Do you own a gold IRA or plan to invest in one? While investing in physical gold through a gold IRA is a smart retirement investment option, it may introduce you to various questions. For instance, how and when can you withdraw from your gold IRA?
Obviously, your motive behind a gold IRA investment is to seek financial stability once you reach your retirement age. After all, gold investment is one of the best ways to secure your wealth. Plus, the tax benefits that come with a gold IRA are a bonus.
But when can you really enjoy this financial stability? Is there a certain age or withdrawal limit? If you have these questions popping in your mind, don't worry; this article will answer all of that and more. So keep reading to make a more informed investment decision.
What is a Gold IRA?
In simple terms, a gold IRA is a specific kind of self-directed Individual retirement account that enables owners to invest in actual precious metals like gold, silver, platinum, and palladium. Notably, IRS regulations for gold IRAs are similar to those of traditional IRA accounts. In fact, the only difference between the two is what and how you can invest in assets through these retirement accounts.
A traditional IRA, for example, allows you to invest in digital assets like stocks through online exchange platforms. In contrast, you can hold gold or silver bullion in your gold IRA account. These investments are made by opening a self-directed IRA account run by a specialized and IRS-approved custodian.
Investing in a gold IRA helps diversify your portfolio, which can help maintain financial stability once you are eligible to seek possession of the gold in your IRA. Additionally, it offers a hedge against inflation while allowing you to enjoy various individual retirement account tax benefits.
Understanding IRA Distribution Basics
Are you confused about what a distribution and withdrawal in a gold IRA is? Now, usually, Individual Retirement Accounts (IRAs) frequently use the phrases "distributions" and "withdrawals" interchangeably. But there is a slight difference between the two.
Distributions are considered to be the funds you withdraw from your IRA account. Now, regardless of your work position or financial situation, you can draw distributions from your IRA anytime. But it is worth noting that distributions from traditional IRAs are normally taxable and may be subject to an additional 10% tax penalty if you are under 59 ½.
Withdrawals, on the other hand, are a broader phrase that incorporates numerous types of funds transferred out of an IRA. So other than distributions, this term can also refer to early withdrawals or rollovers. These rollovers are the finances you transfer to your gold IRA account by rolling over funds from an existing IRA or 401(k) account. This type of withdrawal can be processed with the help of a gold IRA custodian.
Early Withdrawal Penalties
Often, when you need immediate funding, you might think of heading to your gold IRA account. After all, it's your own savings account, so it's only logical to want to withdraw some finances from it instead of borrowing from somewhere else. Sadly, this is not the best option to consider here.
This means that even though you can withdraw funds, early withdrawals before the retirement age — as I mentioned earlier — are subject to 10% tax penalties.
This tax penalty is applicable in both cases:
- Whether you liquidate some of your gold assets in an IRA to access immediate finances,
- or seek physical possession of some assets before the age of 59 ½.
But, if the value of your metals increases while in your gold IRA, your early withdrawal will also be subject to a 28% capital gains tax on the gained earnings. Don't worry; this doesn't mean you're stuck between choosing whether to pay a tax penalty or borrow money from somewhere else. Instead, the IRS does make some exceptions where early withdrawals are acceptable without additional tax penalties. Below is a list of these exceptions with respect to IRS regulations.
Unreimbursed Medical Expenses
If you have to cover some immediate medical expenses and don't have the option to cover them through health insurance, you can get a penalty-free withdrawal from your gold IRA. However, this only applies if you pay the medical expenses within the same calendar year as the IRA withdrawal.
Health Insurance Premiums During Unemployment
IRS also allows you to seek penalty-free early withdrawals from your gold IRA to pay health insurance premiums during the unemployment period.
Higher Education Costs
If you, your spouse, or your children are seeking higher education and you need financial aid for that, you can seek early penalty-free withdrawals from your gold IRA. However, it is worth noting that penalty-free withdrawals in this situation are only eligible for certain costs associated with higher education. This includes (but is not limited to) tuition, fees, books, educational materials, etc.
Dealing with a permanent disability that is making you struggle financially? This is where your gold IRA investment can come to your rescue. As long as you can provide proof of impairment to your IRA administrator, you don't need to inform them how you wish to use the early withdrawals from your gold savings account.
