Choosing the right investment vehicle is difficult, especially in today’s economic climate. In times of financial uncertainty, it can be tempting to make rash decisions with your investments, but this is one time when you should take a deep breath and think things through carefully before making a significant commitment.
If you’re considering buying gold for your IRA, you might be thinking about making an investment that will weather the storm. However, before you buy, it’s essential to understand how gold in an IRA account is taxed and your other options.
What is a Gold IRA?
A self-directed Individual Retirement Arrangement (IRA) allows you to invest in various assets for retirement, including real estate and precious metals. An IRA is a tax-deferred investment account; you pay no taxes until you begin withdrawing funds from the account, usually after turning 70.5 years old (the age at which you are required to start withdrawing money).
Self-directed IRAs allow you to manage your IRA account as if it were your own, choosing what to invest in and how. In this case, that means buying physical gold bullion — actual bars of the precious metal — for your IRA. Although this option has been around for several years now, many investors are still hesitant to fund their IRAs with gold. Here is a section of the frequently asked questions about gold IRAs and why you should consider investing your retirement savings in this valuable commodity.
Is it Safe to Own Gold in an IRA?
In a word: Yes. However, you should take certain precautions to ensure that your investment remains tax-advantaged and within the rules.
Gold comes in several forms, including bars, coins, jewelry, or bullion ingots. Bullion ingots are usually gold alloyed with other metals for durability, but pure gold is also available. As an IRA investor, you need to purchase five or more bullion ingots that weigh at least 100 troy ounces each.
You can buy entire bars, but there is a more significant markup for this method — you will pay a premium of about 4 percent above the market price to cover the costs of fabrication and distribution. If you prefer not to pay extra to have your gold delivered to you, you can set up a depository and have them do the work.
Most gold IRA companies offer this service for an initial startup fee and a monthly storage charge. Once you’ve selected your gold depository, they will provide specific instructions on shipping your purchases there.
Owning physical gold as part of your IRA doesn’t exempt it from the required minimum distribution requirement. You must still withdraw a certain amount of money from your account each year starting at age 70.5, and the distributions are taxed as ordinary income.
However, you do not have to sell any gold your IRA owns to meet this requirement. You can take the entire distribution in cash and then reinvest it into other types of gold bullion that your IRA custodian will hold.
Required Minimum Distribution Rules
Before you choose to invest in gold for your IRA, here are a few things to keep in mind.
There is no specific federal tax deduction for purchasing gold as part of your IRA investment. However, you can write off other investment expenses and fees related to the account, including storage and insurance.
The rules governing the precious metals that can be purchased for IRA accounts are precise. Pure gold, silver, and platinum are the only types that qualify for this type of investment.
While you will pay a storage fee to hold your physical gold within your IRA account, these fees tend to be much lower than those charged by investment companies or stockbrokers.
Should You Invest in a Gold IRA?
There’s no simple answer to this question. The value of gold fluctuates with the economy, but demand for gold is always high. In times of uncertainty, it may be a good idea to add gold bullion to your IRA, but that’s no guarantee that the price will go up or even hold steady.
If you’re looking for a more reliable investment with tax benefits, consider investing in stocks and mutual funds. You can’t use any gold stocks to fund your IRA — it has to be physical gold bullion — but holding cash or bonds in an IRA allows you to generate interest income.
You also have the flexibility of selling your stocks and mutual funds at any time, whereas selling your physical gold before retirement means paying a 10 percent penalty plus regular taxes on the capital gain. Check with your custodian for more information on how long you have to hold gold before a penalty applies and if there are any tax benefits.
As with all investments, it’s essential to understand the risks and the rewards of adding gold bullion to your IRA. Investing in physical gold is one way to protect yourself against inflation and market uncertainty, but it’s not a risk-free strategy.
Is a gold IRA investment something I should seriously consider? That all depends on your circumstances and goals. Ask yourself the following questions to decide if this is a viable option for you:
- Do I have enough money in my self-directed IRA to diversify with gold?
- Do I have the financial resources to pay for storage fees, gold distribution fees, and penalties if necessary?
- Have I done my research on buying gold bullion?
If your response to the above questions is yes, adding physical gold to your IRA is a strong move.
You may be interested in: 6 Tips for Finding the Best Gold IRA Companies
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