In the wake of economic uncertainties, investors prefer to invest in alternative assets such as real estate, cryptocurrency, and precious metals instead of paper assets. Over the years, precious metals like gold have served as a hedge against inflation. This is because they are not as volatile as stocks and bonds.
Investing in precious metals through a gold backed IRA is considered a smart move. It offers some tax benefits which help save towards retirement. However, there are essential guidelines that you should take note of before you begin investing.
Gold IRA Rules and Regulations
Let us discuss the rules and regulations of a gold IRA.
Use a Self-Directed Account
Although there are several types of IRA, you cannot just use any of them to invest in precious metals. It must be a self-directed account. The contributions you make here are tax-deductible. That is, you will pay tax upon withdrawal of funds.
Invest in IRS Approved Metals
You can hold gold, silver, palladium, and platinum in a self-directed IRA, but they must meet specific purity levels. Also, all gold bullion and coins should meet the standards of the IRS. The purity level should be 99.5 percent and the acceptable types are:
- Australian Kangaroo coins
- American Buffalo coins
- American Eagle coins (allowed at a purity level of 91.67 percent)
- Credit Suisse bars
The purity level for silver bars and coins is 99.9 percent while that of palladium and platinum is 99.95 percent. You can only purchase precious metals through a custodian, who will ensure that they are stored in an approved depository. The bullion you purchase should come from an accredited dealer or a government mint. You can visit https://infoforinvestors.com/ to learn how to find a reliable gold dealer.
Purchase Precious Metals Through Your Custodian
As mentioned earlier, you need a custodian to help you buy precious metals for your retirement account. The custodian is a financial institute like a brokerage firm, Trust, or Bank. It has to assist you in setting up a self-directed retirement account, purchasing the metals, and ensuring they are shipped safely to the depository.
Usually, the custodian makes the purchase using the funds in your gold IRA. After setting up the IRA, you can use the following funding methods:
- Direct cash deposit
- Transferring your assets from another IRA to the new one
- Rolling over funds from your 401(k)
Before choosing a custodian, ensure it is approved by the IRS. The firm should have at least 5 years of experience managing precious metals retirement accounts. You may want to read reviews from previous customers and check them out on the website of the Better Business Bureau.
Custodians charge administrative fees, so try to compare fees from different providers. And ask many questions to be sure there are no hidden fees. Most importantly, find out whether the custodian can buy your assets when you decide to liquidate them.
Store Your Assets in an Approved Depository
The rule of precious metals investment is that you cannot store your assets at home or in a bank vault. If you hold physical gold for just one day, the IRS counts it as a distribution. This implies that you will pay tax on it.
As a result, your custodian will take delivery of the precious metals and store them in a depository that meets IRS storage requirements. You can either choose the depository or ask your custodian to make recommendations. Consider the following when selecting a depository:
- Is the environment secure?
- Does the provider have insurance coverage?
- How much do they charge?
The depository will hold your assets until you are ready to liquidate them. You can’t walk straight into the store to request gold or silver. You must go through your custodian and then the depository will deliver your assets to your address.
In a gold IRA, there is a limit to the amount of money you can contribute annually. Currently, the limit is $6000, but if you are up to 50 years or older, you can contribute an extra $1000 as a catch-up.
Avoid Early Distributions
The reason you own a retirement account is so you can have funds during retirement. As mentioned earlier, a gold IRA has tax benefits: you will not pay taxes until you withdraw your assets. However, you cannot withdraw at any time because the IRS considers fifty-nine and half years as the age of retirement.
If you take distributions at that age, you will only pay income tax on the withdrawal without any penalties. You are also free to liquidate the assets in your account in exchange for cash or collect the physical metals. The good thing about holding physical precious metals is that you can hold them for a longer time, and then sell them when the value has increased. You can even pass them down to your children or benefactors.
On the other side, if you decide to withdraw your assets before retirement age, you will pay a penalty of 10 percent of the withdrawal. Also, if the metals appreciate while in the IRA, the IRS will collect 28 percent of the profit as capital gains tax. However, there are some exceptions to the rule. You can visit this website to find out how to avoid paying penalties on early IRA withdrawals.
Upon retirement, you are expected to take distributions. However, it becomes mandatory when you become 72 years old. If you fail to do so, you will pay 50 percent excise tax every year on the amount you are expected to withdraw.
It is worthy to note that the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) waived RMDs (required minimum distributions) for retirement plans and IRAs, including accounts that were inherited by benefactors. This also affects those who turned seventy and half years in 2019 and collected their first distribution in 2020. The implication of this is that you can rollover your distribution instead of withdrawing it.
Although investing in precious metals is an effective way to protect your wealth, there are tax implications. We shared the rules and regulations of a gold IRA as well as the penalty for noncompliance. Before making large precious metals investments, it is advisable to contact a professional.