Have you ever wanted to put gold into your IRA but weren't sure about the tax rules? Many people are in the same boat, but they're determined to add gold, silver, platinum, or palladium to their IRAs to diversify their retirement savings.
The good news is that it's easy to set up an IRA that can hold precious metals. Commonly called "gold" IRAs, these investment accounts can hold highly pure forms of all the precious metals, not just gold.
But, because all gold IRAs are considered "self-directed" under IRS guidelines, it's essential to follow a specific set of rules when setting one up.
The first order of business is choosing between a Roth and a traditional IRA, selecting the metals you want to place into the account, and, finally, learning how your heirs can take possession of a gold IRA you bequeath to them.
Step one is a quick review of the general rules for self-directed Roth and traditional IRAs.
How is a Gold IRA Taxed?
If you remember nothing else about gold IRA tax rules, remember this: they're generally treated exactly like self-directed Roth and traditional IRAs once they're set up and funded. The slightly tricky aspects involve the creation and funding of the gold IRA.
Plus, there are a few minor differences in how you pass on precious metals IRAs to your heirs.
In essence, you should look at four factors about gold IRAs if you decide you want to take advantage of a retirement arrangement that lets you hold precious metals for long-term appreciation, diversification, and protection against the whims of the economy.
Here are the main areas in which gold IRAs differ from non-gold accounts:
Whether you already have an IRA of any kind, or have none at all, you will need to set up your gold IRA through a registered custodian. In the vast majority of cases, your best bet is a reputable precious metals dealer.
Dealers have an advantage over banks and other custodians because they can get the best prices on metals, sell them directly to you, and provide secure storage in an approved facility. There are many such depositories in the U.S., Canada, and even overseas.
You'll have to choose one that your preferred metals dealer uses in order to get the best deal on annual storage fees. But, by law, you can select any IRS-approved depository you wish.
The better dealers have agents who can walk you through the account setup process, do the simple paperwork for you, and sell you the metals to make an initial deposit into the account.
This process applies whether you are simply converting an IRA you already have into a self-directed gold IRA or are creating an IRA from scratch and making an initial deposit.
What you can deposit
For starters, it's essential to understand that you can't deposit metals you already own into a gold IRA. Unfortunately, that's the law. However, if you currently own precious metals, you can sell them for cash and then purchase metals from the dealer for your first account deposit into a gold IRA.
The other part of this rule category pertains to the kinds of precious metals you can deposit. The IRS has specific, detailed regulations about purity. In other words, you can just select gold coins, collectible coins, or any kind of gold bullion. For the most part, everything must be at least 99.9 percent pure.
Additionally, even when you abide by purity guidelines, there are certain kinds of gold, silver, platinum, and palladium you can't place into the account. For example, you can never put rare coins in, or coins that are considered "numismatic" collectibles.
However, U.S., Canadian, Australian, Austrian, and Chinese official government-struck, 99.9 percent or higher purity, bullion coins and bars are almost always allowed. Why the "almost"? Because there is a long list of what is and is not allowed, and there are always a few exceptions to the rules.
For instance, you can't place gold Krugerrand coins into a gold IRA even though they are extremely popular with gold enthusiasts.
For silver, it's pretty much the same situation, but you get to add Mexican silver Libertad bullion coins to the list of accepted items. If your preference is platinum, you can choose from U.S., Canadian, Australian, and Isle of Man bullion. Finally, for palladium, only Canadian bullion is allowed.
One major exception to all of the above: COMEX/NYMEX bullion bars and rounds that meet minimum fineness criteria are okay for any precious metals IRA. The best way to know your options about placing into a gold IRA is to speak with your custodian.
Regardless of the legal options, you will only be able to purchase items that your custodian (the precious metals dealer who handles your account) sells or is willing to buy on your behalf.
How the assets are stored
One of the most commonly misunderstood facts about gold IRAs is related to storage. Many investors want to keep their metals in a safe deposit box at their bank, or even in a home security safe. Neither method is legal. The IRA rule is that the account holder cannot also be the custodian of the IRA.
