Gold IRA Tax Rules and What You Must Know In 2023

Precious metals investments are certainly not a new phenomenon. Investors have gone after them for years thanks to benefits such as hedging against inflation. If you look further before that, gold and silver were used as currency and jewelry.

Even with Fiat currencies in the world, gold coins and bars, alongside other precious metals continue to have their place and one could argue that they are more well-positioned than before.

If you’ve heard of gold IRAs, you may wonder how they differ from a standard retirement account. Traditional IRAs and their Roth IRA counterparts are pretty well-known, but their gold IRA counterparts are less so.

While you will learn more about what a gold IRA is, there’ll be a greater focus on having you understand the taxation side of things.

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Choosing a Company for Your Investment in Physical Gold

One of the roadblocks that you may run into with these self-directed IRA options is selecting the company that you will work with. Financial institutions that deal in traditional IRA or Roth IRA options will not typically offer gold IRAs.

Therefore, you’ll need to find and work with a registered company that offers these kinds of IRA investments. Try to choose the company based on its reputation and alignment with your needs.

For example, you can buy your gold bars from Goldco and set up your gold IRA knowing that the company is willing to buy them back from you down the line if you are no longer interested in the investment.

Why Gold Investments

Put simply, physical gold is an incredibly solid investment. History will tell you that there was even a time when gold was very much outperforming the stock market.

Though that may not be the case today, the ability to diversify your portfolio with an investment vehicle that will likely retain its value for the foreseeable future is invaluable.

If you look at standard retirement accounts, they are tied to investment vehicles that are bound to Fiat currencies. There’s no telling what inflation, market forces, and other variables will do to their value in the future, and historically, drastic fluctuations are always possible.

However, with a traditional gold IRA or a gold Roth IRA, for example, this is not the case. Is there still a risk? Certainly, no investment is free of risk, but there is still great security in gold investments.

Buying Gold Coins and Other Ways of Investing

Historically, if you were interested in gold investments or those of other precious metals, you would need to buy them physically. Gold bars and gold coins, as you imagine, were quite prevalent during this time.

Today is different, though. Even with physical precious metals still as present as ever, investors now can exercise more choice over how exactly their investments are done.

If you want to go the traditional route of investing in gold and other precious metals, you will need to buy them from a registered broker. Storage can then take place at home, with the broker, or via a safe deposit box.

Next, there is the idea of a precious metals IRA, which is, of course, more of a retirement account-based investment. As you’ll see a bit later on, gold IRAs are a lot like standard retirement accounts, but the underlying investment vehicle would be physical gold, and the process to get things started is a little different.

There’s also the ETF option. You invest in physical gold, but the rules of the stock market will apply. This will see you buying ETF shares that are valued based on the physical gold’s weight.

Whether it’s a self-directed individual retirement account or simply buying precious metals, you need to consider your unique situation and requirements. Do you wish to own the gold? Is meant to be a long-term investment?

Ensure that you do your research before you commit to any investment option available.

How You Pay Taxes with Gold in the Mix

Tax rules always come into play if you decide to go the physical purchase route for your precious metals investment. After all, the way you pay taxes will determine how much you stand to gain from your investment.

The idea is always to choose the path that will be most profitable in the end. Imagine your precious metals investments putting you in a position where you end up with a gigantic tax bill. Nobody wants that!

You will pay taxes to the IRS the same way you would for collectibles with gold. This means that you have quite a number of charges you need to think about.

Precious metals investments are often for the long term. If you go that route (i.e., having the gold for over a year), the taxation will be akin to regular income but you’ll have a 28% tax rate cap.

On the other hand, you could have precious metals for less than a year, in which case they will be taxed as ordinary income without the aforementioned cap.

Of course, as lucrative as precious metals are, that’s still quite a hit to take on the taxation side of things, which is why alternative investments in precious metals are often sought after.

Diving Deeper into Gold IRAs and Taxation

Gold IRAs are some of the most cost-effective investments. IRAs as a whole were first introduced in the 1970s, allowing people to access an investment vehicle for retirement. As far as taxation is concerned, taxes were paid at withdrawal, which was very attractive to investors.

