A gold IRA is a great way to add the security of precious metals to your retirement nest egg while enjoying certain tax benefits.
This guide is designed as your roadmap to understanding how a precious metals IRA works. We’ll explain how much and what type of gold to buy, how to find the best gold IRA companies, how to be sure you don’t get tripped up by IRS rules, and more.
How to Get Started with a Gold IRA
When economic growth slows, nearly all investments lose value. In the case of a stock market crash, you can be at risk of losing 50% of your life savings.
To protect your retirement savings during a recession or financial crisis, you want to own some assets that tend to move opposite of most others.
Gold is a good example of an uncorrelated asset. Its inverse relationship with stocks makes it one of the best financial safe havens known to man.
But reducing risk isn’t the only reason to own gold. Even if a recession doesn’t destroy the value of your paper assets, the purchasing power of your nest egg can still be eaten up by inflation.
Think about this: something that cost $10,000 in 1977 would cost $40,974.96 in 2017. What will it cost in 2047?
When you want your savings to last through retirement—but expenses like health insurance and medical care keep increasing—how far your money goes in thirty years can become a life or death question.
It is essential to consider inflation in your retirement planning and having a gold backed IRA is a great start.
A gold IRA is simply an IRA that allows you to invest in physical precious metals.
Conventional IRAs don't allow this; you can only invest in traditional options like stocks, bonds, ETFs, and mutual funds.
When you don’t want your savings tied entirely to paper assets, a self-directed IRA gives you tangible choices like oil, gas, real estate, and precious metals.
There are more IRS rules for self-directed precious metals IRAs, but the peace of mind that comes with owning gold is worth a little extra attention to detail.
The appeal of a gold IRA is that it is a tax-advantaged retirement savings account. When you benefit from those tax advantages depends on the type of IRA you invest through.
A traditional IRA lets you make tax-deductible contributions now (as long as you are younger than 70½). Your money then grows tax-free until you reach retirement age. When you start making withdrawals, also referred to as distributions, you’ll likely be in a lower tax bracket and pay less tax on your savings.
A Roth IRA has no age limit, but single filers must earn less than $117,000 (joint filers may earn up to $184,000). You don’t get a deduction when you put money into the account, but you won’t owe any tax at all when you reach retirement age and begin distributions.
Tax-free contributions –> your money grows tax-free –> you pay tax on withdrawals after retirement.
Contributions are taxed –> money grows tax-free –> you can withdraw money tax-free after retirement.
When opening a gold backed IRA, you don’t have to start your savings from scratch. Investors can move funds from an existing IRA or private retirement plan, such as a 401k or 403b, into the gold IRA.
People often use the term “rollover” to refer to both a gold IRA rollover and a transfer, but the IRS distinguishes between the two, and there are important differences between them.
Direct IRA-IRA Transfer:
- The custodian of your existing retirement account transfers your savings directly to the new custodian.
- No 60-day rule and no tax consequences since cash is not sent to you.
- Simplest way to move funds into a new precious metals IRA.
Indirect IRA to IRA Transfer:
- Your existing IRA is liquidated and the money is sent to you.
- You use the cash to fund your new gold IRA.
- In this case, you have 60 days to make the deposit or you pay tax on the withdrawal plus a 10% early withdrawal penalty.
In-Kind Gold IRA-IRA transfer:
- Gold IRAs can be transferred to new custodians and storage facilities without having to liquidate the holdings.
- Metal can be shipped directly from an existing custodian to the new custodian without triggering a taxable event.
- Fed up with poor customer service, inability to easily buy and sell gold, or take delivery of the metal?… consider a new custodian and metal dealer for your gold IRA.
You can also do a rollover when moving funds from an employer-sponsored retirement plan, such as a 401(k), to your self-directed precious metals IRA.
401K to IRA Rollover:
- You contact the administrator of the retirement plan and request paperwork to rollover to the new self-directed, traditional IRA.
- After the investments are liquidated, funds are transferred directly to the new custodian
- No money is withheld during the transfer.
- The transfer process typically takes about two weeks from when the new IRA is opened until funds are moved into the account, and you’re ready to make an investment in precious metals.