Receiving an IRA Inheritance
Another exception by the IRS for penalty-free early withdrawals is in the situation where you inherit a gold IRA. But remember that this exception is not for the spouse of the deceased who wants to roll over the funds/assets into a non-inherited gold IRA account. This is because the gold/funds in a retirement account also belong to the owner's spouse.
Purchasing, Constructing, or Rebuilding a Home
If you need up to $10,000 for expenses related to the purchase, construction, or rebuilding of your home — you can seek a penalty-free withdrawal from your savings account.
Fulfilling an IRS Levy
Another exception where you can seek early withdrawals without having to pay the 10% tax penalty is when paying delinquent federal taxes. In this case, the IRS takes the money directly from your IRA account without deducting the 10% penalty.
Substantially Equal Periodic Payments
You can also seek monthly withdrawals from your IRA for a few years through substantial equal periodic payments (SEPP). For this exception to work, you must withdraw the amount you need, calculated using one of three IRS-approved ways shared on their website. You can seek substantial equal periodic payments (SEPP) for five years or until you turn 59 ½ (whichever comes first).
Involvement in Active Duty
The last exception is that the IRS allows tax-free early withdrawals when you are a qualified military reservist. It is also applicable if you are a member of the National Guard summoned to active duty for at least 179 days after September 11, 2001.
As mentioned, distributions are the funds you withdraw yearly from your gold IRA account, starting at age 59 ½. Yes, this allows you to withdraw funds from your savings account whenever you want, but these distributions also have certain requirements.
Firstly, the required minimum distributions (RMDs), or the annual amounts you must withdraw from your retirement funds, are to be taken after the retirement age. Generally, this age is 59 ½. However, if born before July 1, 1949, you can take your RMDs at 70 ½. Likewise, gold IRA owners born after June 30, 1949, can take these distributions at 72.
Now comes the question: how can you take these distributions?
Well, you can meet your Required Minimum Distributions (RMD) by either taking money from your investments in tangible assets or using assets of equal value that you own. Your account's required minimum distribution (RMD) specifies how much you must remove from it each year. This amount is calculated by your IRA custodian or plan administrator and is based on factors such as your account balance and life expectancy. We will further discuss both these methods of taking RMDs further in this article.
Apart from reaching the age when you can take RMDs, keep in mind that you'll need to pay income taxes on any withdrawals once you're eligible for RMDs. Only after that point can you convert your account's assets to cash or take physical possession of them without facing further taxes or fees.
Moreover, you must begin taking these distributions from a traditional gold IRA account by 72 (if you haven't already). If you fail to take your RMD, you'll be subject to a 25% penalty on the amount you should have withdrawn. However, the required minimum distributions do not apply to a Roth gold IRA account.
Tax Implications of Gold IRA Withdrawals
Tax implications on gold IRA withdrawals vary based on the type of account you created. Hence, it is better to explore these tax implications beforehand to decide which gold IRA account best fulfills your investment requirements. To get a better know-how, you can refer to the table below.
Traditional Gold IRA
Roth Gold IRA
SEP Gold IRA
Tax Implications on Withdrawals
To withdraw funds from a typical gold IRA without penalty, you must be at least aged 59 ½. If you withdraw money before reaching this age, it is deemed a non-qualified distribution. Other than the tax you pay on any standard IRA withdrawal, these distributions are also subject to a 10% penalty for early withdrawal. You can avoid this tax penalty only if you meet one of the IRS's above-mentioned early withdrawal exceptions.
With a Roth gold IRA, withdrawals after 59 ½ are tax and penalty-free. Because Roth IRAs are started using after-tax cash, funds withdrawn before that age are still tax-free. This means that when you contribute money, you must pay taxes. Yet, if you remove the funds early, you will have to pay taxes and a 10% penalty on any earnings. Now, if you want to avoid the penalty on non-qualified Roth IRA distributions, the same exceptions that apply to traditional IRAs apply here.
If you have SEP gold IRAs, available only to small-business owners and self-employed persons, the same withdrawal rules apply to standard gold IRAs.
