An Individual Retirement Account is a great way to save up for your retirement. However, it does have certain innate problems, such as the limitations imposed on which asset classes you’re allowed to invest in. Thankfully, there are ways to get around these limitations by opening different types of retirement accounts.
One of the major problems that people have with traditional IRAs is that they do not offer any instruments that can be used as hard protection against inflation and market crashes. A gold IRA account, on the other hand, can be used to hold precious metals in a safe and legal manner, and can thus be a great service for managing risk.
Investing in a gold based IRA may seem simple, but there are many nuances that you need to be aware of; for example, you can only invest in approved precious metals.
When investing in precious metals, you must take into account the storage options, the delivery times, and certain gold IRA rules among other things. As such, this gold IRA guide will inform you of all the basics of investing in gold and other precious metals with your individual retirement account. By the end, you will know how you can manage your portfolio risk in a more efficient manner.
What is a Gold IRA Account?
As opposed to a traditional IRA, a gold IRA account allows you to invest in various precious metals. Investors that want exposure to gold can still purchase gold mining stocks or mutual funds that invest in gold through a traditional IRA, but they cannot hold gold bars, coins, or other forms of physical gold.
A gold IRA has a lot of tax benefits that are similar to an IRA used to hold paper assets, and it is IRS approved. The only difference is that you can use your gold IRA to hold bullion coins, as well as any other precious metals, such as platinum, in order to better plan for your retirement.
How Does a Gold IRA Work?
When you open a gold IRA account, you usually need to hire specific gold investment companies that can help you with the purchase and storage of gold, as well as all the documentation and reports that you will need for taxation purposes.
There are various types of gold IRAs (which will be discussed later) that differ in terms of investment limits, types, and withdrawal penalties. As is the case with other IRAs, there is a limit on the amount you can contribute per year depending on various circumstances.
The major difference between a gold and a traditional IRA is that since your investment is in gold and silver (most people don’t invest in another precious metal apart from these two), the value of your IRA account is tied to the value of the underlying metals.
Other differences include the fact that a gold IRA must be self directed. A traditional IRA, on the other hand, can be both self directed and non-self directed. A self directed IRA allows you to choose a custodian and invest in a wider variety of assets. While most investors with a self directed IRA tend to invest in the real estate market, a gold backed IRA is a great idea for those that want to hedge their exposure to the currency against inflation.
Limitations of a Gold IRA
Gold backed IRAs allow you to invest in gold and silver bullion coins. However, IRAs do not allow you to hold collectibles. As such, only a few select coins can be invested in through your Individual Retirement.
There is also the question of storage. The Internal Revenue Service does not allow the IRA account owner to keep the precious metals in their own home/safe. If they do that, the IRS will consider it as a withdrawal and require taxes/penalties.
The precious metals must be kept at an IRS approved facility. Each gold IRA custodian will store the physical gold and silver at an IRS approved facility, usually a bank or depository.
You must also only invest in IRS approved precious metals. This not only applies to the precious metal but also its purity. The list of IRS approved precious metals is:
- Gold with a minimum purity of 99.5%
- Silver with a minimum purity of 99.9%
- Platinum with a minimum purity of 99.95%
- Palladium with a minimum purity of 99.95%
Remember that the purity requirement does not include select coins. For example, you can store American Eagle coins in your gold backed IRA, even though they are only 91.67% pure.
Should I Invest in Precious Metals?
Before we dive into the specifics of opening a precious metals IRA account, let’s take a look at whether you should invest in precious metals at all or keep your money in paper assets.
Almost always, you should invest a small percentage of your portfolio in gold or silver. These have not yielded the same returns as stocks and most other investments in the past, but they do extremely well in times of economic crisis.
That said, you will be losing out on potential returns over the long run if you invest too much, as metals tend to underperform stocks over the long term. Most experts recommend investing between 5-10% of your total portfolio in precious metals. That way, investors can enjoy the money they make during the bull runs, while still limiting their losses during market turmoil.
If you are unable to decide which metal you should purchase, gold/silver bullion coins or bars are always a safe bet. While platinum and palladium may seem interesting, their markets suffer from low liquidity, and it may be difficult to offload your investments when the time comes.
Lastly, if you want to avoid the hassle of finding a custodian, hiring a gold IRA company, and paying all the storage and service fees, you can also opt for precious metals mutual funds. While they will not provide you direct exposure to the underlying precious metal, they will compensate for it by offering diversification and simplicity.
How Do You Hold Gold in an IRA?
Now that we know what a gold IRA is, let’s take a look at what you need to do in order to open a gold IRA, and exactly how you will hold gold in it.
