One of the Most Common Questions We’re Asked is ‘How Does a Gold IRA Work?’
Bullion.Directory – 11 March, 2021
By Alison Macdonald
Commercial Editor at Bullion.Directory
What exactly is it that makes an IRA a better place to hold gold than a regular diversified portfolio? Why bother with the extra paperwork?
As we all know gold is one of the most precious metals on the planet. Ignoring those highly specialist rare-earth elements and the “other” metals in the platinum group – gold stands out on top.
This shiny element has been a staple signifier of wealth for thousands of years. It has retained its importance into the modern era, and isn’t likely to lose its value any time soon.
Gold is considered a great investment for its unique qualities as an asset. This being that it is highly liquid, but is also incredibly scarce. Many investors who wish to safeguard their wealth consider gold to be an important component of their investment portfolio.
If you are interested in setting up a secure and comfortable retirement for yourself, investing in a Gold IRA could be the right move for you.
Let’s examine what a Gold IRA is and the different ways you can get started with one.
What Is a Gold IRA?
So what is a Gold IRA? Simply put, a Gold IRA is an individual retirement account that holds physical gold bullion and/or other precious metals as investments.
These other metals include silver, platinum, and palladium (see which types of each can be added). All of the precious metals in a Gold IRA hold an appeal for their highly liquid nature and scarcity. However, gold itself is by far the most popular choices for a precious metals IRA.
If you wish to purchase and hold onto a certain quantity of gold in your IRA, you should know that you cannot keep it in your regular account. Instead, you will need to place it in a special Gold IRA.
How Does a Gold IRA Work?
A Gold IRA works in a similar fashion to an ordinary individual retirement account.
You set up an account with a financial institution and hold investments in it when saving for retirement. As with any IRA this approach allows you to benefit from tax-free growth or enjoy tax-deferred status on your investments.
Most individual retirement accounts focus on holding paper assets such as stocks or bonds, while a Gold IRA lets you hold physical bullion. This could be coins or bars of gold, silver, platinum, or palladium.
All Gold IRAs are classified as a “self-directed” type of IRA. Such IRAs are provided by various financial institutions across the country that allow you to use “alternative” investments for your retirement savings.
Some other common “alternative” investments include private company stock, real estate, private mortgage, oil and gas partnerships, intellectual property, and livestock. However, a Gold IRA offers many advantages over these other investments.
GET YOUR FREE GOLD IRA GUIDEBOOK HERE
When Did Gold IRAs Come Into Existence?
Before the existence of Gold IRAs it was prohibited to own collectible or precious metals in your IRA. This changed when the Taxpayer Relief Act was passed in 1997.
This act stated that investors could legally invest in U.S gold coins of one ounce, half an ounce, quarter ounce, and one-tenth ounce, or silver coins of one ounce minted by the Treasury Department.
Soon other coins and bullion bars were added to this permitted list and now Americans have access to a wide selection of both US and international bullion products.
The Popularity of Gold IRAs
Investors have been flocking to Gold IRAs as their preferred retirement investment strategy since 1998.
This trend intensified after the 2008 financial crisis and the recession that followed it. This led to a record-breaking number of gold sales occurring in the 21st century.
The widespread popularity of Gold IRAs has also resulted in the appearance of various companies and institutions that have made gold transactions more simple and manageable.
This means investing in a Gold IRA is now easier than ever before. To make finding a new Gold IRA Company at we have a directory category listing only Gold IRA specialists. We also publish an annual list of the Best Gold IRA Companies as part of our annual Bullion Dealer of the Year awards.
Types of Gold IRAs
There are two types of Gold IRA – Traditional and Roth. You can roll over other retirement account types such as a 401k into a gold IRA.
This rollover or transfer is required because accounts such as 401k’s don’t allow holding physical precious metals.
Traditional Gold IRA
This type of Gold IRA permits earnings and deductible contributions on a tax-deferred basis. You do not need to pay any income taxes on your earnings or deductible contributions up till the time you make a withdrawal.
