A gold IRA is a specialized type of self-directed IRA that allows us to purchase precious metals as part of our retirement portfolio. Gold, silver, platinum, and palladium have become popular investment options over the years, as they protect our retirement savings from negative economic events by reducing the risk of value depreciation while offering tax benefits.
However, it’s important to understand how these individual retirement accounts work before putting our hard-earned money into a gold IRA. Fortunately, here’s all the information we need to make a sound decision that really favors our strategy. Read on!
Understanding What a Gold IRA Is
As mentioned, a gold backed IRA is a type of individual retirement account. Therefore, it offers the same benefits. However, it’s a self-directed IRA, which means holders have the freedom to make decisions and choose the assets they want to buy.
If we open a gold IRA, we can invest in physical gold, whether we buy gold coins or other products. However, we cannot store these assets at home. Instead, they must be held by a depository approved by the Internal Revenue Service (IRS).
Gold IRAs also allow holders to invest in stocks and mutual funds of gold companies. In addition, we can buy exchange-traded funds, also known as ETFs, if they track a gold index’s performance.
Also, if we have a gold IRA, we can invest in other precious metals, such as silver, platinum, and palladium. Although they’re physical, we cannot store them at home but in an IRS-approved depository, as we should do with gold.
All assets we purchase through a gold IRA must meet purity, fineness, and size requirements.
How Does a Gold IRA Work?
A gold IRA works like other individual retirement accounts. In order to establish one, we need a custodian or trustee.
These third parties can guide us through the process of opening these accounts. However, we have to choose a reliable and reputable gold IRA company to avoid risks and facilitate the process.
Types of Gold IRA
In addition, we have to choose the type of gold IRA we want to open. These are the common options:
Traditional Gold IRA
This is the most common type of gold IRA and allows us to deduct the amount we contribute to the account from our income when we file taxes.
Also, when we make withdrawals from traditional gold IRAs, we have to pay taxes on the full amount withdrawn.
Roth Gold IRA
As the opposite of a traditional IRA, a Roth IRA is a type of retirement account that allows us to pay taxes when we make contributions. Therefore, our money accumulates tax-free.
If we have a Roth gold IRA, we don’t have to pay taxes when we take distributions. In addition, this account doesn’t limit withdrawals.
SEP Gold IRA, also known as Simplified Employee Pension Plan IRA
Designed for self-employed individuals and small businesses, SEP IRAs are similar to traditional accounts. However, these alternatives allow business owners to contribute for themselves and on behalf of their employees.
After choosing the type of gold IRA, we have to fund our account to buy precious metals according to the eligibility conditions set by the IRS. Also, we have to choose an IRS-approved depository to store our assets.
I know the process seems complex. However, working with a reputable gold IRA company can help us save time, understand each step, and make better decisions to protect our investments.
How Can I Fund a Gold IRA?
Do you plan to open a gold IRA? I’m sure one of the questions you have in mind is how you can fund this account. Don’t worry! You’ll find the answer here!
Essentially, there are three options to fund a gold IRA: transfers, rollovers, and cash contributions. Let’s learn more about each one!
Gold IRA Transfer
If we already have an individual retirement account, we can ask our custodian to transfer our existing funds to a new precious metals IRA. This process is straightforward. That’s why many investors choose it.
A custodian can transfer the funds from our original IRA to a gold IRA account without tax penalties or government reporting. Also, there’s no limit to the number of transactions we can make per year.
All three types of gold IRA accounts listed above are eligible for these rollovers.
With a traditional IRA, we can make pre-tax or tax-deductible contributions, which grow tax-free. However, the IRS limits the amount of money we can contribute each year.
There’s a benefit that makes traditional IRAs attractive: We don’t have to pay taxes until we retire and start making withdrawals or taking distributions. However, this option only favors those who think they’ll have a lower tax rate in their golden years.
As mentioned, we have to pay income taxes when making contributions to our retirement account if we have a Roth IRA. As a result, all the distributions we can take once we’re eligible are tax-free.
This type of retirement account allows transfers from original IRAs, offering even more tax benefits. It’s a good option for those who believe it’s better to pay taxes now because they’ll have a higher tax rate during their retirement.
As explained above, this type of retirement account can be established and funded by employers for themselves or for their employees.