At the time, any collectible item, such as physical gold, could not be used for IRAs and this would go on until the 1980s when the IRS allowed silver and gold coins to be used as investment vehicles.

There would be a further modification in the late 1990s that included bullion, so long as its purity was no less than 99.5%. For reference, purity speaks to the extent to which a piece is made up of the base precious metal.

Take a gold bar, for example. If there are no other elements but gold, it would be rated at 100% purity. However, working with gold becomes a lot easier when other elements such as copper and nickel are introduced. Therefore, you are way less likely to find gold that is 100% pure than its counterparts that are less so.

The changes didn’t end with this expansion though, as come 2007, gold ETFs via IRAs were no longer classed as collectible investments, which is the way things are today.

As advantageous as gold IRA investments are, there are still restrictions to bear in mind for those who are interested in them. For example, not all gold coins are allowed. There is an approved list of what can be used.

Additionally, holders of such a self-directed IRA cannot have the precious metals stored at home. Instead, an IRS-approved depository must be used. This introduces the storage fees that are synonymous with gold IRA options.

Gold IRA tax rules are a little different from those surrounding physical precious metals. First, there’s a 10% fee for early withdrawal. Beyond that, gains upon cashing out will have other fees and taxes applied.

While the 28% taxation rule mentioned in the previous section will not apply here, investors are subject to the marginal tax rate. This can be great for some gold IRA holders, but those who are in a high-income tax bracket will pay even more than 28%.

Losses on your investments aren’t allowed for a deduction, which means you’ll have to write them off.

As you can see, gold IRA tax requirements largely depend on your income bracket. Bear in mind too that once you become 70 and a half years old, you must begin taking distributions from your self-directed IRA.

What Makes a Gold IRA a Good Idea

After seeing the information above, you may be a bit hesitant to go the gold IRA route, but don’t do so just yet, because they are still beneficial. Considering the way gold and other precious metals hold their value, using them as investment vehicles provide quite a bit of security.

Remember that an IRA can be backed by a selection of assets, and those tethered to Fiat currencies are subject to inflation, which means your holdings will likely become perpetually less just by existing.

On the other hand, a gold IRA is a pretty reliable option that is tax protected, and will likely be just as valuable then as it is today. For all you know, the value may even increase.

Remember that many investors turn to precious metals to provide relief from negative economic positions.

How to Setup Your Gold IRA

By now, you understand the gold IRA principle more, especially from the taxation side of things. However, what do you do when you’re ready to set one up? Well, that’s what this section is all about!

Account Creation

The first step you’ll need to complete is the setup of the gold IRA. Remember the mention earlier of choosing a provider based on reputation? This is a part of the reason you were given this advice.

For as long as gold IRA options have been available, they’re not as well understood as traditional IRAs or Roth IRAs.

Since you’ll likely be swimming in uncharted territory, it helps to have a company that will guide you adequately to ensure that your self-directed IRA is set up by going through the required steps.

Funding the Gold IRA

Once you have completed the application element of things, the next step is to fund the gold IRA. Your representative will likely tell you that you can choose from one of three options to fund the account, and these are as follows:

Rollover: This will be used by those who would like to roll funds over from an existing Roth or traditional IRA. Directly rolling over from a 401(k) is also supported. This will be done on a tax-deferred basis.
Cash contributions: Typically, a wire transfer or check will be used to fund the account with cash. How things are treated tax-wise will depend on your choice of a traditional gold IRA or a Roth gold IRA.
IRA transfer: This process is known as an IRA to IRA transfer and will include the completion of a designated form. Like the first option, this will be done in a tax-deferred way.

Unfortunately, if you already own precious metals, you cannot use them to fund your new gold IRA. This is because of the aforementioned limitations on the pieces that can be held in these self-directed accounts.

Remember Only Approved Investment Vehicles Are Allowed

As accommodative as a gold IRA is, you can’t just put whatever you want in it. You’re restricted to using IRA-eligible gold coins and bullion. Similarly, those investing in silver, platinum, and palladium via a precious metals IRA will need to meet the requirements to do so.

While there are approved lists to this effect, you will usually not have to worry about this as your selected company will offer the required guidance to ensure that your purchase aligns with the established requirements.