It’s never wise to put all your money into one asset class or investment, but you do have to put a meaningful amount of gold in your precious metals IRA to truly reap its benefits.
Experts suggest that 5% to 15% of an investment portfolio should be in gold. This will vary based on your age, risk tolerance, and portfolio expectation.
When deciding how much gold to buy, it pays to consider how many investments you perceive to be long-term stores of value. Some of the companies you can own now probably won’t be around in twenty years—let alone forty—but gold has been valuable for thousands of years and will likely continue to be so.
How much gold to hold in your precious metals IRA is a personal decision, but the amount can make all the difference if there’s another recession, terrorist attack, or bank collapse.
Exchange Traded Funds (ETFs) are a proxy for gold that trade on an exchange just like shares of stock. However, most funds are backed in the form of large 400 oz. gold bars, so at the end of the day, you don’t actually own gold since taking delivery is not an option.
ETFs are a convenient and cost-effective option for investors who want to trade actively and capture quick price movements (i.e. not individuals saving for retirement). The bad is that they’re more volatile investments than physical bullion and expose you to counterparty risks.
What do we mean by counterparty risks?
It’s up to another party—known to you or not—to make good on the investment. With a gold ETF, you are dependent upon, among other things:
- management prowess
- fund structure
- chain of custody
- operational integrity
- regulatory oversight
- delivery protocols (which are available only to very large shareholders)
If any of those break down, your investment is at risk. All it would take is another bank failure, and ETF shareholders could see their investments go up in smoke.
When you purchase a gold ETF, your investment may increase or decrease at roughly the same rate as gold bullion, but at the end of the day, you won’t get the same protection and peace of mind from your owning fully allocated gold bullion through a self-directed IRA.
The IRS doesn’t give any free lunches. When they give a tax benefit, they have to make sure people follow the rules.
Because of these regulations, it takes four different parties to complete the buying process for a precious metals IRA:
- the investor
- the IRA custodian
- the gold dealer
- the storage facility
Here’s how it works:
- You find a custodian and transfer your funds to them. Your gold IRA’s custodian can be a bank, a brokerage firm, a trust company, or a private company approved by the IRS.
- You choose a precious metals dealer and place your order.
- The dealer contacts your custodian to verify funds.
- The custodian contacts you to confirm your order.
- Your dealer places the order on your behalf.
- Dealer notifies the custodian.
- You choose the storage facility you will use to hold your gold and your dealer ships your order to the facility.
- The facility verifies receipt of your metal.
- Once your gold is safely in storage, your custodian releases funds to your dealer.
- Your custodian credits your precious metals IRA account.
- The custodian ensures you invest only in assets the IRS allows and files reports with the IRS each year. They also check what you report on your own tax filings and make sure you are paying the right amounts.
As you can see, this process requires a lot of paperwork and coordination among participants, and it takes up to 4–6 weeks to complete. And anytime you want to make a transaction, you have to do it all over again. Should the market move quickly or you need to liquidate some holdings, you may end up having to scramble to find a dealer to work with, at less than competitive prices.
Luckily, there’s a better way.
If you want to save yourself the paperwork, time, and hassle of coordinating each part of the process (and who wouldn’t?), it’s worth it to find a fully integrated precious metals IRA program.
The best gold IRA companies offer one streamlined service that includes:
- An online custodial account so you don’t have to source a custodian yourself.
- Access to a robust dealer network to buy and, perhaps more importantly, be able to sell bullion 24 hours per day.
- An ultra-secure purchasing and management platform.
- A buy-and-store program with domestic and international storage options.
- The ability to make an online request and take a physical distribution of metal any time, without added fees, in a few days.
With everything under one roof, you can easily add physical precious metals to your gold IRA and manage the entire process online, anytime.
Look for a company that offers these additional benefits:
✔ Access to more dealers
An online purchasing platform with a large dealer network will ensure you get the best prices when buying metal for your gold IRA.
✔ Ease of use
A secure online account lets you buy (or sell) quickly, 24 hours a day.
✔ IRS compliance
A platform that displays only products approved for a precious metals IRA eliminates the chance of being penalized for buying the wrong asset.
✔ Control over your metals allocations
A wide selection of approved bullion products lets you diversify your holdings for even more protection.
