How Does a Gold IRA Work?

Many investors like investing in precious metals, such as gold. Conventional wisdom is that gold can hedge against inflation and is less volatile than other investments like stocks.

An Individual Retirement Account (IRA) is a type of investment account that offers tax advantages to people who use one to save for retirement. A gold IRA is a self-directed IRA that lets investors get tax advantages while investing in physical gold and other precious metals.

On this page:

• What is a gold IRA?
• Types of gold IRA accounts
• How can I fund a gold IRA account?
• What type of gold or metal can be held in a gold IRA account?
• Where is the gold stored?
• When can I withdraw from my gold IRA?
• Where can I open a gold IRA account?

What is a gold IRA?

A gold IRA is a retirement account that allows people to invest in physical gold. They are often used to diversify savings and create a hedge against inflation. Like other IRAs, these accounts offer valuable tax benefits as well.

Physical gold is considered an alternative investment, something that’s not allowed in a regular IRA. However, since gold IRAs are a type of self-directed IRA, they can hold alternative investments so long as they adhere to IRS rules.

For gold IRAs, government regulations outline what type of gold can be held in the account and where it is to be stored. Fortunately, gold IRA companies make it easy to meet these requirements and incorporate precious metals into your retirement savings.

Types of gold IRA accounts

There are many different types of IRAs, each offering various benefits to investors. Depending on your financial situation, one may be preferable to another.

• Traditional gold IRA – these are the most common type of gold IRAs. When you contribute money to a traditional IRA, you can deduct that amount from your income when you file your taxes. This account type reduces your taxes in the year that you contribute. When you withdraw from a traditional IRA, you pay income tax on the full amount withdrawn. Read more: Traditional gold IRA guide
• Roth gold IRA – Roth IRAs are the reverse of a traditional IRA. You pay taxes when you contribute money to a gold Roth IRA. Once you contribute to the account, the money grows tax-free. You don’t have to pay any taxes when you make a withdrawal. Roth IRAs also don’t restrict the withdrawal of contributions, while other IRAs do. Read more: Roth gold IRA guide
• SEP gold IRA – SEP IRAs are for the self-employed and small businesses. They function very similarly to traditional gold IRAs but give business-owners the option to contribute to their employees and themselves. Read more: SEP gold IRA guide

How can I fund a gold IRA account?

Once you open a gold IRA account, you have to fund it. There are a few ways to fund your account.

• Cash contributions – The easiest way to fund a gold IRA is to contribute cash directly to the account. Once you have your money in your IRA, you can use it to purchase gold and other precious metals.
• IRA Transfer – If you have another IRA, whether it holds gold, cash, or securities, you can fill out the paperwork to transfer the assets to your new gold IRA. Once the assets arrive, you can liquidate them to purchase precious metals as desired.
• Rollover – If you have a 401(k) or another retirement plan, you can roll the funds in the account into your gold IRA and use them to purchase precious metals.

Even though you’re opening a gold IRA, it’s important to note that you can’t directly fund your account with gold bullion or coins that you own. One reason for this is that the government restricts the types of coins and bars people can purchase.

This means you need to use assets already in your gold IRA to purchase precious metals. You also cannot take possession of the metals in your gold IRA until your retirement age. The metals must be stored at an approved depository.

What type of gold or metal can be held in a gold IRA account?

Gold IRAs can hold more than just gold. There are four precious metals that you’re allowed to purchase and keep in your gold IRA:

• Silver
• Gold
• Platinum
• Palladium

The IRS places limits on the types of coins and bullion that investors can hold in gold IRAs. These limits are intended to make sure that investors buy high-quality metals with long-term value.

For example, gold IRAs can only hold gold that is 99.5% pure in forms such as:

• American Buffalo coins
• Chinese Panda coins
• Credit Suisse bars produced at an approved facility.

One exception to this rule is American Eagle coins. These coins are 91.67% pure and can be included within gold IRAs.

Silver coins and bars must be 99.9% pure. Platinum and Palladium coins and bars must be 99.95% pure.

Your gold IRA provider can help you determine which coins, bars, and other forms of bullion meet the requirements to hold in a gold IRA.

Where is the gold stored?

A critical consideration for a gold IRA is where you will store your gold and other precious metals. Gold IRA rules prevent people from taking possession of precious metals in their IRAs, meaning you can’t keep the metal in a safe in your home.

Instead, you need to choose a depository to store your gold. These are specialized companies that keep your metals safe and secure.

There are two primary types of storage for precious metals.

• Segregated – Segregated storage for your precious metals means that the depository will store your metals and keep them separate from other customers’ coins and bars. When you put coins and bars in the depository, that metal remains yours, and you’ll get the same coins and bars when you take them out of the depository for sale.
• Commingled – Commingled storage means that the depository stores your metals alongside other customers’ metals rather than separately. When you add metal to the storage, the depository notes the type, quality, and amount of metal you added. When you remove metal for sale, you won’t necessarily receive the same coins and bars. You’ll receive equivalent metal instead.

Both types of storage provide similar protection levels, so which you choose is a matter of personal taste. Keep in mind that you have to pay for storage and that segregated storage is often more costly due to the increased space requirements.

Other things to consider when choosing a place to store your gold include the security of the depository, the amount of insurance, and the fees and costs to keep your metals.

When can I withdraw from my gold IRA?

IRAs are designed for retirement savings. When you put money in an IRA to save for retirement, the government gives you tax benefits. It also places restrictions on how you can use the funds in your gold IRA.

With a traditional IRA, you cannot make withdrawals from the account until you turn 59 ½. After you reach retirement age, all withdrawals are counted as income and taxed accordingly. If you must make a withdrawal before you turn 59 ½, you have to pay an additional 10% penalty on the withdrawn funds.

Traditional IRAs also have required minimum distributions for those over 70 ½. These rules force you to withdraw a minimum amount from your IRA each year based on a formula, with penalties for people who fail to make the withdrawals.

With a Roth IRA, you can withdraw money that you’ve contributed to the IRA at any time without penalty. You can withdraw contributions and earnings without restriction once you turn 59½. In either case, you pay no taxes on withdrawals. You must pay income tax plus a 10% penalty on early withdrawals.

There are some exceptions to these rules. For example, you may make penalty-free early withdrawals for a first-time home purchase, qualified medical expenses, qualified educational expenses, or as part of a substantially equal periodic payment plan for early retirees.

>> Read More: Is a gold IRA good for seniors?

Where can I open a gold IRA account?

While there are fewer companies that provide gold IRAs than other types of IRAs, you still have several options. It’s essential to take the time to compare companies to find the best one for your situation.

To get started, you can consider some of the companies below who each offer several educational resources for getting started.

To learn more about your options, check out our guide to finding the best gold IRA company.