Gold IRAs are becoming increasingly popular amongst savvy investors. If opening a self-directed gold IRA is something you are considering- you probably have questions about the ins and outs of how they work and how you can buy gold using one.
This guide covers everything you need to know about opening a gold IRA and buying physical precious metals through the account. That includes the benefits, potential risks, fees, tax implications, funding process, and more.
Exploring investment opportunities is a smart move for any retirement strategy- and gold IRAs are certainly worth looking into. If you are on the fence and need more details to help you make an informed decision, then this is the guide for you.
What Will I Learn?
- Understanding Gold IRA
- The Process of Buying Gold in an IRA
- Decoding Gold IRA Fees
- Tax Implications of Gold IRA
- Transitioning from Traditional IRAs to Gold IRAs
- IRS-Approved Gold Products for IRA
- Role of a Custodian in Gold IRA
- Frequently Asked Questions
Understanding Gold IRA
Before we take a deep dive into how it all works, let’s begin with a detailed explanation of exactly what a gold IRA is.
Defining a Gold IRA
A gold IRA is a gold-backed individual retirement account. In other words, it is a self-directed retirement savings account that allows the account holder to invest in physical gold. They work the same way as a traditional individual retirement account (IRA)- in that they are designed for long-term, tax-advantaged savings to be withdrawn after reaching a certain age. The primary difference is the type of investments they support.
Although this is technically a self-directed IRA, IRS regulations state that you must have an approved custodian (more on that later). The IRS applies several additional regulations to gold IRAs- including how much you can invest annually, where your gold can be stored, what precious metals qualify, and who can have custodial responsibility for the account.
The Rationale Behind Gold IRA
Conventional IRAs offer plenty of benefits, so why branch out into a gold IRA?
Let us begin by saying that one is not better than the other, and it is important to consider your personal finances and savings goals with a trusted financial advisor before deciding if a self-directed gold IRA is right for you.
In short, the whole idea behind opening a gold IRA is to expand your investment opportunities. At the same time, it creates a more regulated way of buying precious metals. Traditional IRAs let you invest in the gold industry via paper gold investments (stocks in gold mining companies, for example) but not the actual goods.
While you can buy gold without an IRA, there are several risks involved. Those looking for a reliable, regulated, and structured way to convert part of their wealth into physical gold or other precious metals should consider a gold IRA.
The Benefits of Investing in a Gold IRA
Now we have cleared up what it is and the reasoning behind its existence, let’s discuss the advantages of a gold IRA. There are four stand-out reasons to buy gold in an IRA that benefit account holders.
A gold or silver IRA is perfect for diversification. The phrase “Don’t keep all your eggs in one basket” has never been more relevant than it is for a retirement portfolio. Spreading your savings across various assets, stocks, and securities is the investment strategy most people recommend.
While it is not a good idea to convert everything to gold, converting some of your savings into physical gold is a smart way to diversify. Gold IRAs themselves offer no diversification within the account, as they are exclusively for precious metals, but alongside other investments, they are another feather in your cap.
The tax advantages of a gold IRA are the same as traditional IRAs. Annual contributions to the account are tax-deductible, and you don’t need to pay taxes on those contributions until you withdraw them (unless you open a Roth gold IRA, where tax is paid upfront). You can also apply for a tax credit. The Retirement Savings Contributions Credit could apply to up to half the total amount invested.
Gold is historically less susceptible to volatility than world currencies during economic uncertainty. When markets are turbulent, the value of gold often increases.
As a safe haven asset, gold provides a reliable safety net for investors when the stock market goes south. The same applies during periods of geopolitical turmoil. While currencies, commodities, and international markets can suffer when world politics are complex, gold is a comparatively safe way to protect your wealth.
One of the primary reasons people invest in gold is to hedge against inflation. Usually, when the US dollar goes down, gold prices go up. If you have savings in a gold IRA, you can limit your exposure to losses through fluctuation.
Risks Associated with IRA Gold
Despite being a time-tested safe haven asset, there are a few potential risks and downsides to consider before buying gold in a gold IRA.
- The gold market is subject to volatility. An unexpected fluctuation could affect your returns from time to time.
- You need to consider the logistics of delivery and storage. Moving large quantities of physical gold is complex and risky. Luckily, most reputable gold IRA companies or custodians take care of this for you (including insurance).
- Account fees are higher for a gold IRA than any other IRA. The reason for the higher fees is simply the fact that more services are required as part of the operation.
