With inflation on the rise, you might be considering putting some of your retirement savings into assets other than cash, stocks, and bonds. One option is investing in gold and precious metals in a gold IRA.
Investing in a gold IRA can be a smart way to hedge against inflation and take advantage of some helpful tax benefits. However, a gold IRA is subject to specific rules and requirements.
Here’s what you need to know about gold IRA rules, what metals to buy, and how to handle the taxes.
Use a self-directed IRA
To add gold and other precious metals to an IRA, you’ll need to open up a type of account called a self-directed IRA, unless you already have one.
Contributions to a traditional self-directed IRA are tax-deductible. You’ll only pay taxes when you take money or precious metals out of your IRA.
A self-directed IRA is different from other types of IRAs because you can invest in assets like real estate and precious metals. You’re not limited to stocks, bonds, and other similar paper assets.
You can purchase and hold four types of precious metals in your IRA:
However, there are specific rules regarding the types of gold and precious metals you can invest in with a self-directed IRA.
You must choose IRA-eligible gold
The IRS has certain requirements for gold coins and bullion that you can hold in a gold IRA. Your gold IRA provider should be able to offer some guidance on coins, bars, and bullion. Generally speaking, IRA-eligible gold must meet the following criteria:
- Have a fineness or purity of 99.5%
- American Buffalo coins
- Australian Kangaroo coins
- Credit Suisse gold bars made at an approved facility
- American Eagle coins are an exception—although they’re 91.67% pure, you can still hold them in a gold IRA
- Be held by an IRA custodian in a secure depository
- Be produced by a national government mint or accredited manufacturer
Silver coins and bars must be 99.9% pure; platinum and palladium coins and bars must be 99.95% pure. The IRS puts these limits in place to ensure investors purchase high-quality metals that will hold their value over the long term.
One more caveat: In some situations, the IRS considers IRA-eligible gold to be a “collectible.” This usually occurs when the gold has been graded by a certified organization such as the Professional Coin Grading Service. In that case, you can’t hold it in your gold IRA.
If you want to have your gold graded, it’s typically better to wait until after you’ve liquidated your IRA assets and taken possession of your metals.
Buy your gold through a custodian
You can’t add gold or precious metals to your gold IRA yourself, even if you already own IRA-eligible metals or plan to purchase them for investment purposes.
Under the precious metals IRA rules, you must work with a custodian—a financial institution responsible for protecting the assets in your gold IRA.
A custodian can set up a self-directed IRA, manage the transfer of funds to the precious metals dealer, and facilitate the process of transporting and storing your physical precious metals.
Most gold IRA companies have relationships with top custodians, so they generally offer these services as part of their package.
Typically, you’ll purchase gold and other precious metals with cash that’s already in your account. You can fund a gold IRA in the following ways:
- Depositing cash: Once the money is in your IRA, you can use it to buy gold and other precious metals.
- Transferring IRA assets: If you hold assets such as stocks, cash, or gold in another IRA, you can transfer them to a new gold IRA. Then, you can use those assets to buy precious metals.
- Completing a rollover: If you have a 401(k) or another retirement account, you can roll those assets over and use them to purchase precious metals in your gold IRA.
Not all gold IRA custodians are created equal. Consider the following when choosing one to secure your assets:
- Is the custodian approved by the IRS?
- Do they charge fees for storage and account management? (Hint: Most do.)
- How many years has the custodian been in business?
- How experienced are the staff at managing gold IRAs?
- Does the custodian have excellent customer reviews?
- Does the company have good ratings with the Better Business Bureau or similar organizations?
- Does the custodian offer a buyback program so you can sell your gold back to them if you decide?
Store your gold in an IRS-approved depository
When you hold precious metals in a gold IRA, you’ll also need to think about where you’ll store them. The IRS rules for precious metals won’t allow you to keep your coins and bars in your home or a safety deposit box.
If you take possession of IRA-eligible gold and precious metals—even for a day—the IRS may consider it a distribution. In specific circumstances, that could mean you’ll end up paying steep penalties and taxes.
That’s why your gold IRA custodian will facilitate a handoff of your physical metals to a secure storage facility called a depository.
You may be able to choose a depository or simply go with the one your custodian recommends. Either way, the facility must be approved by the IRS.
Here are a few other things to think about when choosing a depository:
- How secure it is
- The depository’s insurance policies
- Storage fees for your metals (usually charged annually)
The depository is responsible for storing your gold and precious metals safely until you request that your gold IRA custodian sell your gold or distribute it to you. When you take a distribution, your gold will be sent to your home address by secure delivery.
Don’t contribute more than you’re able to
IRA rules and regulations limit the amount you’re able to contribute to your account each year. The current annual IRA contribution limits are $6,000, or $7,000 if you’re age 50 or older. The IRS sets these limits annually.
Hold the gold in your IRA until you are 59 ½
Ideally, you’ll hold your gold and other precious metals in your gold IRA until you retire since that’s what these accounts are designed for. Precious metal IRA rules include some tax perks, but that also means there are limits on when you can access your gold IRA assets.
According to the IRS, you can’t take a distribution from your gold IRA until you turn 59 ½. At that time, you’ll have to pay any income taxes due on any withdrawals, and you can liquidate the metals in your account for cash or take physical possession of them without penalty.
That’s one upside of a gold IRA: Having access to physical gold and precious metals allows you to hold onto and sell them later, exchange them in a time of crisis, or pass them on to your heirs.
However, should you need to access your funds before age 59 ½, you may have to pay:
- A 10% early withdrawal penalty
- A 28% capital gains tax on any profits if your metals increased in value while you held them in your gold IRA
There are a few specific situations where you won’t have to pay the 10% early withdrawal penalty, such as if you become disabled or are buying a home for the first time. You can also avoid the penalty if you set up annuity payments based on your life expectancy.
You’ll need to start taking mandatory distributions from your gold IRA when you reach age 72. If you don’t, you could face a 50% excise tax for each year that you don’t withdraw the required amount.