Roth Gold IRA
This type of account lets you earn and make deductible contributions that grow tax-free. The main tax benefit of this account type occurs once you make a withdrawal. While all withdrawals are subject to special rules, you can rest assured that they will not be subject taxes.
It should be noted that Roth Gold IRAs do not offer tax benefits on contributions, as these contributions will be made using after-tax funds. If you wish to convert your existing Roth IRA into a Gold Roth IRA, you will be glad to learn that this can be done without any penalties or taxes.
What IRAs can be rolled over?
| Roth IRA | Trad. IRA | Simple IRA | SEP-IRA | |
|---|---|---|---|---|
| Roth IRA | YES 1 | NO | NO | NO |
| Trad. IRA | YES 2 | YES 1 | NO | YES 1 |
| Simple IRA | YES 2 (after 2 yrs) | YES 1 (after 2 yrs) | YES 1 | YES 1 (after 2 yrs) |
| SEP-IRA | YES 2 | YES 1 | NO | YES 1 |
| *1: Only one rollover in 12 months *2: Must include in income | ||||
SEP Gold IRA
SEP stands for Simplified Employee Pension. This type of retirement account differs from ordinary individual retirement accounts in some ways. Individuals with a SEP Gold IRA who also happen to be self-employed and do not have employees under them won’t have to pay administration costs. However, if there are employees working under you, each one must receive identical benefits through the SEP plan.
401K Plans
You can also convert your employer-provided retirement plan into a Gold IRA in some cases. This lets you defer the income taxes on your earnings until you make a withdrawal. This conversion also works if you have a 401K from your previous employer.
GET YOUR FREE GOLD IRA GUIDEBOOK HERE
Where is Your Gold Stored?
You may be wondering where the gold in your Gold IRA is stored. The IRS does not currently permit Gold IRA holders to store their gold at home. Instead, you will need to leave it with a special depository – or custodian.
Your gold IRA company will usually offer you a choice of high-security vaulting locations and IRS-approved custodians, typically in the US although some have recently started advertising offshore gold IRA storage.
Some individuals with Gold IRAs set up their own dedicated facilities to hold their precious metals, but this is a highly contentious issue and may not be a viable option for everyone.
Your best bet is always to store them at a third party specialist metals depository, used to handling metals as part of an IRA, and able to carry out the required custodial duties.
Advantages of a Gold IRA
In a word Tax. In two words, Tax Advantaged! Gold in an IRA will either save you tax at the front end when you buy, or at the back end when you sell.
For higher-rate tax payers this can see gold bought or sold at a significant saving.
If you have a self-directed Gold IRA, your taxes will be deferred until you make a withdrawal at a future time. This is because your contributions to your Gold IRA are done on a pre-tax basis.
If you have placed your gold assets in a Roth IRA, any contributions will be made on a post-tax basis. This means you can make tax-free withdrawals.
A Gold IRA can also help you avoid certain inheritance taxes. A self-directed Gold IRA enables your assets to be passed onto your children and beneficiaries with little to no taxes owed.
A third tax advantage of owning a Gold IRA is tax credits through the Retirement Savings Contributions Credit. These tax credits are made available if you make an eligible contribution to your Gold IRA.
The IRS has mentioned special conditions for this tax credit, so it is important to see if you qualify. Investors who are eligible for this tax credit can enjoy its benefits on up to 50% of their Gold IRA contributions.
You also have peace of mind, knowing your gold is held at a state of the art secure facility – as opposed to a home safe!
Outside of tax and security, Gold itself offers significant advantages being what it can do as an investment diversifier and hedge.
The price of gold is generally volatile in the short term. However, this commodity always maintains its value in the long term, making it an excellent store of wealth.
The most obvious reason to invest in a Gold IRA is to keep your wealth secure into the future. Investing in this gold in this manner lets you convert your wealth into a relatively stable commodity that will benefit you down the line.