- Unfortunately, not all websites selling gold are trustworthy or legitimate. Scams are out there, so stick to well-known, established sources you can verify.
- Gold is highly unlikely to yield significant returns. Your upside potential on any funds invested in physical gold will be limited compared to other assets in your portfolio.
The Process of Buying Gold in an IRA
Something that puts people off buying gold in an IRA is the belief that it is complex and time-consuming. In reality, that is far from true. Because there are such heavy regulations on how gold IRAs can operate and the products that can be purchased, the whole process is very structured and organized.
The majority of the process is you selecting the services you want to work with. Once you have made your choices, most of the actual setup is taken care of on your behalf. There are only four steps to buying gold through an IRA. Here is a detailed look at each one.
Selection of a Gold IRA Custodian
Every gold IRA must have an appointed custodian. The Internal Revenue Service stipulates who can act in a custodial role to avoid mishaps or miscalculations that could put you on the wrong side of gold IRA tax laws.
Banks, trusts companies, and other licensed entities approved by the IRS can act as custodians. It is up to you who you choose to work with, although many gold IRA companies provide their favored options (sometimes as recommendations, other times as a requirement).
Procedure to Open a Gold IRA Account
Before opening a gold IRA, know that it is only half the picture. You must also select which gold IRA company you want to open an account with.
There are many gold investment companies specializing in IRA services- a few of which have been leaders of industry for over a decade. It is essential to work with a reputable, well-established company with a track history of happy clients.
Look into the following factors when picking a company to work with.
- Minimum investment requirement (varies from around $2,000 to $50,000)
- Types of precious metals supported (some also offer silver, platinum, and palladium)
- Storage options (the Delaware Depository or similar facilities approved by the IRS)
- Account charges (including custodial fees where applicable)
- Insurance arrangements
- Customer service ratings
- What additional support is available (educational materials, personal account managers, advisory services, etc.)
Once you settle on a company, the actual setup process is quick and easy. There is some paperwork to fill out and details to confirm, but most of the legwork is done for you. In most cases, the procedure looks something like this:
- Contact a representative to discuss account options.
- Select your account type, custodian, and storage facility through your account provider.
- Provide the required details to initiate the account.
- Arrange funding and direct the custodian to purchase gold on your behalf.
Funding Your Gold IRA
Next comes the funding. There are several ways to add funds to your gold IRA. Many investors opening a gold IRA fund it using savings from an existing retirement account- such as a traditional IRA or 401(k)- through a rollover or transfer. This means they can immediately deposit a lump sum to be invested in physical precious metals.
Alternatively, you can make a cash contribution like any other savings account- but restrictions apply.
Here is an overview of how each funding method works.
A rollover is when you move funds from an existing IRA or retirement account to your gold IRA via your bank account. It is a three-stage process.
- Inform the administrator of your existing savings account that you wish to withdraw X amount for a gold IRA rollover.
- Wait for the funds to arrive in your standard account.
- Send the funds (in full) to your gold IRA custodian to deposit in your gold IRA.
It is fairly straightforward, but only if you stick to the rules. You have 60 days to transfer the entire amount to the custodian. Otherwise, it will count as an early withdrawal from the original account and be taxed accordingly. You will lose 10% of the amount to tax and may face additional penalties.
As long as you complete the rollover within the time given, you don’t need to pay anything.
If the previous method feels too risky, the alternative solution is a transfer (also called a direct rollover). In this case, the funds never pass your hands, and you don’t need to do anything other than request the transaction.
It is as simple as this.
- Have your gold IRA custodian contact the administrator of the existing account requesting a transfer of X amount to the gold IRA.
- The administrator arranges the transfer and sends the fund directly into the gold IRA account.
This is generally the preferred option for most people.
You don’t have to fund the account using existing retirement savings- you can also deposit using cash. That said, funding an account this way doesn’t let you take full advantage of the tax advantages, since those dollars are already taxed.
How much you can contribute annually is limited based on age. Under 50’s can make direct contributions (not including rollovers) of up to $6,500 each year. The limit for over 50’s is a little higher, at $7,500.
Funding an account this way is easy. It works like any other account- just write a check or arrange a wire transfer.
Opting for Suitable Gold IRA Products
Lastly, you decide which physical precious metal products you want to buy. This is entirely up to you, but you do need to stick to products approved by the IRS. There are minimum fineness requirements and production regulations to consider. It is essential to buy gold from a reputable source to ensure the requirements are met.
