Ask any reputable financial advisor on how to mitigate risks in your investment portfolio, and all of them will give you the same answer: Diversification.
Setting up a gold IRA offers retirement portfolio diversity with tangible assets that retain their value through economic downturns and periods of inflation. Essentially making it a gold mine (no pun intended) for investors who are looking to preserve their wealth in periods when traditional investments like stocks and bonds are losing their value.
Having said that, setting up a gold IRA comes with its own set of risks in the form of custodians and complex processes. Keeping that in mind, in this article we’ll help you navigate the process by clearly outlining each step you have to take to set up your own gold IRA. Let’s begin.
Gold IRAs Explained
A gold IRA, also known as a precious metals IRA, is a specific type of IRA that allows individuals to invest in physical gold, silver, platinum and palladium as part of their retirement assets.
Gold IRAs function similarly to traditional IRAs, except that traditional investments like stocks, bonds and mutual funds are replaced by gold, silver, platinum and palladium. Both retirement accounts are funded by pre-tax dollars, which reduces your taxable income in the year you make the contribution.
On the other hand, if you’re eligible, you can also set up a Roth gold IRA which is funded with after-tax dollars just like a standard Roth IRA. These types of contributions don’t provide immediate tax benefits, but do ensure that your withdrawals are completely tax free. This includes both the contributions you make to the account and any investment gains on top of it.
Gold as an investment has been considered a safe haven for centuries, as its purchasing power remains intact even when the world is going through periods of economic uncertainty. The purchasing power of currency on the other hand can erode during these periods, causing even more people to flock towards gold as a backup.
Opening a gold IRA also allows you to gain physical ownership of the precious metals you invest in. Metals that rarely go down in value over a long period of time.
Choosing a Reputable Gold IRA Custodian
The first major step in setting up a gold IRA is selecting a reputable custodian that’ll assist you in setting up the account.
Their initial responsibility is handling and filling out all the paperwork required to set up your account. This includes the application, beneficiary designation forms and other documents.
Additionally, your gold IRA custodian is also responsible for ensuring that your account adheres to all IRS regulations and guidelines. Once you're done with the setup of the account, your custodian will help you pick out the precious metals you should invest in. Moreover, they’ll also help you facilitate the storage of your physical precious metal assets in secure, IRS-approved depositories.
Your account’s custodian is heavily involved in the entire process right from the get go, thus it's important that you research your options extensively. We’d suggest only looking at reputable custodians that have a long track record in the industry, and look at the reviews from previous and existing customers.
You can also check to see if your shortlisted custodians are regulated by relevant authorities. In the United States, the custodian must be a member of industry organizations like Better Business Bureau (BBB) and hold a valid license. Here is an article covering the best recommended gold IRA custodians. My top recommendation is Goldco due to excellent customer service, high review scores, and low fees. See my in-depth Goldco review to learn all about this company.
Setting Up Your Gold IRA Account
Once you’ve chosen a custodian to handle ownership of your account, the next step is for them to set up the account. As mentioned above, Goldco is my top option, although Augusta Precious Metals is another solid choice. Remember to conduct thorough research before making your decision. The gold IRA company will manage all the necessary paperwork for your account.
Determine Your Account Type
Before proceeding, it’s crucial to determine the specific type of retirement account you intend to open. Precious metals are primarily held in a self-directed IRA. Be cautious of any company suggesting a different account type, since that is almost always a scam.
Completing the Application
Your chosen company will provide you with an application, requiring proof of identity, residence, and employment details. Unlike a 401(k), a self-directed IRA can be established by self-employed individuals.
Account Setup Process
Once your application is verified, the gold IRA will be set up in your name. Be aware that reputable gold IRA companies typically charge a one-time setup fee. Additionally, you may incur an annual maintenance fee for your account and possibly transaction fees if you use a credit card.
Timing Considerations
Keep in mind that the setup of your gold IRA can take up to 2 weeks, depending on the custodian and gold IRA company chosen for the process.
Selecting Your Gold Investments
Now comes the exciting part, selecting the precious metals you’ll be purchasing to hold in your gold IRA. Now, before jumping to conclusions, we should tell you that the IRS has imposed strict purity standards on precious metals eligible for gold IRAs.
These standards include a minimum fineness rating for different precious metals. Let's go through them one by one:
Apart from purity, the IRS only allows precious metals that come from certain national mints. Several national mints are part of this list including that of Canada, Australia, United Kingdom and The United States itself. For the full list, you’ll have to check out the IRS’ official website, or call them directly.
As a precious metals buyer, you’ll also have to make an informed decision on selecting coins vs. bullions as part of your investment portfolio.
