How Is Gold Taxed in an IRA?
Are you thinking about adding gold and other precious metals to your investing strategy? You definitely aren’t alone. It’s undoubtedly a good idea to start buying gold, silver, platinum, or palladium investments through a precious metals IRA. It’s a great option to have at your disposal when you attempt to diversify your retirement portfolio.
For IRA investing, it shouldn’t surprise anyone that buying gold is a popular choice. It’s a stable investment, provides long-term growth opportunities, and it even ask as a hedge against inflation during uncertain economic times. Yet, it’s important to understand how is gold taxed in an IRA before deciding if this is the best investment to meet your financial needs.
As you explore the world of gold investments in your IRA, you’ll find that taxes depend on the type of IRA you hold and how you take distributions. For example, there are different tax implications for Roth IRAs and traditional IRAs, and it’s important to know the difference between them.
Traditional Gold IRA: A Brief Overview
Regarding traditional IRAs, you will make tax-deductible contributions, which means you’ll lower your yearly taxable income whenever you add funds to your traditional IRA. Even better, you’ll never need to pay taxes on the funds in your traditional IRA account until you begin withdrawing them until you reach a certain age, which happens to be 59 ½ years old.
Roth Gold IRA: A Brief Overview
On the other hand, Roth IRA investors will open their account and contribute to it with after-tax dollars. The beauty of this type of account is that you’ll never pay taxes on qualified distributions. You’ve already paid taxes on your contributions and the IRS doesn’t require you to pay taxes on this money twice. So, everything earned in a gold Roth IRA account is yours to keep without any tax consequences whatsoever.
Overall, it certainly doesn’t hurt to become familiar with the tax implications related to gold IRA investing. It’s important because this information is needed to make an informed decision, which will help you determine if investing in precious metals through an IRA is the best course of action to better manage your retirement portfolio.
Before getting into the nitty-gritty regarding how is gold taxed in an IRA, it’s important to get a better understanding of this investment vehicle first, which we’ll cover in greater detail below.
The Truth About Gold IRAs
A gold IRA, also known as an individual retirement account, gives the account holder a lot of freedom to perfectly tailor their retirement investments to meet their needs. In fact, this account is self-directed, which means account holders can add some much-needed diversity to their portfolios in the form of precious metals investments, which usually consists mostly of buying gold.
The gold IRA shares the same form and function as a traditional IRA, but there’s one major caveat. Instead of just purchasing paper assets like bonds and stocks, the account is eligible to hold physical precious metals including gold and silver bullion, coins, bars, and more. Platinum and palladium investments are also eligible within this account.
Why is this beneficial? Simply put, these physical assets can add a much-needed level of protection to your retirement portfolio and keep it safe from inflation and market volatility. It will help you better maintain the value of assets as you look to retire as securely as possible.
The first step in opening a gold IRA account is to find a gold company that offers this service. They’ll help you find a custodian specializing in self-directed gold IRAs and they will even help you choose eligible investments that meet the requirements laid out by the IRS.
Precious Metals Investments: Which Types Are IRA Eligible?
It’s possible to have a variety of different assets in a gold IRA account. In fact, the more proper name is a precious metals IRA, because you’re allowed to invest in gold, silver, platinum, and palladium.
Generally speaking, it isn’t possible to invest in all types of precious metals within this account because they need to meet certain purity requirements. Nevertheless, purchasing high-quality precious metals for your IRA account is not only easy, it’s a smart way to add more diversity and protection to your portfolio.
The main types of precious metals investments allowed in a self-directed IRA account include:
- Gold coins, bars, and rounds – the purity level requirement for this type of gold investment is 99.5% pure.
- Silver coins, bars, and rounds – the purity level requirement for this type of silver investment is 99.9% pure.
- Platinum coins, bars, and rounds – the purity level requirement for this type of platinum investment is 99.95% pure.
- Palladium coins, bars, and rounds – the purity level requirement for this type of palladium investment is 99.95% pure.
Please note: certain precious metals investments aren’t eligible for a gold IRA. They include jewelry, numismatic coins, coins that weren’t minted by a government, bars that weren’t produced by an accredited manufacturer or government mint, and storing your metals at home isn’t allowed either.
Besides the information mentioned above and the listed purity standards, it’s also necessary to store your precious metals in a qualified depository as an IRA account holder. What is a qualified depository? It’s a depository that meets certain insurance and security levels required by the IRS.
Right now, the best way to invest in precious metals for your IRA account is to purchase physical bars or coins. Nonetheless, another available option is to purchase gold stocks in gold ETFs, but this is the inferior way to invest in precious metals and it doesn’t provide protection against market volatility.
Taxes 101: The Basics for Gold IRAs
Do you know the gold IRA taxation basics? If not, here is a quick rundown of the most important aspects. They include:
Investments are capable of growing on a tax-deferred basis within a gold IRA. What does this mean? Ultimately, any gains or profits made within the account from precious metals aren’t subject to taxes until you make a withdrawal later on. To withdraw from this account without suffering fees or penalties, the account holder must be 59 ½ years old or older.
Accumulating tax-deferred growth is a wonderful thing. Investors will experience the benefits of compounding interest that takes place over time. Overall, this should lead to much bigger and better returns for the long run.
