The Benefits of a Gold IRA Fully Explained
Retiring comfortably means saving a lot of money for years in advance. Opening an individual retirement account and engaging in traditional investments can help you save money.
However, markets fluctuate, and a traditional retirement account might not be enough — especially if the economy experiences uncertainties or experiences a significant downturn.
If you want to minimize risk and stabilize your retirement accounts, consider opening a gold IRA.
This self-directed account offers benefits such as tax advantages, portfolio diversification, and a possible inflation hedge.
Any physical asset you put there will also be protected by a custodian and depository that follows IRS standards.
If you’re interested in investing in a gold IRA, keep reading to learn more about its potential benefits.
Understanding Gold IRA
A gold IRA differs from other retirement accounts in that it lets you hold physical gold and other approved precious metals in a depository or vault approved by the Internal Revenue Service.
Before you add a gold IRA to your investments, let’s cover all of the basics and better answer what a gold IRA is.
Defining Gold IRA
A gold IRA, also called a precious metal IRA, is a specialized individual retirement account that lets you hold physical gold in different forms, such as physical gold coins, bars, or bullion, in your portfolio.
You can also hold other approved precious metals, like silver, platinum, and palladium. Gold IRAs can also hold securities related to precious metals. Gold IRAs should be held separately from traditional IRAs since they’re considered collectibles.
Trying to invest traditional IRA money in collectibles will cause the Internal Revenue Service to consider that money an immediate distribution. This means you may owe taxes and a 10% penalty on those investments.
There are three kinds of gold IRAs:
- Traditional gold IRAs – These are funded with pre-tax money, meaning you pay taxes when you withdraw funds rather than when you put in the money.
- Roth gold IRAs – You invest in a Roth IRA using after-tax funds, meaning you pay taxes when you put in money. This lets you enjoy tax-free growth and withdrawal later on.
- SEP gold IRAs – These are designed for small business owners and freelancers and work the same way as traditional gold IRAs. The only difference is that SEP IRAs have higher contribution limits.
Gold IRA companies like Goldco and Augusta Precious Metals can help you choose which precious metals fit your investment strategy.
They can offer transparent pricing and educational materials to help you understand how different precious metals have historically behaved under varying economic conditions.
After all, as a self-directed account, investing in a gold IRA means what happens to it depends on you and your IRA custodian.
The Evolution of Gold IRA
Precious metals IRAs came about through the Taxpayer Relief Act of 1997.
Thanks to this act, the Internal Revenue Service started allowing people to hold precious metals.
Specifically, 1, ½, ¼, or one-tenth-ounce U.S. gold coins and one-ounce silver coins minted by the U.S. Treasury Department. It also included palladium and platinum.
The Rising Popularity of Gold IRA
Retirement investors have been drawn to physical gold and other precious metals amid economic turmoil and volatile markets. There are many reasons for this, listed below.
- As a possible hedge against inflation
- For portfolio diversification
- Store of value
- Tax advantages
Essentially, precious metals, especially gold, have been perceived as safe-haven assets and good investments since their values are generally steady during economic uncertainty.
Gold IRA: A Synonym for Precious Metals IRA
Gold IRAs can also contain precious metals like silver, platinum, and palladium. However, there are IRS standards regarding the minimum purity that metals must meet to be IRA-approved.
The specific standards are as follows.
- Gold – 99.5% pure
- Silver – 99.9% pure
- Platinum and palladium – 99.95% pure
On top of that, other minimum fineness requirements include the following.
- Bars, rounds, and coins should come from a refiner, assayer, or manufacturer that’s accredited or certified by NYMEX, COMEX, NYSE/Liffe, LME, LBMA, LPPM, TOCCO, ISO 9000, or the US Mint.
- Proof coins should be in excellent condition in their original mint packaging with a certificate of authenticity.
- Small bullion bars should meet certain weight specifications. However, this doesn’t apply to 400-ounce gold, 100-ounce gold, 1000-ounce silver, 50-ounce platinum, and 100-ounce palladium bars.
- Non-proof coins should be free from damage and in brilliant, uncirculated condition.
The Benefits of a Gold IRA
Investors have been drawn to gold IRAs for years.
But why are people choosing to hold gold over staking their money on other investment tools?
Perhaps the main advantage is that gold IRAs let you store physical gold, which has inherent value, rather than relying on paper-based assets.
Let’s discuss some of the other benefits of a gold IRA.
The Diversification Advantage
Gold barely has any correlation with other traditional assets, like stocks and bonds.
Diversifying your portfolio can protect your savings since you’re not putting all your eggs in one basket.
If one asset in your portfolio drops in value, it’s likely that your other assets aren’t negatively affected as well.
Inflation Protection: A Key Benefit
Gold has historically been a relatively stable asset. In fact, the value of gold even tends to increase over time despite market volatility.
