An individual retirement account (IRA) helps you save money for retirement. Because it is a tax-deferred account, you can avoid paying taxes on your earnings until you withdraw your funds in the future. If you want to diversify your investments, a gold IRA is one of the options you can use.
How a Gold IRA Works
Through a gold IRA, you can turn your retirement investment into gold and precious metals. In March 2021, gold was trading at $1,944.54 per ounce. Back in 2000, it was trading at just $279.29 per ounce.
Obviously, this is great news for investors. In about two decades, the price of gold has increased by more than 600 percent. Because gold retains its value over time, many investors use gold IRAs to diversify their portfolios.
With a gold IRA, you can hold physical assets instead of just investing in traditional stocks. For example, you can buy silver, gold, palladium and silver. Because only specialized financial institutions can store gold, it is important to find the right IRA provider.
Normally, gold and paper assets move in opposite directions. This means that gold prices generally go up when the stock market goes down. Thanks to this inverse relationship, investors can enjoy having strong profits from their gold portfolios while everyone else is panicked about major drops in the stock market.
Can You Store Gold at Home?
The short answer is no. You can theoretically set up a limited liability company to serve as your gold trustee, but there are very specific rules involved. It is important to work with a professional IRA company when you invest in gold because the penalties for improper storage can be substantial.
The Internal Revenue Service (IRS) gives retirement investors tax deductions based on their IRA investments. You only get these deductions when you follow all of the rules exactly. If you are not compliant with all of the rules, your purchase will not be counted as a retirement contribution.
The penalties are worse if you remove gold from an existing storage location and bring it to your home. In these cases, the IRS considers the gold transfer to be a distribution. If you are under 59.5, this means you have to pay a 10 percent penalty as well as your normal income tax rate.
This does not mean you cannot store gold on your own, but it does mean you should be extremely careful. Some companies have deceptive ads that make it seem easy to store gold at home. Unless you want a hefty tax bill and a potential IRS audit, you need to be exceedingly cautious about how you store your gold.
The Requirements for Home Storage
In order to store your gold IRA at home, you have to meet specific qualifications. If you do not qualify for home storage, there are alternative storage options available. As a general rule, you will be required to meet the following qualifications.
The IRS is very specific about what it expects from gold IRA storage locations. If you break a single one of these rules, you are more likely to get audited by the IRS. Because the penalties for early withdrawal can quickly add up, it is very important to work with a gold IRA provider that knows how to perfectly follow all of these rules.
As you may have noticed, it is very unlikely that a typical investor can carry out all of these steps. In essence, you would have to create an actual gold IRA company in order to store gold on your own. Even after you have made an entire financial institution, you would still be unable to legally store gold at home. Instead, you would have to place it in a secure location.
What Does the IRS Think About Storing Gold IRAs at Home?
In essence, the IRS does not want investors to store gold at home. Even if you set up a limited liability company for gold storage, you will not be able to bring the gold into your house. Instead, you would have to store the gold in a secure depository that is controlled by the trustee.
Section 408(m) of the IRS Code is very clear about what kind of physical metals can be bought through an IRA. More importantly, the IRS says that all of the gold and precious metals must be in physical possession of the trustee. This means your personal home is not an option.
Unfortunately, many people are confused about using home storage for gold IRAs. There are many deceptive ads online that say you can store your gold at home. Your gold must be in a secure location. Otherwise, it is no longer considered a part of your IRA.
If you are already older than 59.5, you can always withdraw from your IRA as a normal part of your retirement distributions. In this scenario, you can choose to take your distribution as cash or physical gold. Once the gold has been withdrawn, it is no longer considered a part of your IRA.
Be Wary of People Selling Snake Oil
Goldco and reputable gold providers will not advertise home storage for a gold IRA. Even if you follow all of the rules perfectly, you are still not allowed to keep your gold IRA in your house. A good gold dealer knows this, so they will never push you to break the rules.
Unfortunately, there are companies out there that only care about turning a profit. They will defraud customers by selling them gold that cannot go into an IRA. When the customer is audited by the IRS, they are the ones who end up paying penalties, extra taxes and other fees.
