Alternative investments are always a popular way to diversify a portfolio. Options like precious metals, real estate and even cryptocurrency are popular diversification methods, but in a traditional IRA, you’re typically limited to only a few types of investment classes.
If you’re looking for a way to invest in gold but want to reap the tax benefits of an IRA, a gold IRA allows you to add the world’s most popular precious metal to your retirement plan and still pay as little in taxes as possible.
But what is a gold IRA? And where can you open one? Read on to learn more about the gold IRA meaning and adding the power of gold to your retirement investment portfolio.
What is a Gold IRA?
What is a gold IRA account?
Gold IRAs are a type of self-directed individual retirement account (IRA) with different rules, regulations, fees and investment opportunities. Instead of investing in stocks trending in the media through a series of mutual or index funds, you can diversify your portfolio through a self-directed IRA.
These accounts allow for the purchase of physical gold, not just an investment in companies that deal in gold, provided the gold is up to standards set by the IRS. You’ll make purchases through your brokerage account, which your broker will purchase and store on your behalf. Like any IRA, you may only invest a maximum of $6,500 annually in a gold IRA.
A self-directed IRA in gold requires the use of an IRS-approved custodian. In a typical IRA, the custodian is the brokerage that offers the service. However, the role of the custodian becomes much more important when you consider the physical components of a gold IRA.
How does a gold IRA work? In a gold IRA, the custodian is responsible for handling the physical storage of the gold in your portfolio and managing the IRS requirements for paperwork. They also help you comply with the additional needs for these complex accounts, including the multiple security steps that the IRS requires these companies to implement before taking on investor funds.
Your account fees cover these custodial duties, so be sure to know and consider annual expenses when considering a gold IRA. While a gold IRA can be part of a successful portfolio, it should only be one part of your overall retirement planning. MarketBeat’s retirement calculator is a helpful tool for putting together the full retirement savings picture.
There are multiple types of IRAs, and the best IRA for your needs will vary depending on your current income, your investing goals and the amount of time you have left until retirement.
Traditional Gold IRAs
In a traditional IRA, whether you’re dealing with gold or not, the money deposited into your IRA account is paid pre-tax. Remember that in a gold IRA, physical gold is purchased and held through custodians using the funds deposited into your account set aside to make gold purchases. You can deduct the value of your contributions in cash when you file your federal tax return.
A traditional gold IRA is better if you think you will be in the same tax bracket you’re in now, or maybe even a lower one when you begin to withdraw the funds. When you eventually withdraw the funds, you’ll pay your tax rate effective at the time of the withdrawals, as this money will be classified as income by the IRS.
Roth Gold IRAs
Opposite to a traditional IRA, you fund Roth IRAs with after-tax income. These investments can be better options if you believe you will be in a higher tax bracket upon withdrawal since they are already taxed. This may make them a more substantial choice for younger investors early in their careers.
Unlike traditional IRAs, where you will see short-term tax benefits, Roth IRAs don’t change your current tax situation because you cannot deduct contributions. For more information on Roth IRA investment amounts and which type best suits your needs, check out this helpful calculator for Roth IRAs from MarketBeat.
SEP Gold IRAs
In the context of retirement accounts, SEP stands for “simplified employee pension.” These accounts are funded through deposits from an employer into an employee’s retirement account.
The contribution limit is the major difference between a SEP IRA and a traditional or Roth IRA. With a SEP IRA, you can contribute up to 25% of your salary, not to exceed $66,000.
Because of this significant difference in the money you can set aside, there is more purchasing power if you choose a gold IRA. If you see much potential in gold and want to contribute more annually, a SEP IRA could be the best choice for your gold investments.
How to Set Up a Gold IRA
As you know, a legitimate custodian must oversee a gold IRA. The first step in setting up a gold IRA is to do your research and select a custodian that is not only IRS-approved but one that you feel comfortable with and will best match your investment needs. Custodians offer different service levels and fees, so it matters which one you select. We’ll explore a few trustworthy options you can use to begin your search below.
Once you are comfortable with a custodian and have started an account with them, the next step is to fund the account. If you are starting an IRA, you will be bound to the annual contribution limits. If you already have an IRA, you can roll over those assets to your gold IRA with the help of your selected custodian.
When you fund your account, you can choose where to purchase gold or other precious metals, making up your retirement investments. Your custodian is responsible for the paperwork documenting these transactions and insuring and storing your gold. Note any additional fees to hold your gold in your account. Most gold IRA providers now provide all account holders with online user portals that allow them to track the changing value of their investments.
Best Gold IRA Companies
Choosing the right custodian and gold purchasing partner for your needs can make a big difference in the overall effectiveness of your gold IRA and how much you pay in fees.
Choosing an IRS-approved custodian is necessary, and picking one that matches your investment goals is essential.