Most reputable gold IRA companies offer IRA-eligible gold options through their brokerage and make it clear if any item is not suitable. You can browse the options and direct your custodian to purchase using the available funds.
Only your custodian can execute the purchase- you can’t buy it yourself. This is an additional protective measure to ensure no ineligible products are purchased and that all rules are followed. Your custodian also arranges the shipping and storage of the gold in the pre-selected depository.
Decoding Gold IRA Fees
Calculating how much your gold IRA account will cost you each year is a little more complicated than it should be. Even many of the most trusted, popular gold IRA companies are not too keen on providing detailed breakdowns of IRA costs.
Decoding gold IRA fees can take time, but it helps to understand the various costs involved. You should also be aware that gold IRAs tend to have higher fees on average than other retirement accounts.
Here is a breakdown of the costs and fees associated with gold IRAs.
Initial Costs for a Gold IRA
Every gold IRA company charges something upfront to get your account ready. This is a one-off payment that covers the initial preparation of everything your account needs to be functional and in line with IRS regulations.
- Account setup fee
- Custodial fees
- Initial storage and insurance fees
Recurring Maintenance Fees
Once everything is up and running, there are a few costs involved in the upkeep. Most recurring fees are paid annually, but it depends on your agreement. Some companies wave certain recurring fees for the first year or so as an incentive to join.
Standard recurring gold IRA fees include:
- General account maintenance
- Annual administration fee
- Shipping costs on gold deliveries
- Annual storage charges
Hidden Fees and Charges
Hidden costs are an unfortunate reality in so many industries now, and gold IRAs are no exception. It is important to note that not every company is the same, and some are more upfront than others. You should always discuss additional charges with a representative before setting up an account- and check the terms and conditions before you commit.
Some examples of things to look out for are:
- Cash-out or liquidation fees
- Seller markups on gold products
- Transaction fees
- Account termination fees
Tax Implications of Gold IRA
The tax advantages of a gold IRA are the same as traditional IRAs. You do not pay tax on the contributions until they are withdrawn, meaning they can appreciate tax-deferred until you meet the minimum age requirement for withdrawals. Here is a more in-depth look at the tax implications of a gold IRA and how they affect you over time.
Understanding Tax Benefits
Let us begin by saying that a gold IRA is not ‘tax-free’, but it does have tax-advantaged status. The reason for this is that your contributions are made with pre-tax dollars. In other words, you don’t have to deduct tax from your earnings or savings before depositing them in your gold IRA to invest in gold.
This lets you purchase a larger value of physical precious metals at the offset. Your investment can appreciate over the years- including the amount you would have paid in tax.
When you go to withdraw funds, you will pay the tax you owe. You are taxed using your income tax bracket on all gold IRA savings. If you expect to be in a lower tax bracket when you retire than you are when you invest, this can save you money. Those who expect their tax bracket to be higher at their retirement may prefer to consider Roth IRAs, which operate in reverse- but your gold investment options are slightly different.
Ensuring the Security of Your Investments
Another tax advantage to consider with your gold IRA is the security of your investment. Once funds are contributed and used to purchase gold, the value is more stable- and the products themselves are extremely secure. You not only get to hold on to the tax amount longer, but you can protect it more efficiently with this type of investment.
Taxable Events in a Gold IRA
A taxable event is an action that triggers a tax payment on your savings. In a gold IRA, this is any withdrawal. As mentioned, you will pay your standard income tax amount on all funds withdrawn from your account. However, it’s crucial to consider the tax implications concerning gold IRA, as you will pay substantial tax penalties on any funds withdrawn early. You can withdraw funds from a gold IRA without incurring penalties after you reach 59 and 1/2 years old. Any withdrawals before that time are charged at 10% on top of the income tax payment.
Transitioning from Traditional IRAs to Gold IRAs
Procedure to Convert Your IRA
If you want to take some of your savings from a traditional IRA and move them to a gold-backed account, you can do so using a rollover or transfer. The shifting from a traditional IRA to a gold IRA is fairly simple- you just need to inform the responsible parties from each account and make sure you follow the rules.
Assessing Potential Risks and Downsides
Let us begin by saying that financial advisors do not advise people to transition an entire account. The standard recommendation for gold investments is around 10%, but this figure varies from person to person. We have talked about the benefits of opening a gold IRA, but what about the downsides? Here are a few things to consider.
- Gold IRAs have higher fees.
- The funds you move to your gold IRA will be illiquid for a long time.