That’s because while prices of stocks and bonds can theoretically go down to zero, gold can never have a value of zero.
Economic and Geopolitical Uncertainty Hedge
As a hedge against inflation, gold can help you bet against an uncertain market.
The central bank may unilaterally increase the supply of money to reduce their value. However, you can’t do this with gold, making it a better store of value than other assets like currencies, stocks, and bonds.
Long-Term Growth Opportunities
The price of gold has experienced substantial growth over the last few years, so the potential of gold for long-term growth is consistent.
Gold is taken off the market for years at a time, and it’s not being regularly traded.
So, even if more gold is being mined and pre-existing gold is still around, the demand for it remains high. This results in consistently high gold prices.
Investment Control with Gold IRA
You’ll need a self-directed IRA first to open a gold IRA. After opening a self-directed IRA, you can add contributions and choose investments.
Of course, you’ll need a metals dealer to carry out your transactions for you. However, overall, you remain the primary decision-maker regarding what to do with your account.
Note that despite being self-directed, a gold IRA will still require a custodian to manage it.
Self-directed IRAs allow investors full control of their accounts. This means you can do the following.
- Tailor your retirement strategies to meet your personal needs
- Pick the assets that best suit your financial goals and risk tolerance
- Make your own investment decisions
Having full control over your investments means you can take an active part in managing your personal investment portfolio to ensure it aligns with your objectives.
Gold IRA as a Tangible Asset
Gold’s status as a tangible asset is known worldwide. It’s sturdy but malleable and has good conductive qualities.
This gives it many uses in different industries — from gold plating on dentures to creating TVs and smartphones.
The high demand for gold makes it a good physical asset to store.
The Tangibility Factor in Gold IRA
Precious metals are tangible assets. They hold value as raw materials since they have practical applications in aspects like electronics.
Their inherent value means they have a very low chance of reaching a zero-dollar value.
Thanks to that, adding physical precious metals to your investment portfolio gives you some security and stability even during economic uncertainty.
Note that gold can serve as protection against a recession but can still be affected by inflation.
Demand for Gold: An Asset Perspective
Gold has always been highly sought after for many reasons — from making jewelry to manufacturing electronics. It has also been used as an investment.
The demand for gold is increasing, but the production of new gold from mines has actually been declining. On top of that, selling gold bullion from the vaults of the global central banks has also slowed greatly.
Central banks in countries like the US, Germany, China, and India primarily hold and accumulate gold rather than sell it.
As such, the increasing demand and low supply drive the price of gold to increase, making gold IRAs an attractive option to investors.
Gold IRA: A Resilient Investment
The price of physical gold has remained consistent or even risen throughout the years. It can work as an inflation hedge, providing some stability amid economic uncertainty.
The low supply of gold has also caused gold prices to increase, making them a good store of value.
Gold IRAs also offer tax advantages. Depending on whether you have a traditional IRA or Roth IRA, you can benefit from tax deductions on contributions or tax-free withdrawals.
Tax Benefits of Gold IRA
Like other IRAs, there are also tax rules for gold IRA that you should be aware of. However, you’ll be happy to know that you get tax advantages when you hold gold.
Understanding Preferential Tax Treatment
Preferential tax treatment gives special benefits to certain people. This treatment can include exemptions and reduced tax rates, among others.
In this case, preferential tax treatment for an individual retirement account can encourage people to save up for retirement. On top of that, it protects your retirement savings too.
Gold IRA for Efficient Estate Planning
Estates typically go through probate when the owner dies. This legal process is essentially where a court reviews your assets and will to ensure that your belongings are distributed properly.
However, IRAs can potentially bypass the probate process.
Gold IRAs get the same estate tax treatment as traditional IRAs. So, when you pass away, your gold IRA can be distributed among your designated beneficiaries without the possible delays, costs, and complications of a probate process.
Tax-free Growth: A Gold IRA Advantage
Gold IRAs can help lower your taxes in several ways — the most notable is offering tax-free growth. However, this depends on the kind of gold IRA you have.
Traditional gold IRAs are funded with pre-tax dollars. This means you don’t pay taxes on your contributions. Instead, you’re taxed when you withdraw them based on your income level at the time of withdrawal.
If you withdraw from a traditional gold IRA before you’re at the age of 59½, you’ll be taxed and have a 10% penalty.
However, your contributions to a traditional IRA are tax-deductible, reducing your taxable income for the year you contributed.
Meanwhile, a Roth gold IRA is funded with after-tax dollars, meaning you’re taxed when you make contributions.
That means your withdrawals are not taxed. However, any withdrawals or distributions from a Roth IRA conducted before you reach the age of 59½ may still be taxed unless it falls under an applicable exception.