Selling Gold Assets vs. Taking Physical Possession
What is better: seeking gold IRA distributions by selling them or through their physical possession? Notably, self-directed IRA distributions can be cash or non-cash contributions, which are also termed as ‘in-kind’ distributions by the IRS. In this type of distribution, a portion of actual bullion is delivered to you.
In cash distributions, however, you can resell a portion of the assets valued similar to your yearly RMD to the depository holding your assets. This will allow you to seek the dollar-amount value of your holdings as a distribution.
While both of these options are accessible, we suggest you consult a financial advisor to determine the best distribution-taking approach for you.
Special Considerations for Inherited Gold IRAs
Are you inheriting or have you already inherited a gold IRA? If so, it's crucial to properly understand the tax implications and distribution rules applicable to an inherited gold IRA. You should also keep in mind that the gold within your inherited IRA is subject to Required Minimum Distributions (RMDs), taxes, and potential penalties.
So what are the key considerations when inheriting a gold IRA? Specifically, you must withdraw the funds from a gold IRA account within ten years of inheriting it. But keep in mind that the requirements to seek these withdrawals vary on your relationship to the original owner of the IRA and whether or not they began drawing distributions from the account.
Besides this, the IRS determines RMDs of an inherited IRA based on the following:
- The beneficiary's link to the account owner, i.e., spouse, disabled or chronically ill individual, young child, or an entity other than a human (e.g., a pet).
- Whether the original account owner died before or after the mandatory commencing date (the date when they were obligated to begin taking RMDs).
- The account owner died after 2019. This is important because the SECURE ACT has changed RMD regulations for inherited gold IRAs whose account owner died after 2019.
Notably, if the account owner's spouse is the single beneficiary, they have more options to take RMDs than non-spouse beneficiaries. However, the spouse's status as the sole beneficiary is determined by September 30 of the year after the account holder's death.
Here, the RMD due for the year of the account owner's death is the amount the account owner was required to withdraw but did not remove before death, if any. RMDs of inherited IRAs are determined starting from the year after the owner's death and based on the specific characteristics of the designated beneficiary and the chosen distribution option.
Tips and Considerations for a Smooth Gold IRA Withdrawal
Ultimately, when you're ready to take gold IRA withdrawals, you might want to keep some important considerations in mind to ensure a smooth gold IRA withdrawal. These include:
- When you're ready to start taking distributions, you must submit a distribution request form to your gold depository. After this, you can choose which bullion bars or coins you want to receive as a distribution and if you want them liquidated into cash.
- From a professional perspective, we suggest you seek cash distribution compared to non-cash delivery. This mainly helps get instant funds in your account while allowing you to get the current price for your assets. Whereas, if you seek physical possession of the assets, you will have to wait until you receive their delivery and liquidate them yourself.
- If you established a Traditional IRA, then any distributions will be taxed depending on your income. This means you'll also need to withdraw enough gold to cover the taxes (unless you are paying them separately from your pocket). Moreover, you are obliged to take distributions from a traditional IRA once you reach 59 ½, 70 ½, or 72 (based on your year of birth).
- As mentioned, Roth IRAs are funded through after-tax cash, allowing you to access tax-free distributions. So, if you invest in a Roth gold IRA, you don't have to worry about selling more gold than you want to pay taxes to the IRS.
- To avoid fines, we suggest you finalize the appropriate distribution method and its benefits while filing your taxes. For instance, if you choose to receive gold bullion rather than cash, you can continue to hold it as an investment in the future. But remember that your gains will no longer be tax-deferred after they leave the IRA. So make sure you have decided how you want to take your distributions beforehand to better understand the relevant tax implications.
Gold IRAs can be an excellent retirement investment option only if you understand the tax implications, various types of distributions, and timing concerns that come along with such investments. This will allow you to make better decisions and get the most out of your retirement account.
While at it, we also suggest you seek professional advice and suggestions from a tax specialist or a trusted financial advisor. This will help keep you away from any complications or tax penalties linked with gold IRA distributions. You may also find my article on the best gold IRAs helpful, if you haven't set one up yet.