Some of these snake oil salesmen are so brazen that they advertise their gold storage on Fox, CNN and other mainstream sites. In some cases, they never actually deliver any gold. As a result, customers end up losing $1,000 to $300,000.
Ultimately, the security of your retirement investments depends on who you work with. If you want your investments to be around in a few decades, you need a reputable company that has an excellent reputation in the industry. When it comes to gold investments, you really get what you pay for.
How Do I Start a Gold IRA?
A traditional IRA allows you to contribute $6,000 per year. If you are 50 years old, you can contribute up to $7,000 per year. As long as you follow the rules, you can deduct this contribution from your taxes. Then, your investments can grow in a tax-free account until you retire.
To be legal, IRAs have to be administered by a trustee. This trustee makes sure you contribute the correct amount each year. They are also required to make you take distributions at age 70.5.
The IRS lets people invest in stocks, bonds and similar assets through IRAs. They do not let you invest in collectibles or life insurance policies. If you want to invest in precious metals, you must buy specific forms of each precious metal.
With precious metals, the metals dealer serves as your custodian. They sell coins and bullion that have been pre-approved by the IRS. Once these metals are purchased, the trustee must physically maintain the gold in a secure depository. The owner is not allowed to keep the metals in their home.
1. Choose an IRA Custodian
The first step in setting up a gold IRA is to choose a custodian. Because the custodian is in charge of protecting your gold, you need to pick a trustworthy company to work with. Ideally, you should find a trustee that has years of experience in the industry and a solid reputation.
2. Find a Precious Metals Dealer
Sometimes, your IRA custodian can recommend good dealers. If you want to find a different dealer, you can check with the Industry Council for Tangible Assets (ICTA), the Professional Numismatists Guild (PNG) or the American Numismatic Association (ANA). Once you pick a dealer, your IRA custodian can send your money to the dealer to purchase gold.
3. Pick the Right Products
After the money is in your account, you can use it to purchase different products. There are a wide variety of bullion and coins available. To qualify as an IRA investment, the gold products must be pre-approved by the IRS for gold IRAs.
4. Select the Right Depository
Most likely, your IRA provider already works with an approved depository. If they do not work with specific depositories, they can always recommend good ones. Because you are not allowed to store precious metals at home, you must find a depository that follows all of the applicable IRS rules.
5. Finish Your Transaction
After you have everything set up, you can finalize your purchase. The IRA trustee will finish processing your payment. Then, the dealer can send the gold to the depository you selected.
Once you have finished creating your account, you can invest more money in it later on. Eventually, you can also make withdrawals from your account. If you have any questions, your trustee should be able to tell you what you can and cannot do with your IRA.
Can I Purchase Precious Metals Without an IRA?
If you are determined to store gold at home, there are a number of methods you can use. While you cannot legally store IRA investments at home, it is possible to store precious metals in your house. All you have to do is purchase precious metals outside of an IRA. Then, you can keep your purchases wherever you want.
It is important to remember that all investment types carry some degree of risk. For example, gold prices tend to increase when stock prices decline. If stock prices advance, gold prices will generally fall. Because of this, it is entirely possible that an investment you make today could be worth less in a few months.
Should You Open a Gold IRA?
Before you make any investment decision, you should always talk it over with your financial advisor. A gold IRA can be a good investment choice if you want to diversify your portfolio. Many investors use gold IRAs to hedge against market volatility and inflation.
There are risks involved, so you should carefully weigh the risks and benefits before you make a purchase. If you already have a large portfolio of other investments, it makes sense to invest in a more diverse portfolio. Other than gold, you can also purchase platinum, palladium and silver.
If you want to start small, you can always add gold investments to your current portfolio. For example, there are exchange-traded funds (ETFs) and mutual funds that follow precious metal indexes. These funds can help you get exposure to precious metals through your current retirement accounts.
Ultimately, a gold IRA can be a viable investment decision. When you use gold to diversify your portfolio, it can help you hedge against inflation and market reversals. Through the right trustee, you can get started on your gold IRA and invest in a variety of precious metals.