Does A Gold IRA Make Sense For Precious Metals Bulls?
A gold IRA is an individual retirement account that holds physical gold. You can also get IRAs that hold other precious metals in addition to gold, including silver, platinum and palladium, but do gold IRAs make good investments? A lot of factors are involved in answering that question.
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Some gold IRAs also hold silver, platinum and palladium, as they are the four precious metals that can be held in an individual retirement account. However, gold is the one that's purchased most often.
How a gold IRA works
The Taxpayer Relief Act of 1997 increased the number of investments that could be held in IRAs, but it's also very specific about the type and form of precious metals they can hold. The IRS has approved certain metals and forms of bullion to be held by IRAs, although it excludes items categorized as "collectibles."
Like traditional IRAs, gold IRAs require distributions after a certain age. The laws for both types of account are the same, which means retirees are required to take minimum distributions when they reach age 72. To calculate your required minimum distribution, you need to use these worksheets and tables from the IRS. When you take distributions from your gold IRA, you can either liquidate the metal for cash or take physical possession of it. Both equate to taking a distribution from the IRA and will face the same level of taxes.
Gold IRAs can also hold gold stocks, mutual funds that invest in gold stocks or bullion and gold exchange-traded funds that track told indices.
How to sign up for an gold IRA
To open a gold IRA, you will need to go to a custodian and open a self-directed IRA, which means you manage it yourself directly. Not all financial services that offer traditional IRAs also provide self-directed IRAs. Additionally, not every company that offers self-directed IRAs offers gold IRAs.
You will also have to choose a dealer to purchase the gold or other precious metals for you. The custodian may have one the work with regularly.
When you set up the account, you can choose to create it as either a traditional IRA, meaning contributions are tax-deductible, or a Roth IRA, which means the distributions are done tax-free. After the account is set up, you'll need to find it with a contribution, a rollover from a qualified plan or a transfer.
Once the money is in the account, you can choose investments, and then your metals dealer and custodian will complete the transactions for you.
Storing gold IRAs
The IRS requires precious metal IRAs to be held by a trustee or custodian rather than the person who owns the account. The agency also has specific rules about how the precious metals must be stored.
Trustees or custodians of precious metal IRAs must be "a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian." Some trustees store the gold in private depositories, which can be approved by commodities exchanges.
Security features like timed locks and automatic re-locking, 24/7 monitoring and sound, motion and vibration detectors must be used. Storage facilities usually have large insurance policies. Depositories can't hold the precious metals as a single fund shared by multiple investors or track each investor's holdings separately. Non-bank IRA trustees must show the IRS that they will meet Treasury standards for accounting, reporting, auditing and security.
If gold IRAs do not follow these requirements for storage, it could disqualify the account.
Restrictions in precious metal forms
IRAs can only hold gold and the other precious metals in certain forms with certain levels of fineness. For example, it can hold American Gold Eagle bullion and proof coins and uncirculated American Gold Buffalo coins. Some British, Canadian, Austrian, Australian and Chinese coins are also allowed. Any gold bars or rounds held by the IRA must have been produced by a refinery approved by NYMEX or COMEX or a national government mint.
IRAs can hold American Silver Eagle bullion and proof coins and certain British, Canadian, Austrian, Australian, Chinese and Mexican coins. They can also hold bars or rounds produced by NYMEX- or COMEX-approved refineries or government mints. IRAs can also hold American Platinum Eagle coins and proof coins and certain British, Canadian, Isle of Man and Australian coins and bars and rounds produced by a refinery approved by COMEX or NYMEX or a national government mint.
Such accounts can also hold American Palladium Eagle bullion coins, Canadian Palladium Maple Leaf coins, and palladium bars and rounds produced by national government mints or COMEX- or NYMEX-approved refineries.
Pros and cons of gold IRAs
Like any investment, there are advantages and disadvantages to precious metal IRAs. For example, they come with the same tax benefits as traditional and Roth IRAs, which means contributions to traditional IRAs are tax-deductible. At the same time, withdrawals from Roth IRAs are tax-free.
Additionally, neither gold nor IRAs are particularly liquid, so they are perfect for holding over the long term. Both investments should be made with a buy-and-hold mentality because you won't be able to touch the IRA until after you retire. Since gold IRAs are self-directed, you have more control over them than with standard individual retirement accounts.
On the other hand, investors like Warren Buffett don't like gold in general because it doesn't pay dividends or interest or offer other returns. Thus, gold IRAs don't really offer the tax-free perk of standard IRAs, although usually, the precious metal appreciates in price over time. The only tax break you get is on the capital gain you get from selling the precious metal at a profit.
Fees with precious metal IRAs are also higher because of the IRS' storage requirements and other expenses like buying, shipping and transporting the metal. Finally, you can't take any of the gold or other precious metals you own and put them into a gold IRA, and you can't buy precious metals yourself and send them to your IRA. The custodian must handle all transactions involving the IRA.
Precious metal IRAs can be an excellent way to improve diversification in your retirement portfolio. If you decide to open one up, you'll need to research the companies you are considering using to ensure that you choose one that is trustworthy and reliable.
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