Traditional or Roth IRA
So, should you get a traditional or Roth IRA?
If you think you’ll have a lower income when you retire, opting for a traditional IRA might be better. Meanwhile, a Roth IRA might be good if you think you’ll have a higher income in the future.
If you’re a freelancer or small business owner, you can choose a simplified employee pension (SEP) gold IRA. It works the same way as a traditional IRA but has significantly higher contribution limits than traditional and Roth IRAs.
Gold IRA for Senior Citizens
Senior citizens can open a gold IRA to further diversify their portfolio. Senior citizens also benefit from a higher contribution limit.
Specifically, investors aged 50 and up can contribute $1,000 more annually compared to younger IRA owners.
Gold IRA: A Suitable Option for Seniors
Precious metals are a relatively steady investment. Admittedly, they don’t garner interest or dividends, but gold IRAs are low risk.
This is a benefit since you don’t have much time to rebuild your savings once you retire. If you invested in stocks and bonds, you might have lost some money since their prices depend on the market.
Fortunately, gold is a good store of value, protecting your retirement savings from the same kind of market volatility that can more negatively affect bonds and stocks.
If you have other investment vehicles, adding gold IRAs can help spread your money, and subsequently risk, out more. That way, if the stock market affects your other investment tools, the stability of precious metals ensures your whole investment won’t be negatively affected.
Rules for Liquidating Gold IRA
If you’re a senior citizen looking to liquidate your gold IRA, you won’t need to worry about early withdrawal penalties — which only applies to those ages 59½ and below.
To withdraw from gold IRAs, you should first submit a distribution request form to your gold depository. Then, you can choose which physical gold assets you want to withdraw. You also have the option to have them liquidated into cash before receiving them.
However, we recommend that you opt for cash rather than non-cash delivery. That’s because you’ll get your assets exchanged for what it’s currently worth.
On the other hand, if you choose to get physical possession of your assets first, you’ll have to wait until they’re delivered and have them liquidated yourself.
Gold IRA: A Secure Retirement Plan
If you’re still evaluating the safety of gold IRAs, read this section to learn more about why it’s a good idea.
Admittedly, no investment comes with a 100% guarantee. However, gold has a long history as a good inflation hedge, staying relatively stable amidst economic turmoil.
Yes, you can get gold outside of an IRA. However, gold IRAs come with tax benefits. Moreover, a self-directed IRA lets you actively participate in controlling your retirement accounts.
Your physical gold is also safe in a gold IRA for several reasons:
- It should be under the watch of an IRS-approved custodian.
- It must be placed in an IRS-approved depository.
- It should meet purity standards set by the Internal Revenue Service.
Drawbacks and Risks of Gold IRA
Investing in gold through a gold IRA certainly seems attractive.
However, before you dive in, you should first evaluate gold IRA disadvantages to know what to expect — from paying higher fees to investing in a dead commodity.
Understanding Higher Fees in Gold IRA
Gold and other precious metals are physical assets. Because of that, you’ll need to physically store them in a depository.
As such, gold IRA fees are higher since you have management and storage fees to pay.
Some gold IRA companies offer promotions to help you weather the high fees. However, you’ll have to always clarify what those fees are and when you should pay them yourself.
The Internal Revenue Service doesn’t allow investors to store physical gold and other precious metals used for their IRA in their homes. However, you can arrange to visit the depository to handle them yourself.
Contribution Limits: A Gold IRA Drawback
The contribution limits for gold IRAs are actually the same as those of traditional IRAs.
Traditional and Roth gold IRAs have the same rules.
As of 2023, those under 50 years old have a maximum limit of $6,500 a year, while those 50 and above have a limit of $7,500. However, this 2024, the contribution limits will increase to $7,000 and $8,000, respectively.
It’s important to remember that these limits are aggregate, not per account. That means if you have both a traditional and Roth IRA, your combined contributions can’t be more than $6,500 a year if you’re under 50.
However, if you have a SEP gold IRA, you can contribute up to $66,000 or 25% of your self-employed income, whichever of the two is greater.
Market Volatility and Gold IRA
Physical gold is generally a good hedge against inflation. However, gold and other precious metals are what you’d call dead commodities.
These metals hold intrinsic value, meaning they are objectively valuable regardless of their current market price.
Unfortunately, this objective value and stability also means gold does not grow at the same rate as other financial assets might.
As such, gold IRAs don’t pay interest or dividends.
It’s interesting to note that interest rates seem to have an inverse influence on the price of gold.
For instance, gold prices increased during the COVID-19 pandemic in early 2020, while inflation also increased. In 2022, the government said it would increase interest rates until inflation was brought under control.
During this time, gold prices actually fell as interest rates increased since interest-bearing securities became more attractive options as an inflation hedge.
