on this page:  Top Ranked Gold IRA Companies.

Final Word

Nothing is stopping you from making the right decision for your future and investing in gold today. A gold IRA account that is properly managed ad well-funded is the key to providing a safety net for yourself in case the global situation continues to worsen.

Arthur Karter

About 

Hi, I’m Arthur, and nobody wants to wake up in their 50s like me that they are in serious debt with minimal assets. This wake-up call forced me to reevaluate everything. After going through the school of Hard Knocks, I’m ready to help you by sharing the best retirement choices and how they differ from all the same-old, same-old options that financial advisors sell. These alternatives will help you build and protect your wealth.

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