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Given the economic uncertainty that we're facing, diversifying your investment portfolio with precious metals, such as gold, may be able to offer the stability that you're searching for. While you can purchase gold, silver, and other precious metals as a personal investment at any time, you may have also heard that there are tax benefits to opening a Gold IRA and holding these precious metals in your retirement account.
If you're feeling a bit overwhelmed at the prospect of learning a whole new set of tax rules for your Gold IRA, don't be. The basics rules for Gold IRAs are similar to those for standard IRAs. Keep reading, and we'll lay out more information about how taxes work for Gold IRAs so you can know what to expect.
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What Is a Gold IRA?
Before we start looking at how taxes for an IRA work, let's step back just a bit and review what a Gold IRA is. With a Gold IRA—a type of Self-Directed IRA—you're able to hold precious metals, rather than the traditional stocks and bonds, in your IRA account. Holding a portion of your portfolio in precious metals diversifies your investments and can off-set stock market dips and crashes.
Precious metals, like gold, are also very rare and easy to liquidate. This means that when you're ready to cash in your investments, or some of them, for your retirement years that you should be able to find a buyer with ease.
What Types of Precious Metals Can You Hold in an IRA?
Not all precious metals can be added to a Gold IRA. The IRS tax rules stipulate the types of coins and bars that are acceptable. Gold coins and bars, for example, must be at least 99.5% pure.
In addition to gold, you can also add silver, platinum, or palladium to your Gold IRA (or Precious Metals IRA in this case). The IRS has set minimum purity levels for these precious metals as well. They are:
Below are just some of the different coins and bars that meet these minimum purity requirements. As you can see, there are numerous options to choose from.
What Are the Maximum Contribution Limits for a Gold IRA?
The total amount you can contribute to a Gold IRA—or any IRA—is limited by the IRS. Currently, individuals can contribute a maximum of $6,000 each year if they are under 50. Individuals over 50 can contribute up to $7,000 each year. Remember, that this is the total amount that can be contributed to any IRA accounts. So, if you keep some of your investments in a traditional IRA, and some in a Gold IRA, you'll need to split your $6,000 (or $7,000) yearly contribution between the two accounts.
The yearly maximum contributions may go up in the future. The IRS has adjusted these maximums periodically since the Individual Retirement Account was first signed into law in 1974.
Depending on your total income and modified AGI, you may be able to claim a full or partial deduction of your IRA contributions on your taxes. For those filing single or as head of household, a full deduction can be taken if the total AGI is $68,000 or less, a partial deduction if the AGI is between $68,000 and $78,000, and no deduction can be claimed if the AGI is $78,000 or more.
Married individuals filing jointly and qualified widows or widowers can receive a full deduction if their AGI is $109,000 or less, a partial deduction if their AGI is between $109,000 and $129,000, and no deduction if their AGI is $129,000 or more.
For those married and filing separately, if the AGI is less than $10,000, they will receive a partial deduction. There is no deduction for these individuals if their AGI is $10,000 or more.
Adding Precious Metals to a Gold IRA
The gold coins or bars you add to your IRA must be purchased using IRA funds. This means that you cannot add precious metals that you already own to your IRA. Additionally, you will need to work with an IRA custodian to purchase the gold or other precious metals for your account.
IRA custodians are accredited by the IRS and are in charge of keeping the assets held in a retirement account secure. The precious metals provide you're working with should be able to help connect you with an IRA custodian who handles Gold IRAs, if you don't already have one picked out.
There are a few different ways to fund your new Gold IRA. If you already have an IRA, you can transfer funds from the current account to fund your new account. With a Gold IRA transfer, the money from your current account will be sent directly to the custodian for your new Gold IRA. It will never remain in your bank account.
This is important to understand for tax purposes. If you were to take possession of the funds, as with a rollover, before sending them to your new custodian to purchase the precious metals, it opens the door for potential penalties and taxes. Individuals who remain in possession of IRA funds before the age of retirement (59 ½) are charged penalties. Additionally, the money from the IRA will be treated and taxed like regular income, something you certainly want to avoid.
With a Gold IRA rollover, your IRA funds are transferred to your possession, and you have 60 days to get them reinvested into your new IRA. As we shared above, there are penalties for failing to get the money reinvested in time. Plus, it could be taxed as regular income if it stays in your possession for over the 60 days. This is why a Gold IRA transfer is often recommended over Gold IRA rollovers.
In addition to funding your Gold IRA with a transfer or rollover, you can also fund it with cash (up to the maximum yearly contributions). Future yearly contributions to your account can also be made using cash/wire transfers.
How Are Gold IRAs Taxed?
Gold IRA taxation rules can vary depending on the type of Gold IRA you set up. Much like traditional IRAs, Roth IRAs, and SEP IRAs are taxed differently, so are the different types of Gold IRAs. Let's take a look at the difference between how traditional Gold IRAs, Roth Gold IRAs, and SEP Gold IRAs are taxed.
Traditional Gold IRA Tax Rules
When you contribute funds to a traditional Gold IRA, you can often deduce the contribution from your total income when filing your taxes. Doing so will help offset what you may owe, increase your refund, or bump you down to a lower tax bracket. Upon retirement, when you start taking withdrawals from a traditional IRA, the funds you receive will be taxed as income. Setting up a traditional IRA may be a good strategy if you believe you'll be in a lower tax bracket upon retirement.
Roth IRA Tax Rules
The funds contributed to a Roth Gold IRA are taxed up front. This allows all of the money in your account to grow tax-free. You will not be taxed in the future when you begin taking withdrawals from your account. A Roth IRA can be a good idea if you suspect that you'll be in a higher tax bracket in the future, or if you want to get all the taxes paid up front and be able to enjoy tax-free money when you retire.
SEP IRA Tax Rules
A SEP Gold IRA is another type of tax-deferred account, much like a traditional Gold IRA. SEP IRAs are for small businesses or individuals who are self-employed. The total contributions to your SEP IRA will help reduce your taxable income. Additionally, SEP IRAs have higher contribution limits than traditional or Roth Gold IRAs—up to 20% of your net income.
Required Minimum Distributions
If you have retired and do not need to access any of the funds from your Gold IRA to cover living expenses, you may want to leave the funds in to let them continue to grow. You can just leave them alone until you turn 72. At this point, you are required to begin taking required mandatory distributions (RMD).
The specific RMD amount can vary based on a number of factors, including the balance of your IRA, your age, and your life expectancy (based on averages used by the IRS).
When you take a distribution from your IRA, you can decide whether you want to receive the physical precious metals or liquidate them and receive the current fair market value of the coins or bars.
Taxation With Inherited IRAs
If you pass away and still have a remaining balance in your Gold IRA, your beneficiaries will become responsible for the taxes from inherited traditional or SEP IRAs. An inherited Roth IRA remains tax-free.
Individuals who inherit an IRA can spread out their withdrawals from the account to limit the tax implications. They have at least five years—and more in some cases—to withdraw all the funds from the IRA.
As with individuals taking distributions from their account, individuals who inherit a Gold IRA can decide whether to take the physical precious metals or to receive a payment representing their fair market value.
While taxation for Gold IRAs can sound a bit overwhelming, as you're learning more about the process, it should be becoming clearer. The precious metals provider and IRA custodian you work with for your account can help to answer any additional questions you may have.
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