Frequently Asked Questions
Opening a gold IRA is a big decision since it’s a self-directed retirement account that relies on your decisions to operate well.
If you’re still thinking about how advantageous a gold IRA can be for you, below are some questions that can help.
What Are the Tax Benefits of a Gold IRA?
If you have a traditional IRA, you won’t pay taxes for the money you contribute towards it. On top of that, those contributions may count as tax-deductible in the year you make them.
This means you’ll have a lower taxable income.
Meanwhile, if you have a Roth IRA, your withdrawals won’t be taxed.
You also have tax-free rollovers from regular IRAs, whether traditional, Roth, or 401(k), to gold IRAs. This is called a gold IRA rollover, where the funds that you roll over from existing retirement accounts directly to a new gold IRA are not subject to taxes.
However, there are also indirect rollovers. Here, you yourself receive the funds from your retirement accounts and deposit them in the new gold IRA.
IMPORTANT: When doing an indirect rollover, you must deposit the funds within 60 days of receiving them. Otherwise, the money will be taxed as withdrawals. An indirect benefit to you is that your heirs can save on taxes too.
How Does a Gold IRA Provide Protection Against Inflation?
Assets like stocks can be greatly impacted by market developments and inflation. However, gold has historically been relatively stable amidst economic and geopolitical uncertainty. Thanks to that, gold can protect you from big losses.
However, it’s not advisable to allocate more than 10% of your retirement portfolio to gold. That’s because gold also experiences gold bubbles — which are short periods of volatility.
As such, limiting how much you allocate to gold also limits risks. This also leaves room for other investments like stocks and mutual funds.
Is a Gold IRA a Suitable Investment for Senior Citizens?
Yes, a gold IRA is a suitable investment for senior citizens.
Gold IRAs are low-risk investments that help you secure your remaining savings if you’ve lost them on the stock market or because of economic fluctuations.
You won’t get interest or dividends, but investing in gold IRAs lowers the risk of your retirement portfolio from being further strained.
What Are the Rules for Cashing Out a Gold IRA?
It’s essential to know the detailed rules for withdrawing from IRA for a smooth process. Below are the basic rules you should be aware of.
- You should be at least 59½ years old to withdraw from a traditional IRA without getting a penalty. However, you can bypass the penalty if you need it for specific purposes — such as paying for higher education expenses, unreimbursed medical expenses, or buying your first home.
- You can withdraw contributions made to a Roth gold IRA before you’re 59½ years old penalty- and tax-free. However, you’ll have to pay taxes and a 10% penalty on earnings you’ve made on the funds you withdraw before you’re the right age.
- Traditional IRAs have required minimum distributions (RMDs) that you must begin taking annually when you’re 72 years old. If you don’t take your RMD, you’ll receive a 25% penalty on the amount you were supposed to have withdrawn.
- For inherited gold IRAs, you generally should withdraw the funds within 10 years of inheriting them. You’re also normally subjected to RMDs, taxes, and penalties. The rules on this depend on your relationship with the IRA’s original owner and when they started taking distributions from the account.
Are There Any Potential Drawbacks or Risks Associated With a Gold IRA?
Yes, there are potential drawbacks or risks associated with a gold IRA. Below are some notable risks to be aware of when considering gold IRAs.
- Higher fees – Physical gold bought for gold IRAs cannot be stored at home or in a physical safe. IRS-approved depositories and vaults must meet certain security and insurance standards. Due to this, gold IRAs tend to have higher fees than other IRAs. You’ll also be paying for a custodian.
- No underlying cash flows – You won’t earn interest or dividends when you invest in gold. If you buy 20 ounces of gold now, you will still have 20 ounces in the future. The only difference is the value of the gold. Because of this, you have potentially lower returns than other investment tools.
- Illiquidity – Gold is a highly illiquid asset compared to bonds and mutual funds since you can’t have it liquidated quickly. Gold also costs more money and time to buy and sell. It’s hard to sell large amounts of physical gold without discounting the price. So, if you need money quickly, gold IRAs might be unable to help you.
- Can’t hold traditional investments – Gold IRAs can only contain precious metals. If you want to engage in traditional investments like mutual funds, you must open a separate IRA.
Conclusion
Gold IRAs let you hold physical gold and other precious metals. You’ll have to keep them in an IRS-approved depository and assign an approved custodian. You can consult a financial advisor before investing in a gold IRA.
A gold IRA comes with many benefits — such as diversifying your portfolio, acting as a potential hedge against inflation, and being a good store of value.
However, there are also drawbacks you should consider. These include high storage fees, the illiquidity of gold as a physical asset, and the absence of underlying cash flows.
Despite that, holding physical gold in a retirement account can still be a good idea because of the tax advantages it offers you and your heirs.