The first step is to take a look at your current IRA or 401 K and decide how much you want to invest in gold. After that, there are two different methods for investing in gold through an IRA, and we will look at both.
Rolling Over Funds to a Self Directed IRA
It is possible for you to roll over your funds from a traditional IRA or 401 K to a self directed IRA without losing any of the tax benefits. There are multiple ways to do this, such as asking your plan administrator, asking the financial institution that manages your employer’s retirement fund, or taking distributions from an already existing plan and depositing the amount into a precious metals IRA. Remember that you do not have to invest all of your distributions into the IRA, but you will be taxed accordingly.
Rolling over funds is not an extremely complicated task, and there are numerous IRA companies that should be able to help you with it if you want to avoid the hassle. Just remember that you are only allowed to roll over funds once in a twelve-month period.
Setting Up a Precious Metals IRA – Method 1
The first method has you doing everything by yourself. While this method will require a lot of effort from you, it will also help you save on fees. Investing in physical assets such as bullion coins already requires you to pay a lot of fees due to the associated storage costs, and some investors may consider it prudent to save money wherever they can.
Find an IRS Approved Custodian
Gold IRA Custodians are organizations that have been approved by the Internal Revenue Service. They make sure that all of the IRS rules are met and hold your investments on your behalf. A custodian will allow you to invest in alternative assets and make sure that you do not do anything that may land you in trouble later on.
Remember that custodians do not provide investment advice. Instead, they are responsible for reporting your assets to the IRS and making sure everything is done in a legal manner.
Decide Which Assets You Want to Purchase
As we said, precious metal IRAs can hold gold, silver, platinum, and palladium. You need to decide which specific products you want to purchase. Most investors usually opt for gold or silver bullion coins, with the American Eagle being a firm favorite due to its high liquidity.
However, gold bars are also a great choice and preferred by many investors. You can compare the pros and cons of gold bars relative to gold coins and decide which one (or both) is right for you.
If you are looking to invest in platinum or palladium, then you should purchase it in bar form. Since the liquidity of their markets is low, having the precious metal in bar form will make determining its price much easier.
Select a Dealer
Next, you need to select a precious metals dealer that offers you the metal at a reasonable price and has a stellar reputation. There are numerous industry trade groups such as the American Numismatic Association (ANA) that will help you determine the reputation of the dealer. You should ideally opt for a dealer that is a part of one of these groups.
Move Your Metals to the Depository
The final step is to select a depository. Many companies that provide custodianship of your account also have a depository where you can keep your precious metals. Even if they do not have a
depository of their own, they still have a recommended depository with whom they have an established relationship.
Once you have selected a depository, you can have your custodian make the payment to the dealer and have your metals shipped to the depository. The custodian will take care of all of the fees and let you know the total amount that was spent to acquire the metals.
Setting Up a Precious Metals IRA – Method 2
There is another method that you can use to purchase bullion for your retirement accounts. This involves you going through a gold investment company that specializes in procuring precious metals.
Before 2008, these companies weren’t very common as not a lot of people were looking to hold gold in their IRAs. However, the financial crisis resulted in a lot of awareness of government spending and inflation potential. As such, it is now possible for you to have a single entity handle everything for you.
The process is simple: You select a company that is both reputable and charges reasonable fees for their services. Many of these companies are now offering free incentives when you sign up with them due to pressure from their competitors. However, just remember that you shouldn’t choose a company based only on what they provide to you for free. Make sure that the company is reliable and provides a decent service. An easy way to do this is to read online reviews of other investors.
The company you choose will handle everything for you, including finding a custodian, a depository, and a dealer. For their services, they will charge an additional fee on top of everything else. While expensive, this is an extremely easy way for you to invest in gold and other metals through your IRA.
How to Withdraw Funds From Your Gold IRA
Once you have set up your account, you may need to withdraw these funds. There is no reason to go into detail about the penalty for early withdrawal, as that penalty is similar to the one that is applied on withdrawal of paper assets.
In general, there are two ways through which you can withdraw funds from gold IRAs. Let’s take a look at both of them.
If you want, you can sell your metals to the depository that is currently housing them. The depository will offer you a rate that is similar to the market, and you will receive cash in exchange for the precious metals.
In case of early withdrawal, the penalty will be applied to the total amount of funds you receive from the depository.
You can also take delivery of your metals. The depository will ship those metals to an address of your choice. You will have to pay the shipment fees, and the protection of the metals will be all down to you once the metals are in your possession.
In case of an early withdrawal, the penalty will apply to the value of the metals that you took delivery of.
Required Minimum Distributions (RMDs)
One more thing to be aware of is the RMD. Once you are 72 years old, you must withdraw a minimum amount every year from your IRA. Certain IRAs (e.g. Roth IRA) are exempt from this rule.
