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The history of precious metals goes back thousands of years. Silver and gold have been used as currency in dozens of cultures across multiple continents. Before the stock market was even a concept, silver and gold were kings of the economy.
But the history of precious metals ownership in the US is much shorter. It wasn't until the 1970's that Americans were able to buy their own gold and silver, thanks to a law passed by President Nixon. And it wasn't until 1997 that people could hold gold and silver in their retirement account.
As with anything related to retirement accounts, there are extremely strict regulations and rules regarding IRA investments. You need to have the right type of retirement account, precious metal, and purity level. Even then, if you're investing in coins, the product must be pre-approved by the government.
Sometimes it can seem like the tax laws surrounding your retirement account are total gibberish. That goes especially for people investing in gold, and even more for people who are making these investments without much prior background in the industry. You see, gold must be held in a self-directed account, which means that you choose all of the assets yourself.
We've taken a broad look at some of the most important tax rules regarding your gold IRA. But if this all seems too complicated, have no fear! There are also companies with in-house teams that are experts in this stuff. They're designed to help clients fill out paperwork and comply with relevant regulations, so you don't get stuck with any unnecessary tax penalties.
Investing in Gold
Gold investments saw a major boom during the financial collapse of 2008. The price of precious metals suddenly skyrocketed in a way that we haven't seen before or since. The cost continued to climb until about 2010, when it leveled out to a normal rise.
Gold tends to grow in value over time as the American dollar depreciates. So when you liquidate your holdings, your price is based on the worth of the dollar now, instead of the worth of the dollar when you bought the products.
Interest in gold spiked again during the COVID-19 pandemic. With the economic turbulence, many retirees and people near retirement wanted to secure part of their wealth in gold. That way, they would still have something to live off of when their other investments stopped providing passive income.
It's important to think about taxation when you make investments. Different investments are subject to different taxes. Sometimes your tax burden can even vary by state. Many people don't know where to begin with this, since they don't have a background in tax law.
Types of Investment
You can invest in gold through a variety of different methods.
The most traditional is to buy bullion, hold onto it for several years, and then liquidate it for a profit. Some people also buy bullion and then liquidate it at a loss, just for the extra financial security. You can store these investments at home or you can keep them in a special storage facility for a fee.
Now, if you're using your retirement funds to buy the gold, then the rules are a little different. You need to use one of the IRS-compliant storage facilities instead of your home. It's not legal to hold your gold in a bank deposit box, home safe, or anything other than a government-approved depository.
Fortunately, though, there are hundreds of eligible depositories located all over the world. If you're concerned about government overreach, you can stash your gold offshore. Similarly, if you're concerned about government seizure, you can make sure to pick a depository with a high level of confidentiality.
Another investment option is a gold ETF. With an ETF, you're buying a share of the physical gold. You don't actually own the gold, just a portion of it. There are also gold CEFs, which function similarly, but involve trusts.
You also have the option to invest in the gold industry itself without actually buying physical gold. For example, you might buy stock shares of a gold mining company or a gold refinery. These investments will pay dividends, unlike physical gold. But they are also subject to a significantly higher level of risk than physical gold.
How Gold Is Treated with Taxes
So if you're investing regularly in precious metals using your savings, rather than your retirement funds, how are you supposed to record that?
The IRS has classified gold as being a "collectible." So when you have transactions, you are investing the same way you would in fine art, baseball cards, or comic books. It is a physical investment that is expected to gain value over time.
You will run into certain challenges if you invest personal funds in gold.
One option is to buy the gold and then liquidate it within the same year. This will cause the transactions to be taxed the same way that normal income or short-term capital gains are.
The taxation is different if you hold onto the gold for more than a year. You're still reporting the sale as normal income, meaning that you pay normal taxes. But in this case, you can only pay a maximum of 28%. In the prior case, you might end up paying significantly more than that, depending on the specific tax laws in your area.
Even with the second scenario, 28% is a significant chunk of your wealth. If you invest using your retirement funds, however, the tax situation is different. In fact, using an IRA to invest in gold is among the best ways to retain the majority of your wealth throughout the process.
This is just one of the many reasons that people tend to buy gold with their retirement money. Another reason is that people often have more retirement cash available on hand than savings.
How Taxes Work for Gold IRAs
In order to understand the taxes for gold IRAs, it's important to understand the history of these retirement accounts.
The individual retirement account was first created in 1974. The goal was to help people invest for their retirement. In exchange for not using the funds until they reached the age of 60, people could invest money and accrue wealth without paying initial taxes. Then when they began taking money out of the account in retirement, they would pay the taxes then.
Basically, you could delay your tax payments. This allows you to lower your capital gains and overall tax rate, while also having access to the full non-taxed income in your account. Sometimes people with employer IRAs will also have their employer match their contributions.
There have always been strict rules about what IRA income can be invested in. For example, no collectibles or alternative assets were allowed at first. In the 1980's, the IRS created specific legislation allowing for certain silver and gold coins to be placed in an IRA. That expanded much further in 1997, when the Taxpayer Relief Act allowed for the storage of high-quality bullion in an IRA.
That wasn't the end of the tax shifts, though. There was an even larger change looming on the horizon. Ten years after bullion was made eligible for a retirement account, in 2007, the IRS made a massive statement. If you invested in a gold ETF using your retirement funds, the ETF wouldn't count as a collectible investment. Which means that you wouldn't be subject to the same major tax hikes.
Today, many people choose to invest in ETFs specifically to take advantage of this. The cost of taxing an ETF is much lower than that of taxing a collectible.
On the other hand, many people actually prefer to invest in physical gold. Though you may pay slightly more taxes later, these investments are more secure. You are the sole owner of the gold, so you aren't beholden to what other shareholders do. You also won't lose your investment if your custodian or storage company happens to go bankrupt.
