How Does a Gold IRA Work?

For many investors, buying gold is a way to diversify their portfolio and hedge against inflation. You can get a tax break, too, if you use an individual retirement account to hold your gold.

These accounts, commonly known as IRAs, offer tax advantages, making them a valuable financial tool.  However, you’ll need to follow IRS rules closely to get their benefits. That means buying only certain types of gold and keeping it in a self-directed IRA account.

Keep reading and we’ll cover all the basics about how a gold IRA works. 

What is a gold IRA?

A gold IRA is a retirement account that allows people to invest in physical gold. Like other IRAs, these accounts may offer either a tax deduction for contributions or tax-free income in retirement, depending on how they are set up.

Physical gold is considered an alternative investment that’s not allowed in a regular IRA. However, since gold IRAs are a type of self-directed IRA, they can hold alternative investments as 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 will be stored. 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 three main types of IRAs, each offering various benefits to investors. Depending on your financial situation, one may be preferable to another.

Here’s a brief overview of each account’s major points.

Trad. Gold IRA	Roth Gold IRA	SEP Gold IRA
Available to individuals	Available to individuals	Available to self-employed workers and business owners
Contributions made pre-tax (deductible)	Contributions made after-tax (not deductible)	Contributions either pre- or after-tax
Distributions in retirement subject to income tax	Retirement distributions are tax-free	Distributions can be taxable or tax-free
Min. age for penalty-free withdrawals: 59½	Min. age for penalty-free withdrawals: 59½	Min. age for penalty-free withdrawals: 59½

SEP IRAs can be created as either traditional or Roth accounts, and how they are set up will determine their tax benefits.

Also, while all IRAs are subject to a 10% tax penalty for early withdrawals, that penalty only applies to the earnings of Roth accounts. Since contributions to a Roth IRA have already been taxed, they generally can be taken out at any time without penalty. 

How can you choose among gold IRA types?

Catherine Valega

CFP®

Because gold is not traded as easily as securities, ask each custodian about the process for getting funds out. This is especially important when it comes time to take your required minimum distributions. 

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

Gold IRAs can hold more than just gold. You’re allowed to purchase and keep the following in your gold IRA:

• Silver
• Gold
• Platinum
• Palladium

The IRS limits the types of coins and bullion investors can hold in gold IRAs. These limits are intended to ensure 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.

American Eagle coins are the one exception to this rule. 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 of a gold IRA.

Expert take

Catherine Valega

CFP®

Due to the illiquidity, consider holding commodity funds or ETFs in taxable investment accounts instead of retirement accounts that require distributions or buying the actual commodity and keeping it someplace safe, such as a safe deposit box.

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.

Most depositories offer two methods of storage: segregated and commingled.

Segregated storage

If you select segregated storage, the depository will store your precious metals separately from other customers’ coins and bars. This is the option to choose if you want to ensure that the coins and bars you withdraw are the same ones you deposited. 

Commingled storage

Commingled storage means the depository stores your metals alongside other customers’ metals rather than separately. When you deposit, the depository notes the type, quality, and amount of metal you add. 

When you remove metal for sale, you won’t necessarily receive the same coins and bars. You’ll receive equivalent metal instead.

Which type of storage is best?

Both types of storage provide similar protection levels, so which you choose is a matter of personal taste. You must pay for storage, and segregated storage is often more expensive due to the increased space requirements.

When choosing a depository for your gold, consider the following factors:

• Security and climate control measures used at a facility
• Insurance offered against losses from theft or natural disaster
• 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.

The following table outlines the taxes and restrictions in place for withdrawals from traditional and Roth gold IRAs.

	Traditional gold IRA	Roth gold IRA
Minimum age for regular distributions	59½	59½
Early withdrawal penalty	10% on all withdrawals	10% on account earnings
Required minimum distributions	Yes, minimum distributions begin at age 73 or 75, depending on your birth year.	No
Are distributions taxable?	Yes	No

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.

There are other, easier account options to hold gold. If your only option is in an IRA, you probably shouldn’t be doing it. Try to avoid putting all your eggs in one basket.

Catherine Valega

CFP®

Read More

Is a Gold IRA Good for Seniors?

How can I fund a gold IRA account?

Once you open a gold IRA account, you have to fund it. This process often takes a week to 10 days but can depend on factors such as which gold IRA provider you select and which funding mechanism you use.

Cash	IRA transfer	Rollover
Easiest and fastest	For those with an existing IRA	For those with 401(k) account or other retirement plan
Can be used upon deposit	Paperwork required to transfer assets	Paperwork required to transfer assets
Subject to annual IRS limits	Assets may need to be liquidated before gold can be purchased	Requires working with your company HR department or 401(k) plan administrator

You can’t directly fund your account with gold bullion or coins you own. The government restricts the types of coins and bars people can purchase.

You must 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.

Where can I open a gold IRA account?

Fewer companies provide gold IRAs than other IRAs, but 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, consider our picks for the best gold IRA companies.