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What to Know Before Investing Gold in an Individual Retirement Account

Do you know what a gold IRA is? What about how to start one or the benefits? What should you look for in a gold investment company?

I’ve got plenty of answers to these questions. I even have a specific recommendation about which gold IRA company is the best.

What Is a Gold IRA Account

If you’re not entirely sure what a gold IRA account is, then I suggest you look at the actual name. There are two parts to it. The first is gold, and the second is IRA.

You might already be familiar with IRA accounts in general. Many retirement investors might have a traditional IRA or Roth IRA. This can be in place of a 401(k) or as a companion to it.

All these different retirement accounts let you set aside money for retirement in different kinds of tax shelters. As long as you follow the rules, you can let your money grow without getting taxed. When it’s time to retire, you’ll have more money than if you’d just saved it in a bank account.

The gold part is what separates gold IRAs from other individual retirement accounts. Regular IRAs are usually based on stocks and bonds. This time, however, the investment is precious metals.

Gold is a commodity. It usually holds its value and grows over time. It’s a great thing to put some of your portfolio in if you want to diversify your investments.

What Are Gold IRA Companies

The idea of gold IRA companies usually refers to brokers in this industry. They are companies qualified by the IRS to do two things. They set your gold-backed IRA up according to IRS rules, and they also facilitate your purchases of precious metals to fill that account.

You actually need two companies to accomplish all this. On top of your gold IRA company or broker, you’ll also need your own physical gold IRA custodian. They arrange for the secure depository where your gold gets stored.

The IRS has a specific list of approved depositories where your gold is kept. Fortunately, the best brokers already have working relationships with specific custodians and can help you make these arrangements or even do it for you.

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Are Gold IRAs a Good Idea?

Gold IRAs are generally a good idea, but I will also admit that everyone’s circumstances can be different. Let’s look over the primary benefits and drawbacks so you can draw your own conclusions.

Benefits of Gold IRAs

  • Gold is very rare. Surging demand and limited supply are both seen when you review the history of the metal.
  • Government debt is more than $19 trillion and always rising.
  • Many investors feel safe with gold and silver in times of great fear.
  • A recession due to inflation is likely in the near future.
  • Gold offers liquidity and flexibility other tangible investments don’t.
  • Gold and silver might be tragically undervalued right now.
  • Some countries are boosting gold reserves in anticipation of the power of the American dollar falling.
  • Doing a rollover from another retirement account means your gold IRA could use pre-tax funds instead of after-tax dollars to buy precious metals.
  • Gold rose 700% from 1999 through 2011 despite the dot-com bubble burst and multiple recessions (including the “Great” one).
  • Inflation doesn’t seem to impact the value of gold, but it does make dollars fall in value.
  • Stocks and bonds still dominate retirement investing, but precious metals do offer diversification.

Drawbacks of Gold IRAs

  • Risk is always present with any investment class.
  • Fees and expenses happen when you start a gold IRA and for each year of storage, and that can eat into your net gains.
  • A gold IRA will never generate interest, dividends, or a yield when a traditional IRA is likely to.
  • Choosing the right custodian is crucial, because theft and fraud are always a concern when someone else is watching over your gold for you.

Gold IRA vs Physical Gold

You might be wondering about the differences between having a gold-backed self-directed IRA or owning physical gold yourself. I can certainly understand the confusion here, but there are subtle distinctions between the two. The three areas of distinction between the two come down to taxes, security risk, and buying restrictions.

Taxes are where IRA gold can be the real winner. If you do a rollover of a 401(k), 403(b), IRA or another qualified retirement account into a gold IRA, then you’re using pre-tax dollars to buy gold in a tax-advantageous account that itself might not get taxed. That’s going to extend your buying power considerably and help you make more money.

Physical gold you buy will be taxed when you purchase it. You’re also going to have to consider the physical safety of that gold. Outside of a secure depository, theft is a serious threat, and your insurance might not cover it without thorough documentation in advance if they do it at all.

One freedom that physical gold gives you is a lack of restrictions on what you can buy. Self-Directed IRA precious metals have to meet very specific IRS standards, and there are many exclusions. Your own personal gold collection can have anything you want in it, including rarities and collectibles.

Don’t get too caught up in having a gold IRA versus owning your own physical gold and storing it at home or in a bank. If you are torn between the two, I should point out that there’s no reason you can’t do both at the same time.

How to Open a Self-Directed IRA

Opening a gold IRA is really just a three-step process. You can bring funds from other retirement accounts, or you can just fund the whole thing from scratch. The choice is really yours.

The first step is choosing a provider or broker. If you’ve read everything so far, then you know what they are and who the top five are. It’s okay if you’re jumping around though because this page isn’t going anywhere.

How much you decide to put into your gold IRA can be a tough decision. I think it’s worth doing at least 5% of your portfolio investment is smart just for the diversification. Doing anything less just isn’t enough exposure to make it matter.

Your gold IRA ceiling gets a little fuzzier. Most investors average 10% or 15% for their gold allocations. Doing more might be appealing to you if you’re concerned about the status of the American economy and dollar.

The second thing you need to do after starting with a gold investment company is pick your custodian. You can do that on your own, but many brokers will have custodians that they can recommend. Then, you either transfer your funds or do a rollover.

If you do a rollover, be sure it is finalized within 60 days. Otherwise, the IRS will deem it a withdrawal. You’ll get hit with a 10% penalty if you’re younger than the age limit for distributions.

I encourage you not to let this happen. While gold can make you money, there’s never any point in wasting the growth. You get one rollover per year, so be careful when and how you do them.

Tax Rules and Regulations of Gold Investing

If you do a rollover from another retirement account to fund your gold backed IRA, then you need to know about the IRS rules. Specifically, you need to know what is a taxable event and a non-taxable event. Taxable events are what you want to avoid so you keep more of your money.

I can briefly mention the rules, but they are truly deep and complex. Choosing the right broker and custodian goes a long way towards maintaining compliance and staying within the rules.

If you ever take the precious metals out of the depository holding them, then they are going to be subjected to income tax at the time of withdrawal. However, you’ll avoid capital gains taxes, which is a big appeal of a gold IRA. On the other hand, without a predetermined exclusion, an early distribution (often earlier than 59.5 years of age) can mean being taxed 10%.

The biggest thing to watch out for is when you do a move funds at the start. Direct transfers are best since they happen faster and minimize the odds of complications, including a 10% penalty. That’s more likely to happen with indirect transfers, but everything must be finalized within 60 days.

Gold IRA Eligible Physical Gold

Gold and precious metal products acceptable for a self-directed IRA have to meet specific IRS standards. Collectibles are usually excluded, and minimum standards for fineness and purity must be met. Gold needs to be .995% and silver .999% with palladium and platinum even higher at .9995%.

Acceptable pieces could include American Gold Eagle, American Silver Eagle, and Canadian Silver and Gold Maple Leaf coins. Unacceptable pieces often include many foreign currencies.

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