Article Overview: This covers all the gold IRA tax rules that you need to know today. If you’re finding yourself searching for answers on, “How is a gold IRA taxed?” then this is the article you want to be reading. Below I cover everything related to gold IRA rules and regulations. See below before investing your money.
From the beginning of time, humans have used precious metals as currency. Ancient civilizations would create gold statues that they would venerate. These metals would even be offered to their gods as a tribute. Moreover, as humanity advanced, we still care a lot for these metals, and we keep using them to create beautiful and expensive ornaments and even coins for our country’s official currencies.
However, these metals are still very important on their own, as there’s a whole investment market created around them. Loads of people have decided to invest in these assets, which are the world’s most reliable assets at the moment. The price of gold has been increasing since the beginning of the century, and it has been proven to give incredibly high profits to the people who decide to jump into this market. However, not everything has been perfect, as there have been some dips in the trend where investors ended up losing money.
Nonetheless, although this is a volatile market and you could either be very successful or not, it is still worth the risk once you learn how to manage yourself within it. Moreover, you must be aware of annual returns, which are entirely unavoidable if you want to start investing in gold. Therefore, taxation should be one of your main concerns when creating your investment strategies, so you can maximize your after-tax returns.
In this article, you’re going to learn everything you need to know about gold IRA tax rules and how to properly manage yourself to get the best possible results from your investments.
Learn The Gold IRA Tax Benefits With this Free Consult
The Different Types Of Gold Investments
Did you know there are several ways you can invest in gold? Most people only know the traditional way of buying gold coins and then reselling them. However, this precious metal is extremely versatile and it can help you make a profit in many other ways.
- Coins and bullion. This is the traditional way that most people use for investing, as you only have to buy a certain amount of gold and hold onto it until it is time to resell it. You can easily do this transaction with a registered broker, and keep your new acquisitions with you or at a deposit box where you’re sure it is going to be safe.
- Gold exchange-traded funds or ETFs. In this case, you aren’t going to have the real physical gold with you, but you are going to own a share that’s backed by a specific amount of gold. You can buy shares that are worth different amounts of gold, but they usually range around one-tenth of an ounce.
- Closed-end funds or CEFs. These are quite similar to the previous type of gold investments, but ETFs are constantly adding new shares that can be bought as the demand rises, on the other hand, CEFs only have a limited amount of shares that are usually sold during the initial offering.
- Non-physical gold investments. This type of investment can be quite suitable for new investors, as they aren’t going to be investing in real physical gold. All profits that may happen are going to be tied to gold’s current market value and other traits of the asset. Some examples of how you could do this are through mutual funds or buying gold mining stocks.
All of these investments can be quite helpful for starting your gold investing journey. However, you must keep in mind there’s no such thing as a riskless investment and you should thoroughly evaluate all your options before committing to one and potentially losing your money. Evaluate the risk and always be mindful enough to only invest what you’re willing to lose.
How Much Does It Cost?
If you think that gold investing is as simple as just buying gold and getting shipped to you, you should think again, as there are several other costs that new investors tend to overlook when starting their business. Therefore, if you want to make the most of your annual returns, you should always keep in mind all of these expenses and add them to your total budget. This practice is wonderful for minimizing risks and preventing losses.
- Storage. This going to be the thing you’re going to spend the most money in, as keeping your gold in your house can cause several problems in the long run, and you could end up losing a lot of money. Therefore, you must rent a safe deposit box from either a bank or a broker. In these boxes, you can safely store your gold for an annual fee.
- Transactions. Although this may seem obvious, not many investors consider that gold transactions have a fee that can change depending on the brokerage accounts. Other fees include trading and portfolio management costs. If you don’t want to experience unnecessary losses, you should always look at the big picture and deduct these fees from your total profit.
- Taxes. Every investor should be aware of the taxes they’re going to face once they start doing this business, as this represents the widest expense they’re going to be facing if they plan on investing in gold for several years. However, we are going to provide you with much more details about this later.
- Insurance. If you decide to store your gold at your house, at least you should invest in good insurance if you wish to keep it safe. However, this isn’t only necessary in those cases, as hiring an insurance company can protect you from the bankruptcy of your broker or chosen bank.
