How Does a Gold IRA Work?

A gold individual retirement account (IRA) is a type of IRA that allows you to invest in physical gold, silver, platinum, and palladium. Gold IRAs work by first setting up a self-directed account, purchasing IRS-approved precious metals, and then storing them in an approved depository. Your gold IRA account benefits from tax advantages similar to a traditional IRA. 

In this article, we will cover all aspects of a gold IRA—including advantages, disadvantages, the setup process, and frequently asked questions—to help you understand how a gold IRA can diversify your retirement portfolio. 

What is a gold IRA?

A gold IRA is a self-directed retirement account that allows you to invest in physical gold, silver, platinum, and palladium. 

These accounts differ from traditional IRAs that primarily hold stocks, bonds and mutual funds because they provide a tangible asset that is used to hedge against inflation during market volatility. Similar to traditional IRAs, gold IRAs provide tax deferred growth for account holders. 

Types of gold IRAs

There are three main types of gold IRAs: traditional, Roth, and SEP. Each one offers a unique benefit. 

Traditional gold IRA

A traditional gold IRA is funded with pre-taxed income. This makes your contributions tax-deductible. The growth in this type of account is tax-deferred, and you only pay taxes when you take distributions.

Roth gold IRA 

A Roth gold IRA is funded with income that has already been taxed. This qualifies you for tax-free withdrawals in retirement. This account is good for investors who expect to be in a higher tax bracket after retirement. 

SEP gold IRA

A SEP gold IRA caters to business owners and investors who are self-employed. Your contributions are tax deductible and this type of account offers higher contribution limits. This type of account allows you to invest significantly more in precious metals.  

Ask the expert: How to choose a gold IRA

Erin Kinkade

CFP®

Consider your current and future income along with your current investment portfolio (i.e. tax diversification between traditional and Roth funds). The amount of income and limitations will impact your decision as well. For example, if you are self-employed and earn more than the maximum amount that can be contributed annually to a Roth or traditional IRA, have significant excess cash flow, and are concerned about your tax liability, then choosing a SEP gold IRA could be the best option. Meanwhile, if you are in a low tax bracket, and have excess cash flow but limited income, the Roth IRA may be the better option (as long as your modified adjusted gross income (MAGI), which is your adjusted gross income with certain tax deductions and tax-exempt income added back in, is below the annual threshold). If you have excess cash flow, are not self-employed, and your MAGI exceeds the annual limit to be able to contribute directly to a Roth IRA, then a traditional IRA could be the route to go. It really depends on your financial circumstances and overall goals (including tax sensitivity!).

How a gold IRA works

A gold IRA lets you hold physical precious metals in a self-directed retirement account. Gold IRAs give you greater flexibility over your investment options. This type of IRA gives you the security of physical assets, the potential for long-term growth and a hedge against inflation. Let’s dive deeper into how it works. 

How to set up a gold IRA

Setting up a gold IRA is straightforward:

1. Choose a custodian: Select an institution specializing in gold IRAs to manage your account. 

2. Open an account: Complete the necessary paperwork and fund your account through contributions or rollovers from your other retirement accounts.

3. Purchase your metals: Once your account is funded, you can work with your custodian to purchase IRS-approved precious metals.

How to purchase and store precious metals for an IRA

You can begin purchasing metals as soon as your account is set up. Your custodian will help you select IRS-approved gold, silver, platinum, and palladium, making sure they meet the purity requirements. 

Your metals will be stored in an IRS depository, which is a facility that stores your assets according to regulations. Contrary to what you might hear, you cannot store your metals at home.  

IRS rules and regulations

The IRS has specific rules for gold IRAs, including:

• Purity: Gold must be at least 99.5% pure. Silver must be at least 99.9% pure. Other metals like platinum and palladium must be at least 99.5% pure

• Eligible coins and bars: Only specific coins and bars are eligible for gold IRAs. Collectible coins are not allowed. American Gold Eagle coins and Canadian Maple Leaf coins are allowed. 

• Storage: Your precious metals must be stored in an IRS-approved depository. Home storage isn’t allowed. You can face significant tax penalties if you fail to comply. 

If you’re considering a gold IRA, start your research online, potentially call gold IRA custodians to ask questions, and engage a financial professional to guide you.

Erin Kinkade

CFP®

Disadvantages of a gold IRA

A gold IRA allows you to diversify your retirement portfolio, but there are some disadvantages.  

Costs and fees

Gold IRAs usually come with higher fees compared to traditional IRAs. You will need to account for setup fees, account maintenance fees, storage fees and transaction fees. Gold IRA fees can reduce your overall return on investment. 

