There can be no doubt that any smart investment plan should have a well-diversified portfolio of assets, and not be limited to just stocks and mutual funds. The reason to include alternative assets such as physical gold and silver bullion in a gold IRA is to reduce the risk of concentrating too much money into a particular asset type.
When you have multiple asset types that are not strongly correlated with each other, one asset may increase in value when another falls, thereby reducing your portfolio’s overall volatility. In addition, using an IRA for your investments provides you with important tax benefits that can increase the ultimate value of your nest egg.
In this article, we’ll describe how IRAs can be used for precious metal investing and the tax consequences of using an IRA. We’ll also explore the case for a substantial commitment to physical gold and silver.
Individual Retirement Accounts
There are two types of IRAs:
- A traditional IRA allows you to deduct from your taxable income the annual contributions you make to the account. That is, contributions use pre-tax dollars. Furthermore, the money in the account is tax-deferred until you distribute it, which you must begin doing by age 70 ½.
- A Roth IRA provides tax-free distributions, but contributions are not tax-deductible. You can grow a substantial nest egg in which you access earnings tax-free as soon as five years after establishing the account, as long as you’ve reached age 59 1/2. Moreover, you can withdraw contributions tax-free at any time and at any age without taxes or penalty. Unlike a traditional IRA, a Roth IRA does not have any required minimum distributions at age 70 ½ (or any other age).
Both types of accounts assess a 10 percent penalty if you withdraw money (except Roth contributions) before reaching age 59 ½. However, there are several exceptions that allow you to escape the penalty if you use the withdrawals for certain reasons. They are both subject to the same contribution limit in 2016 of $5,500 a year, or $6,500 if you’ve reached age 50. The deductibility of traditional IRA contributions might be limited if you or your spouse are also enrolled in an employer retirement plan, such as a 401(k).
Roth IRAs have certain limits on the amount you can contribute based on your income. If you file jointly, your Roth IRA contribution is curtailed when your modified adjusted gross income (MAGI) exceeds $184,000, and eliminated if your MAGI is $194,000 or higher. For single filers, the two numbers are $117,000 and $132,000, respectively.
All IRAs must be administered by a custodian or trustee, who is responsible for ensuring that you do not contribute too much money and do not break any of the rules concerning what you can own in the IRA. They also ensure you begin taking minimum required distributions from your traditional IRA and that the distribution rules for your IRA are followed when you pass away.
Gold and Silver in Your IRA
In general, you may not own two types of assets in your IRA:
- Life insurance policies
- Collectibles, including art, rugs, silverware, memorabilia and so forth
However, there is a special exception to the ban on collectibles. Certain types of precious metal – gold, silver, platinum and palladium – can be purchased in your IRA. The metals must be in IRS-approved forms, such as certain coins as well as slabs and bars that meet quality standards.
Bullion coins, as opposed to numismatic ones, are allowed in an IRA, and they must be minted from certain sources, such as the official mints of the United States, Canada and Australia, among others. Other coins are not permitted, such as the South African Kruggerand, because they do not meet the IRS standards for 99.9 percent purity.
You can also purchase precious metal slabs and bars if they meet the purity standards. You can’t contribute gold and other precious metals to an IRA, but you can roll it over to another IRA or qualified retirement account once you’ve purchased it in an IRA.
From a practical viewpoint, folks who want to collect gold in their retirement account open a self-directed IRA. This kind of IRA gives you the most latitude to own all sorts of investments beyond the plain vanilla ones. In the case of a Gold IRA, the custodian is usually a precious metals broker/dealer who is set up to buy, sell and hold your physical gold and other precious metals for you.
The rules generally do not permit you to physically store your own IRA metals yourself, but rather have it kept by your custodian in a depository or some other safe place. In the last few years, “at-home” IRAs have come about that allow you to keep physical custody of your IRA metals yourself, but the practice is controversial in that the IRS has yet to specifically approve it – speak to your lawyer before contemplating an at-home Gold IRA.
By the way, you can own any number and mix of IRAs – traditional and Roth, regular and self-directed – which means you can set up a self-directed IRA just for your precious metal investments, perhaps another one for real estate investments, while maintaining your conventional investments in a custodian-directed IRA. It’s completely up to you. The only proviso is that you can’t contribute more than the annual limit in total.
Why Gold in Your IRA?
Gold and the other precious metals are great investments for your IRA, for a number of reasons:
- Diversification: As we mentioned earlier, gold and other precious metals diversify your retirement holdings when purchased in your IRA. You don’t have to search very hard to find evidence for this. In the first quarter of 2016, gold prices shot up 16 percent while the stock market was flat. Generally, you can expect the stock prices and gold to move counter to each other — one will go up when the other goes down.
- Store of Value: Gold has been a store of value for thousands of years. This is especially important during times of economic and political distress, when paper assets such as currency and stock certificates can lose their value. After the stock market crash of 1929, Germans had to spend billions of deutschmarks to buy a loaf of bread, but it only took a little gold to pay for food and other necessities. Gold is a rare element that holds its value over the long run.
- Inflation Hedge: Nothing destroys the value of currency like inflation. As prices rise, currency loses its purchasing power. Historically, the price of gold as kept pace with inflation, meaning you can use it to maintain your wealth even as currency loses its value. Cash can be devalued, but gold can’t.
- Security: Most people no longer stash currency under their mattresses, but rather keep it in banks and invest it in brokerage accounts or mutual funds. Your “money” is actually an electronic entry in a digital account. All it takes is for a clever hacker or financial terrorist to put your accounts at risk. Gold is tangible – you can touch and hold it. It’s not going to suddenly disappear due to cybercrime or computer errors. Even if you can eventually recover the money in a hacked account, the process may be lengthy and very distressing. Gold provides the security to survive in the brave new world of vulnerable electronic money.
Your Gold IRA Investment Plan
The amount of gold, silver and other precious metals you include in your investment plan is up to you. However, many authorities recommend allocating 10 to 25 percent of your wealth in precious metals and other alternate investments.
We are have reviewed some of the more established, trusted gold and silver dealers that sell bullion suitable for a gold IRA retirement account. Find a company that specializes in Gold & Silver Precious Metal IRAs to investors who want the convenience and flexibility of a self-directed IRA, as well as the tax benefits these accounts provide. Opening an IRA is very easy and can be done in minutes.
After you’ve selected a dealer, fill out the online application, name your beneficiaries and fund the account with a contribution and/or rollover. A reputable gold IRA dealer can remove any uncertainty and walk you through the process.
We’ve reviewed 50+ gold IRA companies, and suggest companies that specialize in gold IRAs and offer the best prices for gold and silver. If you have a Gold IRA somewhere else and are unhappy with the prices you pay or the service you receive, we urge you to compare with some of the competition. If it makes sense on paper, you can arrange a tax-free and hassle-free transfer of your precious metal holdings to your new IRA right away.
Note: We highly encourage you to perform your due diligence. Get on the phone and interview two or three gold IRA custodians to see which will best fit your retirement gold and silver needs.
This can be especially useful if you hold funds or precious metals in an employer 401(k) plan and are about to retire or otherwise separate from your job. By comparing gold companies, you may avoid paying any taxes or penalties. Choose a custodian that guarantees your holdings are maintained in an insured, secure depository, and has a cost structure that is among the lowest in the industry.
Also, pick a gold IRA custodian that has earned high ratings on BBB, BCA, TrustLink and other sites. A good custodian will advise you on which types and forms of precious metals are suitable for IRA investment and which are problematic. Request a free gold kit from our top recommended gold dealer. Don’t delay, the rewards of investing in gold have never been more compelling.