Taxes & Gold
In order to be a successful gold investor, you need to carefully plan out each of your investments, so you choose the ones that provide you with the most profit and fewer tax expenses. However, if you want to do this, you must understand how gold taxation works, which is why we’re going to go through several aspects that may help you learn how to properly manage your taxes.
Any gold investment is considered an investment in collectibles, which means it works the same way as it would if you were buying art or any other collectible item. However, this isn’t good news, as this type of investment tends to have quite high tax rates. Nonetheless, the chances are that you’re going to fit into one of the following two scenarios.
- You purchase gold pieces and keep them for less than a year. In these cases, your investment is going to be treated as short-term capital gains.
- However, if the investor holds onto the gold for more than a year, collectibles can’t be considered long-term capital gains, so they’re going to be taxed as ordinary income, which has a much higher tax rate.
This has caused investors to face a huge loss of money each year during their tax returns, which is why more of them are opting for alternative vehicles, such as gold IRAs. However, these accounts have specific tax rules that you must know before investing in one.
Gold IRAs & Taxation
IRAs have been around since the 70s, and they’re a fantastic investment option to secure funds for your retirements. These investment vehicles allow you to cut some tax expenses as you’re only going to get taxed once you start withdrawing money from it, which allows you to invest in gold without losing a huge amount of money every year.
However, this hasn’t always been the case, as at first IRAs didn’t accept collectibles as investments. Then, about a decade later, the IRS started to allow gold and silver coins and bullion. Nonetheless, in 2007 a major change was made in which the IRS announced that IRA gold investments weren’t going to be considered collectibles anymore. This has opened a fantastic window for investors, who to this day have been taking advantage and growing their profit using gold IRAs.
You should always keep in mind the restrictions created by the IRS on these accounts, which forbid you to own any type of physical gold, and all your pieces must be safely stored in a registered bank account with fees that you must pay annually. If these restrictions don’t bother you, investing in gold IRAs should be perfect for you.
However, some other factors that shouldn’t be overlooked are:
- Roth IRAs and brokers are the best options if you want to reduce tax expenses
- Once you cash out your investment, the IRS is going to start taxing it as ordinary income
- You may be subject to extra taxes if you cash your IRA before you’re 60
- If you have a gold IRA you’re going to pay a marginal tax rate, but if you’re in the high-income bracket, your taxes can increase to more than 28%
- Your income bracket is going to determine how much you get taxed, as the total amount you take from the IRA is going to get added to your total income during your tax treatment
- Investment losses can’t be deducted from taxes
- Once you turn 70, you must start withdrawing money from the IRA
Getting a Better Return on Your Gold
Although you may witness gold values increasing every year, in most cases, a huge part of this income gets lost once you pay your yearly taxes, especially if you’re buying physical gold that is considered a collectible.
Some smart things to do are to hold each piece of gold for more than one year and invest in an IRA, which is going to allow you to tax your investment as a long-term capital gain. Moreover, you can also opt for ERNS and mutual funds, which provide a much larger after-tax return.
Keep in mind that investing in gold isn’t 100% safe, as it tends to experience dips in its price, which is a risk that’s always going to exist. In addition, your results are going to be determined by the quality of your strategies and your personality profile.
Nonetheless, investing in gold is still a great idea, as these investments tend to be in the long-term, so small fluctuation of its value shouldn’t affect the overall outcome.
Types of Gold IRA Accounts
Although we went through the general taxing rules for IRAs, each type has different requirements and benefits, and knowing them can help you choose the one that suits you better. Take a look at them.
Traditional Gold IRA
Traditional gold IRAs are tax-deferred, which means that any contributions or gains aren’t going to be taxed. However, it has an annual limit of $5,500 for people under 50 and $6,500 for those over 50. Moreover, all taxes must be paid once you begin using the funds in it.
Roth Gold IRA
On the other hand, Roth gold IRAs don’t give you any tax reductions at first, but with these IRAs, you don’t have to pay taxes once you begin taking distributions during your retirement.
SEP Gold IRA
SEP gold IRAs can only be used by business owners and freelancers, but these IRAs are like an upgraded version of traditional IRAs, as you can contribute 25% of your income, which is a lot better than the $5,500. However, if that 25% is more than $53,000, this is going to be your annual limit.
Another thing you must consider is that not all precious metals are acceptable for the IRS, and you must only buy certified coins and bars to prevent any possible tax liabilities and loss of status.