Lack of liquidity 

Selling gold quickly can be challenging, so gold IRAs are less liquid than traditional assets.

No dividends or interest

Gold does not pay out dividends or gain interest like stocks or bonds. This means your investment’s growth is limited to the price appreciation of the precious metals you own. 

Advantages of a gold IRA

There are some compelling reasons to invest in a gold IRA. Here are some advantages for your retirement planning.

Diversification

Gold IRAs let you add physical gold to your portfolio, reducing your dependency on stocks and bonds.

Hedge against inflation

Precious metals and gold have historically performed well during inflation. A gold IRA can offer protection against the declining purchasing power of cash. 

Tax benefits 

Gold IRAs offer tax benefits like pre-tax growth or tax-free withdrawals. 

Ask the expert: How to use a gold IRA for retirement account diversification

Erin Kinkade

CFP®

First, make sure you do your research and choose a reputable custodian. Then, maintain a range of five to 15% (depending on your risk tolerance) in gold, with the remaining assets to be diversified between stocks, bonds, real estate, etc. Monitor your accounts regularly (at least annually) to ensure they align with your financial/life goals.

What are the best gold IRAs?

Choosing the best gold IRA requires extensive research. The best companies combine transparent fee structures, strong customer reviews, and a robust library of educational content. We considered factors like fees, customer support, and reputation when compiling the list below. 

How to execute a gold IRA rollover or transfer

A rollover or transfer lets you move funds from an existing retirement account into a gold IRA without triggering taxes or incurring any penalties. While they both achieve the same goal, there are some key differences to pay attention to to remain compliant with IRS regulations. 

Gold IRA rollover vs. transfer 

The term rollover means you withdraw funds from your current retirement account into a separate account and later deposit those funds into a gold IRA. This must be done within 60 days to avoid any taxes. A transfer is a direct transaction between two account custodians, and the funds never touch your “hands”. There are no penalties for direct transfers.  

How to perform a gold IRA rollover

1. Request a distribution from your current retirement account 

2. Deposit the funds into your gold IRA within 60 days to avoid any penalties 

3. Work with your gold IRA custodian to buy IRS-approved precious metals 

Mistakes to avoid during a rollover

The most common mistake during a rollover is missing the 60-day deadline, which can result in a taxable event and incur penalties. Another mistake is performing more than one rollover in a year, which is prohibited. 

Trying to add non-eligible metals to a gold IRA is another common yet avoidable mistake. You can avoid any complications by opting for direct transfers and checking with your custodian if your precious metals meet purity standards. 

FAQ 

Can I hold other precious metals in a gold IRA?

Yes, a gold IRA allows you to hold other precious metals besides gold, such as silver, platinum, and palladium. However, these metals must meet the IRS fineness standards: gold must be at least 99.5% pure, silver 99.9%, platinum 99.95%, and palladium 99.95%. 

Only approved coins and bars, such as American Silver Eagles, Canadian Maple Leafs, and specific bars from approved refiners, are eligible.

What are the tax implications of a gold IRA?

A gold IRA offers tax benefits similar to traditional IRAs. With a traditional gold IRA, contributions may be tax deductible, and taxes are deferred until you take distributions in retirement. 

With a Roth gold IRA, contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. However, early withdrawals (before age 59½) from either type of IRA may incur a 10% penalty and income taxes.

Can I take physical possession of the gold in my IRA?

No, you can’t take physical possession of the gold while it is part of your IRA. The IRS requires that all gold held in an IRA be stored with an approved custodian in an IRS-approved depository. 

However, you can take distributions of the gold itself upon retirement or when you reach the age of 59½, but doing so will be subject to taxes and potential penalties, depending on your IRA type.

How do I sell the gold in my gold IRA?

To sell the gold in your gold IRA, you must contact your IRA custodian, which will help facilitate the sale according to IRS regulations. 

The custodian will handle the sale transaction through an approved dealer, and the proceeds will be deposited back into your IRA account. It’s essential to check for any fees or penalties associated with selling your gold because these can vary by custodian.

What happens to my gold IRA when I retire?

When you retire, you can start taking distributions from your gold IRA. These distributions can be taken in cash (by selling the gold) or in-kind (receiving the actual gold). 

If you opt for a cash distribution, the custodian will sell the gold and transfer the proceeds to you, minus any applicable taxes. If you choose in-kind distribution, you’ll receive the physical gold, but you may owe taxes on its fair market value at the time of distribution.