Taxation upon Withdrawal
Eventually, you’ll reach the point where it’s time to begin withdrawing funds from your precious metals IRA account. Guess what? At this stage, you’ll begin to pay taxes on these withdrawals. The taxes are considered income tax based on ordinary income.
Just like varying income tax brackets, your interest rate will vary depending on your personal circumstances. Always remember this: if you make a withdrawal from this account before reaching 59 ½ years old, you’ll pay a withdrawal penalty that equals 10% of the total withdrawal.
Specific factors that may have an impact on your taxes upon withdrawal include the following:
- Your state of residence
- Your income tax bracket
- Withdrawal type – lump sum or series of payments over time
IRA Rollovers and Conversions
Do you need to move funds from one retirement account to another? In this particular instance, the movement of money is known as an IRA rollover or IRA conversion. It’s possible that one or more of these actions may have tax implications.
For example, during a rollover the account holder will move their friends from one of their retirement accounts and put it in another, usually resulting in a 401(k) to gold IRA rollover. If done properly, there will not be any tax implications whatsoever during the rollover process.
Always keep this in mind: remember to complete the rollover in 60 days or face the consequences, because you just might find yourself un-compliant and in a pickle. At this stage, you’ll have to pay penalties and taxes if the rollover is completed incorrectly and the 60-day rule isn’t adhered to.
For an example of conversions, this is the same as moving funds from your traditional IRA account to a Roth IRA account. A conversion is different from rollovers because it’s considered a taxable event. During the completion of a conversion, you’ll have to pay the ordinary income tax rate on the amount of funds converted during the process.
Have you gained a better understanding of the basics of gold IRA taxation? This information is necessary to make fully informed decisions about the impact of your future finances through gold IRA investing.
Strategy Session: Strategies & Special Considerations
When it comes to retirement taxes, there are certain strategies and special considerations that you should make note of. They include:
Required Minimum Distributions
At 72 years of age, things begin to change with your precious metals IRA account. At this age, you must begin to take the Required Minimum Distribution or RMD for short. This amount is determined based on your account balance in your life expectancy. Since the value of a gold IRA is directly tied to precious metals, you’ll have a fluctuating RMD amount based on the price of gold and/or the other precious metals held within this account.
To figure out your RMD amount, take the following steps:
- Figure out the market value of your precious metals
- Use the IRS Uniform Lifetime Table to find out your distribution period.
- Take your account balance and calculate your RMD by dividing the distribution period to figure out how much to withdraw.
Helpful hint: all required minimum distributions are considered ordinary income and they are taxed that way. Remember to plan for these mandatory withdrawals and keep the associated tax implications in mind as well so they do not catch you off guard.
What is an in-kind distribution? This distribution gives you the opportunity to take possession of your gold coins, bars, or rounds – or any other physical possession in your IRA. You can do this in Lou of cashing out of the investment.
What’s the benefit to the account holder? Some gold IRA account holders find this option preferable because they want to keep their gold and would prefer not to cash out of their investments because they believe it will continue to accrue more and more value.
Steps to take an in-kind distribution include:
- Request an in-kind distribution with your IRA custodian
- After taking the precious metals from your IRA, remember to properly store and ensure your investment to keep it safe and protected.
Warning: even though you aren’t technically selling your precious metals, the in-kind distribution is still a taxable event according to the IRS. You’ll pay taxes on the withdrawal. They are based on the fair market value of the precious metals at the time.
Possible Tax Pitfalls to Keep in Mind
Now that you understand the gold IRA tax basics and special considerations, it’s best to understand possible tax pitfalls as well. They include:
According to the rules made clear by the IRS, the rules regarding prohibited transactions are as follows:
- Buying gold from a family member or yourself is not allowed.
- Personal use of the precious metals in your IRA account is not allowed. They are investments and must remain that way.
- It’s prohibited to sell items from a personal collection to your gold IRA.
Do your best to avoid making prohibited transactions at all costs. If you make this mistake – intentionally or unintentionally, you may put your tax-deferred status at risk. If accused of making prohibited transactions, you’ll wind up paying major penalties and fees.
Tax Reporting Requirements by the IRS
It shouldn’t surprise anyone to learn that the IRS has specific reporting requirements for gold IRAs. To remain compliant, please keep the following in mind:
- The custodian must report any and all precious metals purchases made within this account
- You must store your precious metals in an IRS-approved vault in a depository
- To report account activity including contributions of distributions, the account holder must fill out Form 5498 and Form 1099-R
At this stage, you undoubtedly have a better understanding of how is gold taxed in an IRA. We learned quite a bit today, so to recap:
- Traditional gold IRAs accrue tax-deferred growth
- Roth gold IRAs are funded with after-tax dollars, so the account holder isn’t required to pay taxes on any distributions
- To avoid penalties and additional fees, never make prohibited transactions and follow all of the IRS tax reporting requirements to the letter
- Give special consideration to the tax consequences of Required Minimum Distributions (RMDs) and In-Kind Distributions
- Gold IRA tax basics include the implications regarding tax-deferred growth, taxation upon withdrawal, and rollovers and conversions
Please remain compliant and follow all the rules and you’ll never have to worry about unwanted penalties or other potential negative consequences of opening a gold IRA account in the near future.