Purchasing gold coins, bars and bullion isn't the only way to invest in gold today. Instead, you can secure your financial future by investing in physical gold through an Individual Retirement Account (IRA).
While traditional IRA investments focus on growing your savings for a secure retirement, a gold IRA offers the unique opportunity to include physical gold in your investment. This means you can diversify your retirement portfolio by adding precious metals to it.
Simply put, a gold IRA (or precious metals IRA) investment allows you to add various IRS-approved precious metals to your IRA account. Navigating through this investment option can be challenging if you're new to investing in a gold IRA.
In this detailed guide, we will explain everything about gold IRA investments. Keep reading to learn all you need to know.
What is a Gold IRA?
As mentioned, a Gold IRA is an Individual Retirement Account (IRA) where participants can hold physical gold and other precious metals in their IRA account. However, you can't just invest in any physical gold or silver assets. Instead, only IRS-approved gold and precious metals are eligible for precious metals IRA investments.
Notably, this type of IRA investment has the same tax benefits and IRS regulations as a traditional IRA.
Now, you might wonder how this is different from a traditional IRA. The only difference between the two is what you can add to the accounts. A traditional IRA allows you to add investments like stocks, mutual funds, and physically backed ETFs.
In contrast, a gold IRA — as already stated — holds physical gold and precious metals investments. Both these IRA accounts allow you to enjoy a financially stable future upon reaching your retirement age.
Legal Framework of a Gold IRA
Besides the basics, one of the key considerations when investing in precious metals or gold IRA is the IRS guidelines. Failure to comply with these IRS guidelines can result in tax penalties. Hence, it’s important to be mindful of these guidelines before investing.
Let’s take a look at the IRS regulations for precious metals IRA investments:
- To include gold or other precious metals in your IRA, start by opening a self-directed IRA account. If you already have one, you can add your precious metals investments to it.
- While these accounts are tax-deductible, you will only be taxed when you withdraw precious metals from your IRA account.
- You can only invest in physical gold, silver, palladium, and platinum that meet certain purity criteria. This purity criterion will be further discussed below.
- You must engage with a custodian to open a gold IRA account. This custodian serves as a financial organization that helps set up your IRA account, handle funds transfer to a precious metals dealer/company, and transport, store, and safeguard your assets.
Why Invest in Gold?
Are you curious about the reasons to invest in gold? Despite the perception that precious metals might not yield profits, gold offers several advantages for investors. These benefits include:
Historical Stability and Performance
Gold has held its value throughout history, unlike coins, paper money, or other assets. This makes gold investments a means of transferring and preserving wealth from one generation to the next. In fact, people have treasured the special characteristics of precious metals since antiquity.
What makes gold capable of preserving wealth is its non-rust and non-tarnish properties. Additionally, gold’s high melting point, at approximately 1,948 degrees Fahrenheit (1,064 degrees Celsius) makes it practical to handle and store, further enhancing its durability and reliability as a long-term asset. Gold is also aesthetically pleasing thanks to its brilliant yellow color, which has kept its demand consistent.
Hedging Against Inflation
Besides its non-aging properties, investing in gold introduces a great hedge against inflation. Gold is a good investment during high inflation since its price grows with the cost of living. In fact, gold prices have increased over the past 50 years while the value of regular currency has decreased due to inflation.
Since gold is priced in these currency units, its value increases alongside everything else. Meaning, if you invested in gold 10 years ago, your assets are now significantly more valuable than your initial investment. This proves that holding gold promises financial stability, especially during economically struggling times.
Finding investments not highly correlated with one another is the key to diversification and investing in gold can diversify your portfolio with physical assets. When you hold gold alongside other investments, it is easier to mitigate the risk of losses from any particular investment. But how does gold contribute to that?
Historically, gold has been negatively correlated with stocks and other financial assets. For instance, the late 1970s were excellent for gold but disastrous for stocks. Likewise, gold performed exceptionally well in the market during 2008, while stocks significantly declined. When comparing the great years for equities during the 1980s and 1990s, the performance of gold was the opposite.
This historical pattern demonstrates that holding assets like gold, which tend to perform differently from traditional investments, can help mitigate losses and provide a measure of diversification in your investment portfolio.