✔ Domestic and international storage options
Non-bank storage locations, both at home and abroad, give you greater freedom in storing your metal.
With the tax benefits of a precious metals IRA comes a bunch of rules. And violations can result in stiff penalties.
To make the best investment with your retirement dollars, it’s important to know the basic dos and don’ts of gold IRAs.
An IRA’s tax advantages sound great to you, but the government is deferring income it would normally be earning on your dollars. Because of this, the IRS limits how much money you can contribute in a year.
Individuals are allowed contributions of up to $5,500 (if you are 50 or older, it’s $6,500).
Despite a few false claims, mostly through purveyors of IRA LLCs, precious metals IRA holders are not allowed to store their gold at home (if you take delivery, it is considered a distribution and subject to tax). The IRS stipulates that you must store it in an IRS-approved vault.
This third-party facility will charge an annual storage and insurance fee (these fees can be paid for outside of IRA contributions).
Selling vs. Withdrawing
The whole point of a gold IRA is to set yourself up for retirement.
To discourage people from tapping into their nest egg early, there’s a 10% penalty on savings withdrawn before age 59½. (There are some exceptions, like using funds to cover medical expenses.)
But taking your gold out of the IRA and selling it are two different things. You can buy and sell your precious metals as often as you like while it is still inside the IRA without tax consequences.
If you sell your gold at a profit, you won’t owe any tax on the gain until you retire and begin withdrawals (or possibly never if you have a Roth IRA).If you withdraw cash and bullion from the account before retirement, it will be taxed as ordinary income and possibly be subject to an early withdrawal penalty.
Age Limits & Required Mandatory Distribution
You’re never too old to contribute to a Roth IRA as long as you’re still earning income. For a Traditional IRA, once you hit 70 ½, you can no longer make contributions.
The penalties for withdrawals from your gold IRA go away starting at age 59½, but you don’t have to take a required mandatory distribution (RMD) each year until age 70½.
Failure to use your savings after that will result in penalties.
Once you’ve found a company offering a precious metals IRA that meets your needs, you’re ready to fund the IRA and start investing.
But buyer beware! If you don’t know the right kind of gold or other metals to buy, and your dealer doesn’t distinguish between IRS-approved and non-approved products, you run the risk of disqualifying the IRA.
The IRS requires that IRA funds can only be invested in highly refined bullion (not collectible coins). The minimum purity requirements are .995 for gold and .999 for silver.
For a handy reference, here are the precious metals approved for IRAs:
American Platinum Eagle
Canadian Platinum Maple Leaf
Palladium bars and rounds from approved mints that meet the purity standards
Isle of Man Noble
Australian Silver Kookaburra
Australian Platinum Koala
Chinese Gold Panda
Chinese Silver Panda
Platinum bars and rounds from approved mints that meet the purity standards
American Gold Buffalo uncirculated coins (proofs not allowed)
Gold bars and rounds from approved mints that meet the purity standards
Silver bars and rounds from approved mints that meet the purity standards
As you can see, gold isn’t the only precious metal that can secure your retirement savings. In fact, owning other types of metal will only protect your assets further.
In certain situations, increasing exposure to one metal or another can offer greater returns.
Silver has unique attributes that help it perform well even when gold is in a slump. Its industrial uses are growing at a staggering rate and show no signs of slowing.
As demand grows and supply is squeezed, investors holding a meaningful amount of silver stand to make substantial profits.
Platinum is more expensive than silver, but can also help diversify your precious metals portfolio. Its price movements can be quite different from gold or silver because it has different industrial uses and supply/demand dynamics.
Your largest allocation in a precious metals IRA should be in gold, but holding more than one type of metal will limit your risk and reduce volatility specific to one market. Consider adding silver and eventually platinum or even palladium to your stash.
It’s hard to have peace of mind about retirement if your savings are tied up entirely in traditional paper investments.
A gold IRA makes it easy to diversify your nest egg with the security of physical precious metals, while still reaping the tax benefits associated with IRAs.
Given the uncertainty investors face in today's global economy, it has never been more important to diversify and add security to your retirement plans.
With the information included in this guide, you’re well on your way to securing your retirement with a gold IRA.