- You may face low selling costs when you reach the time of required distributions if the price of gold is low at the time.
IRS Regulations for Conversion
- Rollovers must be completed within 60 days.
- An approved custodian must handle the transaction.
- Withdrawals cannot be made before the age of 59 years and six months.
IRS-Approved Gold Products for IRA
You can buy a selection of gold bars, coins, and bullion coins using your gold IRA- as long as they meet the IRS eligibility requirements. Anything that doesn’t meet the minimum fineness or is produced by an unapproved entity cannot be stored in a gold IRA. Collectible coins and other gold collectibles are also not allowed.
Eligibility of American Silver Eagle Coin
American Eagle coins are popular among investors, and fully backed by the IRS as an IRA-eligible precious metals product.
Eligibility of Australian Gold Kangaroo Coin
The Australian Kangaroo is one of the most popular gold IRA-eligible coins.
Eligibility of Austrian Silver Philharmonic Coins
Due to its high purity and international appeal, the Austrian Silver Phil is an eligible coin for gold and silver IRAs.
Other Approved Gold Products
Some other notable eligible products include Canadian Maple Leaf coins, American Gold Buffalo, Britannia coins, Credit Suisse gold bars, Perth Mint gold bars, and Mexican Gold Libertad coins.
Role of a Custodian in Gold IRA
We already touched on gold IRA custodians and their importance, but we wanted to share a little more insight about what they do and how to pick one. Remember, this is not an optional service- the IRS requires you to have one if you want to buy gold in an IRA.
Responsibilities of a Gold IRA Custodian
This type of account is technically a self-directed IRA. As such, the custodian does not have the power to make decisions on your behalf. They act upon your direction and make no investment or account decisions without your say-so.
Here are some of the primary responsibilities of a gold IRA custodian.
- They assist in the account setup process.
- When you want to purchase gold, they will execute the transactions.
- It is their responsibility to ensure all IRS filing and reporting requirements are fulfilled.
- Custodians provide quarterly statements for the account.
- They monitor contributions to stay within the limits and ensure minimum distributions are fulfilled once the account holder reaches the applicable age.
- Asset titling, inventory, shipping, and storage arrangements are handled by your custodian.
Selecting a Reliable Custodian
In many cases, choosing a custodian goes hand-in-hand with choosing a gold IRA company. They are often a package deal, but you should know that you have other options. Most companies provide a recommendation- or include one as part of the package. If not, the RITA (Retirement Industry Trust Association) website is a great place to search for custodians.
Frequently Asked Questions
How to hold physical gold in an IRA?
All physical gold purchased through an IRA must be held in an IRS-approved depository. These secure storage facilities are located in various states. The one your gold will be held in depends on the company you open an account with or a specific request you make to your custodian.
What is a Gold IRA account?
The understanding of the gold IRA concept is pretty straightforward. An individual retirement account lets you invest in gold and other precious metals. Unlike traditional IRAs, you can use the funds to buy physical gold- not just paper assets. The other physical precious metals you can buy depend on the account you open.
How to own gold in an IRA?
The process of owning gold in an IRA is fairly simple. You must select a company and a custodian to start managing your gold IRA, beginning with arranging the account setup, funding the account (using savings from an existing retirement account or via a cash contribution), and then directing the custodian to purchase the physical precious metals you want. Once you have the account, you can continue owning the gold as long as it is stored in an approved depository.
What is IRA-eligible gold?
IRA eligibility relies primarily on the gold’s purity. Any gold product must be at least 99.5% pure- and be produced by an approved refiner, assayer, or manufacturer. Silver products must be 99.9% pure. Platinum and palladium must be 99.95% pure.
What are the tax implications of a gold IRA?
Contributions to a gold IRA are tax-deferred, meaning you don’t pay taxes until you withdraw the funds (except Roth gold IRAs). There is also a tax credit available for up to 50% of contributions. On the other hand, you face steep tax penalties if you make early withdrawals.
An IRA precious metals investment can be highly beneficial for retirement portfolios- especially for those looking to diversify and protect their assets long-term. While no investment strategy is entirely risk-free, gold offers more security than the stock market- but it won’t generate the same returns as a riskier investment.
Buying gold in an IRA is a lot simpler than people think. Understanding the process and how regulations apply to you can help you make better investment decisions and begin your gold investment journey on the right foot. Once you know how to buy gold in an IRA, you can take the next step in deciding how to diversify your portfolio.