A Gold IRA lets you control your wealth in a manner that is distinct from other commodities.
After all, any money stored in an IRA account typically loses its value over time due to inflation. However, this inflation won’t impact your IRA account if you are holding gold. This is due to differences in the inflation rate and the rate at which gold prices increase.
The U.S inflation rate typically hovers between one and three percent annually. The price of gold on the other hand varies more significantly annually, but over a longer term tends to average an annual 7-10% increase.
It’s not uncommon for gold prices to rise by twenty or even thirty percent in a single year. This trend is still quite volatile in the short run, especially when you consider that gold prices fell and then remained fairly static between 2013 and 2015. However, the general long term trend shows gold prices increasing faster than the inflation rate. This means investing in gold offers investors an easy way to protect their wealth against inflation.
Portfolio Diversification
Most investors should already be familiar with the benefits of portfolio diversification.
Put simply, a diverse portfolio offers a better balance of risk and reward. This is because diversification involves spreading your investments across many different assets. This then limits your risk exposure from any one asset.
Gold is an especially great choice for portfolio diversification as it avoids the pitfalls of other types of investments. You can try spreading your assets across various industries; however, the truth is that a change in other sectors may significantly impact your investment.
For example, if you invested heavily in real estate, the value of your assets will still be at the mercy of changes to the economy, government policy, and country demographics. That isn’t to say gold does not fluctuate in value due to external factors. However, it has been observed that gold’s value is better shielded compared to other commodities during significant market events.
GET YOUR FREE GOLD IRA GUIDEBOOK HERE
Potential Drawbacks of a Gold IRA
While a Gold IRA offers numerous advantages over other types of savings accounts, there are some potential downsides to consider before investing in one.
Not Receiving Interest, Yields or Dividends
One of the main drawbacks of investing in a Gold IRA is that it does not offer the interest, yields, or dividends that paper-backed assets provide. That being said, stocks and bonds can be riskier to invest in. It’s not uncommon for the interest gains from paper-backed assets to be lost in a flash. This means Gold IRAs could still be advantageous over these types of investments.
Under the right circumstances, the gains from gold appreciating in value could exceed the gains from paper-backed assets.
Extra Costs
Holding precious metals can be a bit trickier than holding paper-backed assets. You will need to pay the one-time initiation fee along with the annual custodian fees that are associated with IRAs. This is the same for any IRA regardless of what you hold in it. Since precious metals are physical assets, you also need to pay storage fees to keep them in a qualified storage facility.
Risk of Theft
While nearly all storage facilities do a good job of protecting the precious metals entrusted to them, there is always a small risk of theft occurring.
The good news is that most qualified storage facilities are required to have full all-risk insurance. This means you won’t have to worry about losing part of your Gold IRA savings if you choose the right storage facility.
Lack of Privacy
This is probably the biggest downside for many. Gold investors tend to be privacy-focused, libertarian in attitude and down on government surveillance. They prefer their gold in-hand.
The thought of handing their gold over to a government-backed IRS-controlled program is not a happy one!
Is a Gold IRA a Good Investment?
After reading about the potential drawbacks mentioned above, you may be wondering, “is a Gold IRA a good investment?”.
After all when investing in any asset, it is important to weight up the pros and the cons before making your move.
When it comes to something as important as making plans for your retirement, a wrong move could make a real difference to your quality of life in later years.
Gold is widely used for it’s abilities to protect accounts by acting as a market-hedge, and this is all the more important in something like an IRA. If your other assets are taking a hit due to a market crash, you can count on your Gold IRA to soften the blow slightly.
After all, this precious metal has been considered a valuable commodity for thousands of years, and isn’t likely to lose it’s value anytime soon. Can anyone say the same for bitcoin?
How to Set Up a Gold IRA
If you wish to create a retirement plan that involves gold investments, you should familiarize yourself with how to set up a Gold IRA.
