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Gold isn’t the first asset most folks think about for their retirement accounts. However, gold continues to work as a strong asset for value growth and protection against inflation even today.
This is why gold IRAs exist with many brokers.
Many people prefer to hold physical gold themselves. So, can you take physical possession of gold in an IRA? Yes, but there are some terms and conditions.
Let’s take a deeper look at what the rule is for gold IRAs.
How Does a Physical Gold IRA Work?
A gold IRA is an individual retirement account where you can deposit and hold physical gold while maintaining the perks of a tax-deferred account.
Essentially, gold IRAs allow you to put off paying taxes on the gains made by your gold investments until you reach retirement age.
This works due to the definitions and rules in place by the IRS. To encourage individuals to invest for retirement, IRS rules require that assets in a retirement account have an easily defined value.
Thus, the gold, palladium or other precious metals in a gold IRA must have value as a broad commodity and not as a collectible, such as coins and historical currencies made of gold.
How to Hold Physical Gold in an IRA
Gold IRAs work differently than retirement accounts for paper assets like stocks and bonds. The definitions around most gold and other precious metal goods place them in the collectibles category.
An exception exists for gold, palladium and precious metals held by banks or other IRS-approved nonbank trustees. This rule prevents you from selling yourself gold or collectibles, reducing the chance of fraud.
So, to set up an IRA for your gold, you would follow these steps:
- Open a gold IRA with an approved broker or IRA custodian of your choice.
- Make deposits into the account up to the annual deposit limit for the broker to purchase approved gold bullion.
- If necessary, purchase approved gold bullion for yourself and transfer the gold into the gold IRA account.
Gold IRA Possession Rules
In addition to the regulations about gold IRA accounts, you also need to know the rules about withdrawing gold from a gold IRA.
For example, the minimum age at which you can begin to withdraw from a gold IRA without penalty is 59 and a half years old.
Any withdrawals from this age and beyond would incur standard capital gains taxes as well as any fees associated with the account.
Withdrawals before this age result in taxes and penalties for early withdrawals, which can be as much as 10% of the total withdrawn from the account.
Thus, taking possession of gold from an IRA doesn’t work well if you want to retain the full value of your investment for yourself.
Benefits of a Physical Gold IRA
There are several benefits to opening a physical gold IRA for yourself, such as:
- Inflation hedge: Gold helps protect against inflation thanks to its ability to maintain its value alongside historic inflation trends.
- Portfolio diversification: Gold can help you diversify your portfolio by exposing you to another sector or asset class outside of paper assets or mutual funds.
- Increased wealth: The past performance of gold shows that the precious metal grows in value over time, allowing you to increase your initial investment to a higher value in the long term.
- Asset protection: Traditional IRAs don’t have the same protections placed on them to ensure the value of the assets, which both limits what you can do with the account and helps keep the assets safe.
- Tax-free growth: Retirement accounts help reduce tax burdens for you as an investor, reducing the overall costs of growing your wealth.
- Secure storage: Since gold IRAs require an accredited broker or bank, your assets are more likely to be around when you need them compared to riskier assets like stocks, bonds and other collectibles.
Disadvantages of a Physical Gold IRA
Still, there are some disadvantages to using a gold-backed IRA, such as:
- Management fees: Due to the necessity of an approved depository, gold IRAs tend to have higher management fees to ensure the facility maintains the gold correctly.
- Storage fees: In addition to management fees, a depository needs space to hold physical gold, further increasing the fees on the retirement account.
- No physical possession: Unlike real estate or other tangible assets, you can’t keep gold meant to go into the IRA yourself.
- Early withdrawal penalties: Much like Roth IRAs and other retirement portfolio accounts, you incur a potentially large fee for withdrawing money before the required age.
- Economic uncertainties: The future results of an asset aren’t certain since markets don’t always follow clean trend lines, meaning the value of gold in the future might not be what predictions make it out to be today.
- Decline in price of gold: Speaking of price drops, gold might come down in price by the time an investor needs to withdraw from the account, forcing investors to realize losses compared to what they might otherwise have earned.
How to Invest in Gold IRAs
In addition to the steps mentioned earlier about setting up a gold IRA, there are some other practices you might want to follow to get the most out of your investments.
The first practice involves your annual contribution. To get the most out of your IRA investment, you’ll want to deposit up to the maximum contribution you can each year, assuming you can afford to do so.
This practice helps you maintain your retirement planning goals and plays into the lack of rollover for contributions on these accounts.
Finally, a precious metals IRA should not be the only retirement account you maintain. Focusing on one asset class means you are at the whims of that market.
However, diversification continues to be the best strategy for most investors.
A gold IRA offers you a way to use gold as an asset to grow wealth and protect your money against inflation into retirement.
While gold should not be the only asset you buy, it can provide benefits to an overall portfolio when used smartly.
Still, you should be sure to review depositories and brokers before depositing gold with them. A poor asset manager can hurt a portfolio more than any downtrends in the market in the long run.
Here are the answers to some other important questions about investing in gold IRAs:
Can you buy gold in a self-directed IRA?
You can purchase gold for a self-directed IRA so long as the gold is in a form that meets IRS regulations and stays with an approved broker or bank.
In general, these definitions refer to gold bars or gold bullion that has value due to its mass, purity and fineness rather than its dollar value.
How is gold taxed in an IRA?
Gold follows the rules of other collectibles like artwork or baseball cards in that gold investors can be taxed at short-term capital gains taxes if they hold the gold for less than a year.
Longer than that, gold sales result in a tax of up to 28%, depending on the income of the person selling the gold.
Is there a limit on how much gold can be held in an IRA?
Most IRAs have a limit to how much you can contribute to them each year.
Gold IRAs have a maximum contribution of $6,000 per year, or $7,000 if you are aged 50 or older.