Rollovers are eligible options to fund SEP IRAs. However, there’s a limit on annual contributions. They cannot exceed the lesser of 25% of an employee’s salary. Additionally, all employers are required to contribute the same amount for all participants.
Also known as Savings Incentive Match Plan for Employees, SIMPLE IRAs are retirement accounts that combine the rules and features of both SEP and traditional IRAs. They have been designed for small businesses or companies that don’t sponsor a retirement plan.
A SIMPLE IRA allows employers and employees to make contributions to a traditional gold IRA originally set up and funded for workers.
Gold IRA Rollover
Besides making transfers, we can also roll over funds from our standard IRAs or retirement plans, such as a 401(k), into a new account to purchase physical precious metals.
If we plan to roll over the funds from our existing accounts to a new precious metal IRA, we have two options: direct rollover and indirect rollover. Here’s more information on each one.
When we want to make a direct rollover to move our existing funds to our new gold IRAs, we should ask our existing retirement plan administrator to move the money from one account to another.
Retirement plan administrators can directly move funds from an existing IRA to a new precious metal IRA. In other words, we never touch the money, so it isn’t subject to taxes.
We can also make an indirect rollover from our existing IRA or retirement plan to our new gold IRA. However, we have to serve as intermediaries if we choose this option.
In simple words, we have to withdraw our funds from our existing custodian. After that, we can deposit our chosen contribution with our new custodian.
Although this type of rollover is tax-free, we only have 60 days to complete the transaction. Otherwise, the money will lose its tax-deferred status, which means we would have to pay tax penalties.
Also, there’s a limit to the number of transactions we can request annually. We can only make one indirect rollover per year.
These types of accounts are eligible for a rollover:
It’s a tax-advantaged retirement plan, often sponsored by an employer, which allows both employers and workers to make contributions.
401(k) account holders can choose a contribution amount, which comes out of their paycheck, but there is a maximum sum. In addition, we can choose between pre-tax or post-tax contributions depending on the plan we selected.
Also known as the Thrift Savings Plan, a TSP works similarly to a 401(k) account but is designed for federal employees and uniformed service members.
This retirement plan is available to government employees and some people working for non-profit employers. Essentially, a 457(b) is a tax-advantaged retirement plan where a selected percentage of pre-tax income is withheld from participants’ paychecks.
This type of retirement plan allows holders to compound tax-free, but taxes are paid when making withdrawals.
Employees of public schools and tax-exempt organizations, such as doctors and ministers, can choose a 403(b) retirement plan, which allows them to invest in mutual funds and annuities.
Although this type of account doesn’t allow us to invest in physical precious metals, we can make rollovers to establish a new IRA and buy gold, silver, platinum, and palladium with our existing funds.
- Pension Plan
Pension plans allow employers to contribute to a pool of funds created to pay for employees’ retirement. In some cases, workers can also make contributions.
When it comes to pension plans, there are two options available: defined-benefit and defined-contribution plans.
- Tax-Sheltered Annuities
With this type of retirement account, employees can make pre-tax contributions. This option is ideal for people working in public schools and other tax-exempt organizations.
Gold IRA Cash Contribution
Besides the options mentioned above, we can make contributions out of our money, whether the funds come from a check or a personal savings account, to open a gold IRA and buy precious metals.
Making cash contributions is straightforward if we work with reputable gold IRA companies, especially if an expert guides us through the process.
Many investors choose to turn their cash into precious metals through gold IRAs, as they want to diversify their portfolios to protect their retirement money. However, we also have to comply with several rules and requirements.
Ideally, we should work with an expert to open our gold IRAs with cash contributions in compliance with the IRS guidelines, limits, and rules.
Final Thoughts – What Is the Best Option?
After reviewing all the key facts about gold IRAs, there’s one more question we need to answer: what is the best option to fund these accounts?
Well, I’d say the answer depends on our preferences, resources, and investment strategy. All of the options listed above have one thing in common: they can help us open a gold IRA.
However, we must consider several aspects to choose the best one for us, including the type of account we have now, if we want to handle our existing funds, or whether we’re looking for tax benefits.
If you still have doubts or are not sure which is the best option to fund your gold IRA, don’t hesitate to contact an expert advisor!