In the case of metals, meeting the required minimum distribution is difficult. This is because your assets will be in the form of bars or bullion coins. As such, it may be the case that you need to go slightly over your minimum distribution amount and sell more coins to meet your financial obligations.
Types of Gold IRAs
There are three different types of gold IRAs. They all offer their own benefits and drawbacks. Let’s take a look at all three of them to better position you choose one that fits your needs.
Gold Standard IRA
A standard gold IRA works very much like a traditional IRA, except for the fact that it is self directed and can hold precious metals.
You invest your pre-tax earnings, and the contribution limits are the same as a traditional IRA i.e. $6,000 for individuals under 50 and $7,000 for individuals over 50. Your contributions to this type of IRA are tax-deductible as well. However, you will need to pay taxes on your distributions during retirement.
Gold SEP IRA
A Simplified Employee Pension IRA is a type of IRA that can also be used to hold gold. It is similar to a standard IRA in the sense that your contributions are pre-tax. However, the major difference lies in the contribution limits.
You are allowed to contribute up to 25% of your earnings to a maximum of $58,000. However, you can only utilize the SEP IRA if you are a self-employed individual, or if your employer is making use of this plan.
Gold Roth IRA
A Roth Gold IRA is different in three key ways from your standard and SEP gold IRAs. The first is that you invest your after-tax income into a Roth IRA. This means that you will not be taxed when you take distributions from your account during retirement.
The second difference lies in the withdrawal rules. In certain cases, it is possible to withdraw funds from your Roth IRA without having to pay the penalty.
The last difference is the fact that there are no RMDs for a Roth IRA account. You can continue to add gold and other metals in your Roth IRA indefinitely, and the metals can be passed to a benefactor upon your death.
Precious Metals IRAs FAQ
Now that you’re familiar with the gold IRA basics, let’s take a look at a few common questions that you may have over holding gold in IRAs.
Are My Precious Metals Safe in a Depository?
Yes, there is no way for you to lose your metals as long as they are held in an IRS approved facility.
All depositories are bound by certain rules and have air-tight security systems to protect against theft. Some of the measures include 24-hours monitoring and automatic relocking systems. On top of this, all depositories are insured to the tune of $1 Billion, ensuring that even if your metals are stolen, you will be appropriately compensated.
Will I Receive the Same Metals That I Purchased Upon Withdrawal?
This depends. You can either opt for commingled storage or segregated storage when you select your depository.
In a commingled storage, similar items are held together in a communal space. For example, gold bullion will be held in one area, whereas silver will be held in another.
When you withdraw metals from a commingled storage, you will receive metals that are similar in purity and form to the ones you deposited. All depositories keep a comprehensive record of your initial purchase to make sure that the metals you receive are exactly the same in quantity, weight, and type.
If you have a segregated storage for your metals, they will be marked with your name and your IRA account number. If you take distribution of these metals, you will receive exactly the same products that you had purchased from your dealer.
Won’t A Precious Metals ETF Be Much Simpler?
While investing in a precious metals ETF is definitely very simple, it comes with its own drawbacks. The biggest problem with such an ETF is that you will need to not only pay for the storage fees of the metals (which will be automatically deducted from the fund), but you will also need to pay for expenses and a commission when purchasing or selling the ETF.
Thankfully, price wars between various ETFs have led to the expense ratios being at a historical low. Most precious metals ETF now charge expense ratios lower than 0.50%.
In the simplest terms, ETFs offer you a higher level of diversification without having to invest too much money. However, they only give you indirect exposure to the metal. On top of that, they may not have a mix of metals that suits your investment strategy. It is best to compare their pros and cons before deciding what to invest in.
Can I Only Have Precious Metals in My IRA?
It is possible for you to have other investments that are a part of a more traditional IRA. Precious metals IRAs can be used to invest in stocks, bonds, annuities, and ETFs among other things.
What is the Minimum Amount Needed to Set Up a Precious Metals IRA?
Usually, you need to have between $5,000-10,000 in order to open a precious metal IRA. The amount usually depends on your custodian.
Most custodians require a minimum of $10,000 if you are doing a rollover into a precious metals IRA. For those that are opening new IRA accounts, a deposit of $5,000 is usually enough.
A gold IRA is a great way to diversify your portfolio and can work as an insurance on the rest of your portfolio. Investors that are looking to maximize the long term performance of their investments should invest a small part of their portfolio in gold or other precious metals.
When opening a gold IRA, you can either do everything yourself or make use of various IRA companies that exist. While they will charge you a higher fee, they will also simplify the process. However, just make sure that you want to invest in physical gold in the first place, as a precious metals ETF may be the better choice for some people.