Below are a few reputable companies that might kick-start your search.
American Hartford Gold is a gold IRA provider based in Los Angeles, offering a straightforward and well-reviewed gold IRA. Hartford Gold’s team can help set up your account and assist with paperwork, and in as little as three days, you can roll over your funds from an existing account and begin purchasing gold through Hartford.
With well-established custodial and storage partners like Equity Trust and Brinks, Hartford offers the security of a reputable and well-reviewed partner. You can invest confidently with Hartford with an A+ rating from the BBB and a 4.95/5-star BBB rating.
Another Los Angeles-based gold, silver and precious metal custodian, American Bullion has been in business since 2009. It offers storage and insurance with the Delaware Depository and has generally positive reviews for its service.
American Bullion offers an experienced team who can walk you through the gold IRA process, from initial funding to eventual disbursements. Its team provides consultation and guidance for people looking to invest in an IRA for the first time. It might be an excellent place to gather information about retirement planning and investing in gold if you’re a new investor.
Goldco is another reputable gold custodian, offering some unique perks for its customers. With excellent scores on review sites and a long history of selling precious metals, you can consider Goldco when purchasing gold for your IRA.
Its highest buyback price guarantee is a significant advantage of purchasing gold through Goldco. If market conditions change and the price of gold falls, Goldco guarantees it will buy back the gold from you at its highest value, a service that gives customers peace of mind. It can be a valuable consideration if you’re close to retirement during volatile markets.
Contribution Limits and Withdrawal Rules for Gold IRAs
The contribution limits for any IRAs, gold or otherwise, are the same for Roth and traditional options in 2023. Those 50 and under may contribute a maximum of $6,500 per year, while those over the age of 50 may contribute $7,500.
Regarding withdrawals, if you take money out before age 59, you are subject to taxation and a penalty in a traditional IRA and Roth IRA. The current penalty for early withdrawals is 10% of the value of the amount you’re withdrawing.
Between the ages of 59 and 73, you can withdraw without penalty, but traditional IRA withdrawal will be taxed at that point. After age 73, there is no stipulation on Roth IRA withdrawal, but traditional IRA holders must begin making annual withdrawals equal to or greater than their required minimum distribution. This ensures that the money in the account is taxed at some point (instead of being left in an inheritance or will, which are usually non-taxable).
Pros and Cons of Gold IRAs
Gold is classified as an alternative asset so you’ll need to consider the higher level of risk you may take on by investing. The following are the major pros and cons of gold IRAs.
Check out the benefits of investing in a gold IRA:
- Hedge against inflation: Gold is considered by many investing experts to act as a hedge against inflation because it tends to maintain its value even when the value of paper currency decreases. This may make a gold IRA a more stable investment in volatile markets.
- Diversification: A gold IRA can help diversify your retirement portfolio beyond traditional assets like stocks and bonds, which may reduce overall risk.
The downsides include:
- Fees: Fees associated with storage and gold purchase are usually higher than a traditional or Roth IRA, making gold IRAs more expensive.
- Takes a while to sell: It may take time to sell your gold holdings and convert them into cash when needed, as physical gold is significantly less liquid than stocks or funds.
- Volatility: Like any investment, gold prices can be volatile and subject to fluctuations. Investing your retirement funds entirely in a gold IRA can mean severe losses if the market turns negative.
Summing Up Gold IRAs
For people who want to diversify their retirement portfolio, taking advantage of an IRA’s tax benefits and being able to invest in gold is a win-win.
Rather than riding the highs and lows of stock trading and making frequent transactions based on resources like this media sentiment stocks list, gold allows for a steady and long-term hold investment. Its track record for retaining value goes back thousands of years. However, it should not be your only retirement investment, as physical assets do not show the same long-term stability as an index fund or mutual fund.
When setting up a gold IRA, it’s essential to do your research on your custodian and gold providers to ensure you maximize profits and keep your investment safe. Check out the trending stocks list from MarketBeat for more traditional options to diversify your portfolio.
Take a look at some commonly asked questions about gold IRAs.
Is a gold IRA a good investment idea?
A gold IRA can be a good investment if you already have a diverse portfolio of traditional assets. Gold is classified as an alternative asset and is not as closely regulated as the stock and bond market. If you decide to open a gold IRA, do so as a complement to a fully diversified portfolio.
What is the minimum investment for an IRA gold account?
The minimum investment amount for a gold IRA will vary by provider. However, most providers allow you to roll an existing IRA’s funds over into a gold account penalty-free, which can help you meet any minimums.
Do you need a gold IRA to invest in gold?
No, you do not need a gold IRA to invest in gold. There are other ways to invest in gold, such as buying physical gold bullion or coins or investing in gold exchange-traded funds (ETFs). However, you must invest through an IRA to gain tax benefits from your gold investment.