Depository Storage Facility

As indicated before, a gold IRA holder is not allowed to store the physical gold at home. Therefore, a depository will come into the mix. Some gold IRA companies have established relationships with certain depositories, so you will be recommended one of them during the process.

One of the main reasons that the IRS has this rule is the fact that depositories are insured. Additionally, they typically have to meet security standards to achieve their approval status. If you were to be allowed to store your gold at home, you would probably meet neither of these two requirements.

Some of the standard security implementations include 24-hour monitoring systems, timed locks, auto relocking, and sound and motion detectors, alongside cutting-edge security technology.

A few of the reliable storage facilities are the Delaware Depository, Brinks, and International Depository Services.

Another thing to note is that your gold and other precious metals may be placed in either commingled storage or segregated storage, both of which are explained in greater detail below.

Commingled storage

As the name implies, your gold bullion and coins will be held alongside those that belong to others. While the depository storage facility will properly audit your initial submission to properly record the quantities and varieties present, you will not necessarily get back what you put it.

This doesn’t mean the value will be different. It’s just the reality of having all the coins and bars of specific types stored together.

Segregated storage

Segregated storage is the opposite. Whatever you bring in will be properly marked as your property, and it will be held separately from whatever the depository may have for other clients. Therefore, when the time comes to withdraw, the items that you get will be the same ones that were brought in the first place.

The only exception to this would be if something took place during holding time that would lead the items to need replacement via insurance. As you can imagine, segregated storage is a lot more expensive than its commingled counterpart.

Types of Gold IRA Accounts

You’d remember from above that there are different types of gold IRAs just as there are different kinds of standard IRAs. Each of them will come with its own benefits, which should be properly evaluated before a final decision is made. The three options are as follows:

First, there is the traditional gold IRA. This is a tax-deferred option, which means your gains and contributions will not incur any taxation. Of course, these accounts operate within IRS contribution limits of $6,500 for those 50 years old and over and $5,500 for everyone else. Taxes will be paid from distributions during retirement.
Next, you have the Roth gold IRA, which is the gold equivalent of the typical Roth IRA. On this side of the fence, you will have to face tax deductions at contribution time, but this means that you will not have to deal with paying taxes during retirement.
The final option is the SEP gold IRA, which is available to self-employed persons and business owners. It’s a lot like a traditional IRA, but the contribution limits are a bit higher. Here, the limit is percentage based and not numeric. People are allowed to contribute the lesser of $53,000 or 25% of income annually.

Optimizing Your Returns

Capital gains from gold investments can be tremendous, especially if gold increases in value. Unfortunately, you may still not stand to gain much considering that the applicable taxes could pose a huge problem.

Holding gold beyond a year is one way to create a better return since it will be subject to long-term capital gains taxes. Additionally, by investing it in an IRA, you are more likely to get that kind of treatment.

While gold mining stocks, mutual funds, and ETFs may have lower pre-tax returns, you may find that after taxes, the returns are more outstanding.

Whatever route you decide to go, do not being to invest in gold before you do a proper tax planning exercise. Gold is known for holding its value and while unlikely, you never know if it will drop in the future.

Your tax plan needs to be able to account for its appreciation or depreciation.

The Cost of Investing in Physical Precious Metals

After seeing all the information you have up to now, you’re well aware of the fact that there’s a tax-based cost on gold.

Additionally, while you can store your gold at home if you choose to just buy it, IRA-eligible gold in a retirement account will attract continuous storage fees.

There are also transaction fees to bear in mind. Some brokers will charge you for the sale and purchase of gold while others will not.

Depending on the gold IRA company you go with, there may even be a fee associated with the creation of the account. What is more common is an annual fee that comes with the management of your portfolio on your behalf.

Even considering all of this, the taxes you pay will likely be the biggest cost, so you want to have a plan that sees you incur the lowest taxes possible.

The Next Step to Take for Your Precious Metals IRA

If you’re interested in a gold IRA, the next step from here would be to seek a company to work with. Goldco is well known for its customer service, alongside other positive attributes, and may be a solid option for you!

Gold IRA Tax Rules and What You Must Know

James McCollum