Coins offer recognizability and are easy to trade and sell. Bullions, on the other hand, have lower premiums over the spot price of the metals compared to coins. Plus, their authenticity and purity are easier to verify.
Funding Your Gold IRA
Before discussing what coins or bullions you should be investing in, let’s talk about how you can fund your gold IRA. Gold IRA holders have two options of funding their accounts.
Rollover or Transfer from Existing IRA or 401(k)
The first and recommended option is rolling over or transferring funds from your existing IRA or 401(k) into your brand new gold IRA. The process itself isn’t complicated either as your existing IRA’s custodian and new gold IRA’s custodian will connect and take care of everything for you. All you have to do is contact your existing IRA’s custodian and express your desire to move funds.
You can then connect them with your gold IRA’s custodian to initiate the process. You should know though, that the transfer can be taxable if either custodian doesn’t process the transfer within the IRS’ guidelines. Basically, they just have to ensure that the funds don’t pass through your hands as that can incur early withdrawal penalties and cause you to pay income tax.
Direct Contribution With Personal Funds
The other option is directly contributing to your account with your own funds. However, if you opt for that method then you’ll have to make sure that you don’t go over the IRS’ annual contribution limit for gold IRAs.
Understanding Storage Requirements
As an owner of a gold IRA you do have the choice of selecting where you’ll be storing your physical precious metal assets. It falls on the custodian of your retirement account to provide you with a list of IRS-approved, secure depositories that have a proven track record of safely storing precious metals.
All IRS approved depositories are specialized facilities that have no correlation between them and regular bank vaults. They're specifically designed to hold precious metals in an IRA.
Prohibition of Home Storage
Previously, investors also had the option of storing purchased precious metals in their homes.
However, the IRS has since prohibited home storage as they’re considerably less secure compared to a specialized storage facility. One that’s designed to keep anyone from accessing the metals until you reach retirement age.
These depositories also offer you the choice of either segregated or commingled storage.
Segregated Storage
Segregated storage is the preferred option as it allows your assets to be kept separate from the assets of other investors.
Commingled Storage
In commingled storage on the other hand, your precious metal assets will be stored with the assets of other gold IRA holders, which can possibly result in your assets being misplaced or lost. Thus, segregated storage may cost a bit more, but it's a lot safer as well.
Monitoring and Managing Your Gold IRA
One of the major responsibilities of your account’s custodian is to provide you with periodic updates and detailed reports on the assets in your account. This includes monitoring their performance and current value to evaluate if the asset is still worth keeping as part of your portfolio.
Another individual that can help you judge whether a precious metal asset is worth keeping is the representative of the gold IRA company you’ve hired. They can help you evaluate your current portfolio and help you rebalance your holdings in accordance with the current spot prices of various precious metal assets.
This is necessary because gold as an asset can be quite volatile when it comes to its price. Thus, it's important to keep chopping and changing the precious metals you’ve invested in to ensure that your portfolio stays strong.
The major goal is to ensure that you’re mitigating risks, while also ensuring that you reach your investment goal by the time your retirement rolls around.
Tax Considerations for a Gold IRA
An IRA by definition is supposed to help you achieve tax-deferred growth of your investments. A traditional gold IRA fits this model as well, as each contribution you make is tax-deductible Essentially meaning that the amount you contribute is deducted from your taxable income in the year of the contribution. This helps your precious metals assets achieve tax-deferred growth until you begin to take distributions.
After-tax Funding for Roth Gold IRA
A Roth gold IRA on the other hand, is funded with after-tax dollars. Meaning it doesn’t provide an immediate tax-deduction. However, in the long term this account can be quite beneficial, as it doesn’t tax you on withdrawals. Thus, allowing you to withdraw your contributions plus the additional earnings on top of those contributions, tax free.
Early Withdrawal Penalties
It's important to note that early withdrawals from either type of gold IRA are subject to heavy tax penalties. Specifically, any withdrawals made from a gold IRA before the recipient reaches the age of 59 ½ may incur a 10% early withdrawal penalty, in addition to income taxes.
This is applicable during the transfer of funds from an existing IRA to a gold IRA as well. There are some exceptions, but only for individuals who meet a certain criteria.
Conclusion
In conclusion, setting up a gold IRA may seem daunting initially, but with proper knowledge, it becomes a manageable process. Reputable gold IRA companies and custodians can guide you throughout this process. Just keep a vigilant eye on their activities, follow instructions accurately, and be aware of their fee structures to avoid potential scams.
Also make sure to stay informed about the tax implications and penalties associated with gold IRAs at each stage of the process. Ultimately, opening a gold IRA is crucial for diversifying your investment portfolio, mitigating risks, and aiming for greater returns upon reaching retirement age.