At one time, it was possible to store your own IRA metals via a loophole in the law. But, that was years ago, and the loophole has been eliminated. All of this means that you absolutely must use a custodian to oversee your gold buying, selling, and storage.
Note that the custodian does not store the metals, but only sells them to you, repurchases them on occasion, assists you with the legal paperwork of account setup, and delivers the physical assets to the storage location you select. Both the custodian and the storage facility must be IRA-approved.
The law was written to protect consumers from unscrupulous custodians and storage vaults with less than adequate security. That's why, if you are careful to follow the rules, your gold IRA is safe and serves as a fully legal way to maintain a retirement account for many years.
Because gold IRAs hold physical assets, bequeathing one upon your death comes with a few special rules. For instance, when you leave a traditional, non-self-directed IRA in your will, the beneficiary generally has five years over which to take the total distribution. They can choose to take it in cash or metal, but will have to pay income tax on the amount in any case.
It's a fact of the tax law universe that rules about inheriting ordinary, non-gold IRAs can be awfully complex. That's why anyone who inherits an IRA, whether traditional or self-directed gold accounts, should speak with a financial professional to figure out the most advantageous way to gain access to the funds and pay the lowest amount of tax.
Taking Possession of metals
What if you decide to remove some or all of the precious metals in your gold IRA? Legally, you can do so at any time by informing the custodian and filling out the short paperwork for transfer of the physical gold or other metals to your home.
In fact, in most cases, you can even travel to the storage location, show ID, and take possession of the metallic assets. What are the tax consequences? In most every case, you'll automatically be considered to have "withdrawn" assets from an IRA and will be subject to penalties if it's an early withdrawal, and will also have to pay income tax on the distribution if your self-directed IRA is not a Roth account.
Again, the question of removing metals from a gold IRA is a complex legal situation and depends on dozens of factors. That's why consulting a lawyer, CPA, or licensed financial advisor is the wise thing to do if you wish to remove assets from a gold IRA (or from any type of IRA, for that matter)
Mastering Key Concepts
Understanding all the details about gold IRAs and tax rules is next to impossible for people who don't deal with the subject as part of their everyday career. The good news is that just about anyone can stay on top of the subject by remembering a few key facts.
Here's a "gold IRA tax" cheat sheet you can store on your phone or a notecard for quick reference.
1. Roth vs Traditional: Decide whether you want a Roth or traditional IRA. You pay tax on Roth contributions *before* depositing them into the account. You pay no tax on traditional IRA contributions before deposit.
Upon withdrawal, you'll pay zero tax on Roth proceeds, but will pay regular income tax (not capital gains tax) on traditional IRA proceeds.
2. Setup: You must open a new IRA or convert your current one into a self-directed account before putting precious metals into it.
3. Funding and storage: Your custodian, typically a precious metals dealer, will sell the metals to you, place them into the account for you, and store the assets in an approved depository.
4. Withdrawal: All the same withdrawal rules apply to self-directed gold IRAs as to other kinds of IRAs, based on whether they are Roth or traditional accounts.
5. Inheriting a gold IRA: In general, your heirs will pay income tax on inherited gold IRA assets they withdraw, and they usually have five years or more to take all the money out. They'll pay no tax of any kind on a gold IRA that is a Roth account.
How To Choose a Reputable Custodian?
If you have decided that a gold ira is something you're interested in, the next step is to find an experienced, reputable gold IRA company who could help you through the process.
There are hundreds of companies out there, and not all of them are highly reviewed or come recommended. The three companies below are the best of the best according the real customer reviews on BBB, Trust Pilot, and Consumer Affairs.
Goldco, the #1 overall option, has over 1000 customer reviews across these review sites. It's easy to make a dozen customers happy, but when you've done it over 1000 times within the last few years, then you're definitely standing out above the competition.
You can request a free gold investing kit from the company you like below.