But there are rules in place when you invest in pure gold bullion. You must buy bullion with your existing funds, rather than entering a current coin collection into your retirement account. You also need to store it in a highly secure and specialized depository, rather than a bank deposit box or your home safe.
Because of this, you will have an annual fee to pay to the storage company for use of their vaults. You'll also need to pay your account custodian annually to maintain your holdings.
Roth or Traditional IRA
Some people question whether they should use a traditional or Roth IRA to invest in gold. You can open both of these as self-directed accounts, which can hold alternative assets. But there are significant advantages to using a traditional IRA.
With a traditional IRA, you don't pay taxes on your income until you're taking distributions. With a Roth IRA, the opposite is true. You pay your income taxes upfront in exchange for not paying any taxes on your distributions later.
Roth IRAs are often used with high risk, high reward investments. For example, if you invest in a startup company that later becomes a multi-billion dollar business, you'll be thrilled not to have to pay taxes when the distributions come.
On the other hand, with traditional IRAs, your investment has a better chance for organic growth. There's more money tied up in the products, so as they increase in value slowly over time, you end up earning more than you would if you paid your taxes immediately.
Most people prefer to use traditional IRAs with precious metals investments. Gold is a relatively stable investment, and it's unlikely to explode in value the way you'd want a Roth IRA investment to.
So let's assume that you invest in gold using a traditional IRA, rather than a Roth IRA. What do you need to know about paying the taxes?
A self-directed IRA has basically the same tax rules as a traditional IRA. You'll liquidate your gold by selling it, and then you'll take the distributions. The taxes will be paid on your gains after you receive the funds.
Instead of being given the collectible tax rate of 28%, gold IRAs are given a marginal tax rate. This can be beneficial for some, but it does mean that you'll pay greater than 28% if you're in a high tax bracket. Your income bracket is the main factor that determines how much you'll pay in taxes.
If you sell your investments for a loss instead of a gain, then they can be written off on your taxes. They aren't permitted to be deducted from your income, meaning that you don't need to pay the taxes.
If you choose to take any distributions before you reach the appropriate age, then you'll be given a penalty on top of the taxes. Early withdrawal penalties are 10%.
You can start taking distributions when you're almost 60. But you don't have to. It's only when you're over the age of 70 that you are legally required to remove distributions from the account rather than letting it sit quietly and grow.
Our Top Recommendations
Overall, the simplest and most tax-advantaged way to invest in gold is to buy bullion for a self-directed traditional IRA. Though you may pay more taxes than you would on an ETF, you also don't have the same level of risk.
With this investment, you'll pay for storage and maintenance every year. These costs depend on the companies that you use.
There are gold dealerships that specialize specifically in IRAs. They know everything about the regulations, paperwork, eligible products, and industry. When you're new to investing, they can answer questions and take you through the whole process.
These companies also often partner with storage and depository companies. If you meet certain qualifications, they may be willing to waive some of your startup costs and expenses.
We've broken down our three main recommendations.
Goldco has an impeccable industry reputation. There are thousands of customers who say that they've been guided through the IRA process from start to finish without a hitch. Customers will commonly praise their representative by name, saying that the employee made the process super simple and straightforward.
Goldco's biggest advantage is convenience. They handle literally everything for you. They'll show you where to sign on the paperwork, what information you need, and then they'll facilitate your whole rollover. They'll even talk to your custodian and coordinate with your depository on your behalf.
Goldco is our top pick because their customer service is unbeatable. But the other two options are excellent as well.
#2. Augusta Precious Metals
Augusta Precious Metals is similar in many ways to Goldco. They have entire teams of in-house experts who all focus on a different part of the IRA process. Since everyone has a specific niche, they're able to become much more thorough experts. If your representative can't answer a question, they'll be able to find another employee who can.
Augusta is best known for having excellent educational materials. In addition to an entire learning center on their website, they host webinars for their clients. When you create an account, you can always log on and instantly speak to your representative about your thoughts or concerns.
Augusta has incredible reviews and is a very worthwhile company to work with. However, they also have a relatively high minimum investment. If you don't have $50,000 saved up in your retirement account to spend on gold and silver, then Augusta won't be the right fit for you.
#3. American Hartford Gold
American Hartford Gold has many of the same services as Goldco and Augusta. This company will take you through each piece of paperwork and connect you to your custodian. The custodian is the one who will help you with your rollover. Then AHG will help you choose the right products to invest in.
AHG has been praised for being honest and transparent. The customer service team replies promptly to questions and makes an effort to satisfy every customer. In addition, there isn't any minimum required to make an investment, so this is a great option for people with limited funds.
AHG's inventory changes on a day-to-day basis depending on what's in stock. But they specialize in a variety of American and Canadian coins, often from several years back. The bullion is still extremely valuable, but it's not as "trendy." Because of this, they can acquire and sell the bullion at lower prices.
Tax rules for your IRA can be overwhelming. There are so many different kinds of IRA and types of gold investment. How can you be sure that you're making the best decision for you?
This gets especially tough because of the self-directed nature of the account. With most traditional IRAs, an investment manager can answer these questions. They have the expertise to choose assets based on growth, stability, and a minimal tax burden. But unless you happen to have a background in this, that's tough.
We recommend buying pure gold bullion in a traditional self-directed IRA. There are even companies set up to help you do this. They'll take you through the paperwork and recommend ideal products for your specific situation.
Our favorite of these companies is Goldco, thanks to their high performance customer service team. But American Hartford Gold is great for those with less to spend, and Augusta is a luxurious option for people with a little more.