Types of Precious Metals Eligible for Gold IRAs
Adding IRS-eligible precious metals to your IRA account is the best way to ensure a smooth gold IRA investment process. This means that you should only invest in assets that meet the purity criteria according to IRS regulations for such investments. These include:
- Physical gold with 99.5% purity
- Physical silver with 99.9% purity
- Physical platinum and palladium with 99.95% purity.
Additionally, invest in physical bars, coins, and rounds that an accredited or certified refiner or manufacturer creates. This certification should be offered by one of the following:
- ISO 9000
- Or any national government mint
Besides these points, you should also remember that:
- Your invested proof coins must be encased in their original mint packaging and be in exceptional condition. They should also come with a certificate of authenticity.
- Other than 50-ounce platinum, 100-ounce palladium bars, 100-ounce gold, 400-ounce gold, and 1,000-ounce silver, you can only invest in 24-karat small bullion bars.
- If you invest in non-proof (bullion) coins, they should be pristine and without defects.
Setting Up a Gold IRA
Once you understand the requirements of investing in a gold IRA, it's time to process the investment. But what is the right way to set up a gold IRA without facing challenges? For this, you can refer to the short step-by-step guide below.
Step 1: Find a Custodian
First, you will need a custodian who will handle all the professional work for you, from opening your precious metals IRA account to handling the account funding, precious metals investment, storage, and security of your assets.
Choose a custodian with professional experience to guide you throughout the investment, such as one of the top gold IRA companies. Additionally, opt for a company that maintains transparency regarding their pricing, security measures, and storage facilities. It’s recommended to research customer reviews about the company on trustworthy platforms like the Better Business Bureau (BBB) to ensure you’re making a well-informed choice. Goldco and Augusta Precious Metals are two of the best precious metals companies.
Step 2: Rollover vs. New Account
The next step is determining what account type you want to open. Some gold IRA custodians allow you to choose between opening a new retirement account or rolling over funds from an existing IRA or 401(k) to a precious metals IRA account.
The decision between these options depend on your financial circumstances and investment goals. It's advised that you consult a financial expert to determine the best choice.
After you choose an option, your IRS-approved gold IRA custodian will help open your account accordingly. However, some custodians don't support rollovers from an existing retirement account. Consult with your chosen custodian to check they offer your preferred option before proceeding.
Step 3: Funding the Account
The next step is to fund your account. Similar to opening a new account or rolling over from an existing retirement account, you can fund your account through direct cash or a transfer from an existing retirement account.
Notably, you might have to pay a bank fee if you fund your account with direct cash. In contrast, a transfer or rollover of funds from an existing IRA would not incur any tax charges or additional fees.
Step 4: Choose Your Investments
Last but not least, once you have funds in your account, it's time to make your investment decisions. Here, we suggest partnering with a company that offers various precious metals IRA investment options.This approach allows you to diversify your investment portfolio — potentially maximizing your returns while adhering to your budget.
However, this is not the case with every dealer or company. Make sure you find one that offers your preferred gold, silver or other precious metals investment options before using them.
What to Look for in a Gold IRA Provider?
When looking for a Gold IRA provider, consider the following key aspects to make a more informed decision.
Transparency is one of the most important considerations when selecting a Gold IRA provider. Make sure to look for a company that is transparent about its operations, costs, and policies. The best way to evaluate this is by exploring what information an IRA shares with its customers.
For example, Augusta Precious Metals shares all the important details on its website, ranging from fees to storage processes. But, this isn't the case with all gold IRA providers. Hence, it’s crucial to carefully examine the information a company provides on its website and partner with one that values transparency with its customers. See this article on the best precious metal IRA companies.
The cost of establishing and maintaining a Gold IRA can vary greatly between providers. It’s important to consider a company's setup fees, yearly maintenance fees, storage fees, and costs for buying and selling precious metals before investing with them.
When you compare these fees across several providers, you can easily pick a provider with a fee structure that adjusts to your budget.
Customer Reviews and Reputation
One of the primary ways to evaluate a company's professionalism and credibility is by considering the customer reviews. Customer feedback and the provider's reputation are great reliability indicators.
To explore unbiased reviews and ratings, check your preferred company's profile on consumer review sites like BBB (Better Business Bureau), TrustPilot, Consumer Affairs, and BCA (Business Consumer Alliance).
Once you have invested in a gold IRA, you must ensure secure storage of your physical gold or other precious metals assets. Therefore, pick a gold IRA provider that provides secure and reliable storage services for your physical assets.