Moreover, your precious metals must be at least 99.9% pure, and you can only collect bullion and proof, as rare numismatic coins aren’t allowed in IRAs. In addition, the precious metals that you can buy are gold, silver, platinum, and palladium.
Withdrawal Gold IRA Tax Rules
Most of these accounts have several rules that must be followed when you withdraw money from them. However, these rules aren’t the same for all of them. Keep reading to understand better the withdrawal gold IRA tax rules.
You must pay taxes each time you withdraw money or precious metals from traditional IRAs as they are tax-deductibles. The total amount is going to then get added to your annual gross income, but if you do this before you turn 60, you’re going to be charged with a 10% fee for early withdrawal.
Some exceptions can be applied to this rule, such as buying your first home or paying for insurance if you’re unemployed. You can also avoid it if your life expectancy is shorter than 70 years old. However, once you reach that age you must start withdrawing money or you’re going to face taxes that can go up to 50%.
On the other hand, Roth IRAs are completely tax-free unless the account is less than five years old or you’re under 59. If you withdraw money or precious metals under any of these circumstances, you may face several penalties. However, these penalties can be avoided the same way as in traditional IRAs. Moreover, these accounts don’t have any minimum distributions at any age.
Another popular way to avoid tax penalties is dying. However, this also depends on the type of account, as beneficiaries of traditional IRAs must pay taxes on all their withdrawals, while Roth IRAs are completely tax-free.
Moreover, dying can remove the 10% penalty if you used your IRA money before you turned 59, but your beneficiaries still have to wait five years to use the money if it is a Roth IRA. If you inherit an IRA, the best thing to do is to space out your withdrawals to reduce taxation. However, this is going to depend on your age, relationship with the former owner, their age, and if there are other beneficiaries or not.
Once you settle all those conditions, you’re ready to cash out your precious metals in their current market value. Nonetheless, you should always hire a gold provider who can guide you through the process.
Depository Storage Facility for IRA
When investing in gold and any other precious metals, you should hire a depository storage facility, which is a safe place where you can keep all your investments and prevent losses or damages that may happen at your home. This is a place with peak technology and high security that’s sure to keep your physical gold 100% safe. Moreover, they tend to provide a 1 billion dollar insurance to cover any accidents.
You should also remember that a requisite of IRAs is to keep all your physical gold in a third-party storage facility until you reach 60 and can begin taking distributions of your assets.
These depositories are extremely safe, as they have a team in charge of inspecting each piece of physical gold or gold coins that are received. Then, they write down all of the features and store them in a safe deposit box.
Commingled Vs. Segregated Storage
There’s not only one type of storage facility for your physical gold bars, as you can choose between commingles and segregated storage. However, each of them varies in price and benefits. Keep reading to understand how they work.
- Commingled storage. In this type of storage, your gold coins and bullion are going to be kept with other people’s gold coins and gold bars. This also means that when you withdraw your funds, you’re not going to get the same gold bullion that you bought. Instead, you’re going to receive an equivalent of the same price.
- Segregated storage. These storages ensure that all your minerals are marked as yours, as they’re going to be stored in a separate area. This is the only way to ensure you get what you originally purchased, but these storages are a lot more expensive than commingled ones.
Gold IRAs Extra Costs
- Account setup feed. These fees usually range from $50 to a couple of hundred dollars, and you must pay it up front when you create an account.
- Custodian maintenance fees. Managing accounts require some administrative expenses, which is why you’re going to get charged with a flat fee that tends to range between $75 and $300.
- Seller fees. Sometimes the seller charges a bit more of the market price of gold so they can make a profit out of the transaction. Moreover, they also tend to charge around $40 per transaction as a commission fee.
- Storage fees. This is the fee that you must annually pay to your storage facility, and it is going to depend on how many precious metals you own.
- Insurance fees. If you’re lucky, this fee is going to be included in your storage fee, but if it’s not, you should expect to pay around $100 and $300 per year.
Now you know everything about how to handle taxes for your gold IRA. Hopefully, you can now make the best out of your retirement account, and you’re more than ready to make incredible profits.
If you want to learn more about gold IRAs and investing in gold, we have plenty of information on our website where you can learn more. If this is new to you, learn what is a gold IRA rollover and start there. Then, fill out a form with GoldCo and get your free gold investing guide and learn how precious metals can add balance to your portfolio.