Step 1 – Open a Self-Directed IRA
The first step in setting up your Gold IRA is to open a self-directed IRA. This could be traditional IRA or a Roth IRA.
Once you open up your self-directed IRA, you can add many different types of investments to the account, not just precious metals. This includes private companies or even rental properties. This makes self-directed IRAs a great option for certain kinds of investors such those with a more entrepreneurial streak.
You should note that many of the bigger institutions such as banks who normally provide IRAs rarely provide self-directed IRAs.
This means you may need to look around to find a suitable company with whom to open your self-directed IRA. These companies will then guide you through their own procedure for setting up your self-directed IRA. Luckily we list over 80 who specialize in gold IRAs.
It is important to find a trustworthy and reliable company for your account, as they will be responsible for maintaining and keeping track of your assets. To this end we list our top-5 gold IRA companies here.
Step 2 – Select a Custodian
As mentioned earlier, you will need to select a custodian to look after your Gold IRA account.
This is the company responsible for storing your gold and administering your account. It is possible to find certain brokerages with whom you can open your Gold IRA account if you are taking a more DIY route. Many custodian’s roles can be somewhat limited – not every custodian is set up to monitor your Gold IRA account to ensure it meets IRS regulations.
This is why it pays to go with a gold IRA specialist.
It is also important to consider your custodian’s fees and pricing structure before using their services. You should be prepared to pay a fee to administer your account as well as to store your gold or other precious metal bullion. These can either be a percentage of your holdings or a fixed sum.
Typically annual fees and storage charges run from $150-500.
Step 3 – Add Funds to Your Account
Once your account has been set up and is being overseen by your custodian, you may be wondering how to invest in a Gold IRA.
The next step is to start adding funds to your account. Once you have added a sufficient amount of funds, you can then use them to purchase gold or other precious metal bullion. You should note that the IRS does not allow Gold IRA holders to purchase bullion directly from a provider.
Instead, you will need to ask your custodian to make the purchase using the funds in your account. This is a standard procedure, so you can expect your custodian to already be familiar with the buying process.
Again, most custodians will have bullion dealers they work with regularly, so the process can be simplified greatly. When you use a bullion dealer who is gold IRA specialist, it’s just a case of phoning the bullion dealer, who will liaise with the custodian on your behalf.
Step 4 – Choose Your Storage Method
As mentioned earlier, your gold must be stored in an IRS-approved secure location. The IRS does not permit you to store your gold or precious metals in lockboxes or safes at home.
The good news is that many gold IRA specialist bullion dealers are already in touch with different IRS-approved storage facilities and custodian companies. They offer a simple service where they do all of this legwork for you.
Why Use an Gold IRA Specialist
If you are interested in starting a Gold IRA or converting your existing IRA into one that can hold gold and other precious metals, you should seek out the services of a Gold IRA specialist.
There are many reasons to use the assistance of a professional when setting up and managing your Gold IRA. These include:
Choosing the Right Type of Account
There are many different types of Gold IRAs to choose from. We have already discussed the benefits of each account type. However, you may still be unsure about which type of Gold IRA is best suited for you and your needs. A specialist can help guide you on this matter so that your Gold IRA is in line with your long-term financial goals.
Knowing When and What to Buy
Precious metal prices can be quite volatile. This can make it challenging to figure out when it is the best time to purchase gold, silver, platinum or palladium. You can look up various resources online, but you may not be able to find any guidance that fits your situation.
A Gold IRA specialist will be up to date with the latest price trends and can guide you on the best time to purchase gold or any of the other precious metals you wish to invest in for your Gold IRA.
As you can see, starting your own Gold IRA account can be both financially rewarding and complicated. The various benefits these accounts offer make them appealing for anyone that wishes to invest wisely for their retirement – but making a mistake at any step can remove all of the benefits and in some cases lead to fines and penalties from the IRS.
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