Here, you can consider companies that offer segregated storage (where your assets are kept separately from others) or allocated storage (where your assets are specifically identified and assigned to you). Either way, you should dig deeper into the storage services of a company before entrusting them with your investment.
Note: If you're unsure what companies to consider when picking the best gold IRA provider, you can always refer to our guide on the best gold IRA companies.
Tax Implications and Penalties
Precious metals or gold IRA laws offer certain tax advantages, but it's essential not to overlook the associated restrictions. Gold IRA tax implications and limitations resemble those of traditional IRA investments. You can take physical possession of your precious metals in an IRA once you reach the age of 59 ½, but not before that. However, if you were born before July 1, 1949, you can opt for physical possession or distribution from your gold IRA at age 70 ½. Conversely, if your birth date falls after June 30, 1949, you'll become eligible for distribution at age 72.
When you reach retirement age, you'll need to take out Required Minimum Distributions (RMDs) from your gold IRA. This amount can either be a percentage of the value of the physical assets you hold, or you can opt to take out assets of equal value to meet the RMD requirement.
It is worth noting that you must pay any income taxes payable on any withdrawals when you are eligible for an RMD. Only after this can you liquidate the metals in your account for cash or take physical ownership of them without penalty.
Additionally, when you reach the age of 72, you must begin withdrawing obligatory distributions from your gold IRA (if you haven't by that age). If you do not, you may be subject to a 50% excise tax for each year you do not withdraw the required amount.
This applies if you wait until the eligible age to take distributions from your gold IRA. But what if you opt for early withdrawals? While it may sound tempting, IRS guidelines for a gold IRA limit early withdrawals. If you withdraw your physical assets or their value from an IRA before reaching retirement age, you will face tax penalties like:
- A 10% penalty for early withdrawal
- A 28% capital gains tax on any earnings made if the value of your metals grew while they were in your gold IRA.
However, owning a gold IRA isn’t a strict “either this, or pay a penalty” situation. Instead, the IRS does offer exceptions for early withdrawals where you don't have to pay the tax penalty. For instance, if you want to purchase a property for the first time or you have a permanent disability, you can seek early withdrawals from your gold IRA without tax penalties.
Risks and How to Mitigate Them
Like any investment, gold IRAs come with various risks. However, these are things that you can prevent with the right solution. Speaking of which, let's look at some common risks linked with gold IRA investments.
Gold performs well during financial instability, particularly when the stock market is volatile. However, there are times when gold's value may decline, especially when other investment markets are rising. This is a risk many gold IRA investors overlook. Consider the potential of gold’s value to decrease, and diversify your investments to add more assets to your portfolio. This way, you can mitigate losses if gold’s price drops.
There is always a possibility that you choose a gold IRA company with poor management services. In this situation, there is no guarantee that they will securely manage and frequently maintain your assets in their possession. Hence, investing with companies with a solid and stable reputation for professional management services is the best way to avoid this risk. Have a look at this article on the best gold IRA companies.
Another key issue many gold IRA investors face is the unreliable storage of their assets. For instance, companies that don't provide clear details about where they store your physical gold can't be trusted. If you proceed with them, there's a great chance you could lose your investment due to robbery or other safety concerns.
For this reason, it is better to invest with reputable precious metal companies that are transparent about the storage depositories they work with, keeping your assets insured at a secure IRS-approved depository.
Frequently Asked Questions (FAQs)
Depending on your financial and investment profile, gold IRAs may be an excellent addition that can help diversify your retirement account.
Varying from company to company, the rates to start a gold IRA account range from $100 to $300. This includes a one-time account establishment fee from $50-$150 and an annual administrative fee from $50-$150. Besides this, you must pay for the purchase, storage and insurance of physical gold in your IRA. These costs can differ based on the current market value of gold and the investment company's charges.
The smallest amount you pay to open a gold IRA is a one-time account setup cost, usually around $50-$150.
As mentioned earlier, the risks of investing in a gold IRA include sudden shifts in gold market value, poor IRA management offered by your service provider, and storage of your assets at an unreliable depository.
While it is a popular and beneficial gold investment option today, there are certain risks associated with gold IRA investments. However, that doesn't mean you should give up on the benefits of gold IRA investments, which include portfolio diversification and wealth preservation.
Instead, it is better that you carefully make every decision during your IRA investment journey and only proceed with one of the best gold IRA service providers. We hope this detailed guide will help you make a more informed investment decision.