How Does a Gold IRA Work?

By now, you’ve heard of a Gold IRA and you may be asking yourself: how does a Gold IRA work? A Gold IRA is similar to any other individual retirement plan (IRA) in that it allows an investor to plan for the future and invest on either a pre-tax or after-tax basis. A Gold IRA, however, includes real, physical gold coins and bars as an investment. 

Traditionally, an IRA is a plan that holds paper investments like stocks, bonds, exchange traded funds (ETFs), and treasury notes. What differentiates a Gold IRA, is that you can own all of the paper assets that you still want to own, but you can also own physical gold bars and coins, stored and tucked away for safekeeping, inside of your plan. Yep, you heard that right. Real, physical gold inside your IRA. 

Although it may sound complicated, it isn’t. We’ll break it all down for you right here, and you’ll understand how a Gold IRA works in no time at all.

Types Of Gold IRA

There are three types of Gold IRA:

• Traditional
• Simplified employee pension (SEP)
• Roth

Each type has its own rules, and each suits different needs for different investors and their particular set of circumstances. 

Roth

A Roth Gold IRA is for those who expect that, in the future, their earnings will be greater than they are now, and that they will be in a higher tax bracket later in life. 

Contributions to a Roth Gold IRA are made with after-tax funds—meaning the taxes are paid up front. Because you’ve already satisfied the tax obligation on the initial contribution, the investments in a Roth grow tax-free. You will not have any taxable consequence when, following IRS guidelines, you take distributions or withdraw funds from the plan. 

To withdraw with no penalty or taxation, you must be 59½ years old and the plan must have been in place for five years. You won’t pay taxes as your investments grow, and you may take tax-free withdrawals during your retirement. 

Unlike traditional plans, Roth IRAs never require you to take mandatory withdrawals, and when handed down to heirs, their withdrawals are also tax-free. 

Roth plans do have income limits for eligibility, so not everyone will qualify for this type of plan. Be sure to check with your tax advisor. 

SEP

If you are self-employed or own your own business, and don’t have access to an employer-based retirement plan, a simplified employee pension (SEP) IRA is for you. The SEP, funded by you, allows you to look toward the future. 

Because it may be your only source of retirement planning, SEP plans allow the owner to put away much more money than the typical individual retirement account. For 2023, the SEP allows up to $66,000 or 25% of compensation, whichever is less. SEP contributions are typically tax-deductible in the year they are made, but they are taxed at the time of withdrawal. 

Unpenalized withdrawals are allowed to begin at age 59½, and required minimum distributions (RMDs) must begin at age 73. 

Contact your tax advisor or certified professional accountant (CPA) to determine if a SEP is right for you. 

Traditional

If you currently have an employer-sponsored, tax-deferred retirement plan, such as a 401(k), but wish to sock away more money on a tax-deferred basis, or if you have left a job and still have a 401(k) sitting there, then a traditional IRA may be for you. It is designed for those who look to their future and expect to be in the same or a lower tax bracket during retirement.

Traditional IRAs have contribution limits that are set by the IRS and must be adhered to, but, depending on your situation, the contribution to your traditional IRA may be fully tax deductible.  Withdrawals from the plan may begin, without penalty, at age 59½, and must begin RMDs at age 73. The withdrawals, much like the SEP IRA, are taxed as regular income. 

Your CPA or tax advisor can give you clarity on your specific contribution limits and level of deductibility. 

What Is A Custodian?

A custodian is the bank or financial institution that manages your retirement account. 

Think of a custodian as your personal IRA valet. They facilitate all the required paperwork, reporting, and regulatory compliance for your account. The custodian also ensures funds flow smoothly from one account to another and informs you of any consequence or obligation that may arise from said transfers.  

Your statements will come from your custodian, and your custodian can answer questions regarding account balances, distribution requirements, and other concerns. 

How To Fund A Gold IRA

After you have consulted your CPA or tax advisor to decide what type of IRA is right for you, and you understand the eligible contribution limits for your situation, you can fund your Gold IRA in one (or a combination) of three ways:

• Direct contribution
• IRA transfer
• 401(k) rollover

Direct Contribution

With a direct contribution, you have funds available and earmarked for investment, and you send those funds to the IRA custodian via check, wire, or traditional mail. The custodian deposits them into your account and makes the funds available for investing. 

IRA Transfer

IRA transfer occurs when you already own an existing IRA and you instruct your current custodian to move your assets directly into a different IRA, whether at the same firm or with a different one. The direct transfer stays tax-free and penalty-free, as the funds remain housed in an IRA. 

401(k) Rollover

You can use a 401(k) rollover to fund an IRA directly, meaning funds route from your 401(k) account straight into your new or existing IRA. There is typically no tax consequence or penalty for this type of rollover, as funds move from one institution to another, and no distributions are considered to be taken. 

An indirect 401(k) rollover varies in that the funds are sent from the 401(k) to the account holder, and the account holder then has 60 days to deposit them, wholly, into another eligible account, such as a Gold IRA. Assuming that the entire amount is deposited within the allotted time period, then no penalty is assessed and there is no tax consequence. 

Types Of IRA-Approved Precious Metals

Whether you have your eye on shiny coins or your heart set on gleaming bars of gold, there are plenty of approved metals that are eligible for your Gold IRA. 

The IRS has strict guidelines for what types of gold can be held in an IRA. 

Gold must be at least 99.5% pure, with the exception of the Gold American Eagle coin. The Eagle is the USA’s flagship 1-ounce coin, contains 1 pure ounce of gold, but actually weighs slightly more than an ounce and therefore misses the 99.5% purity standard. Of course, it is allowed!

The guidelines also stipulate that:

• Coins must be minted by approved government mints, be new, uncirculated, and in perfect physical condition. 
• Proof coins must be accompanied by certificates of authenticity. 
• Eligible gold bars must meet the same purity standards and must be manufactured by COMEX-traded firms. 
• No scrap gold, jewelry box gold, or junk gold is allowed in an IRA. 

Where Gold Is Stored?

Owning gold in an IRA is one of the safest ways to own physical gold. We’ve covered the quality and purity benchmarks, and the standards for storage are just as exacting. 

Because you cannot be in possession of the assets in your IRA without taking a distribution, the physical gold must be stored in a neutral, guarded, and insured location. These locations are called depositories, or simply put, a big vault. 

The IRS has a long list of stringent guidelines that must be met before it approves a depository as a safe place to store precious metals. Vault size, security, service area, management, and record-keeping all have to meet stringent standards. Only the best of the best get the seal of approval and are then allowed to accept metals on your behalf. 

Once metals arrive at the depository, one of the institution’s important tasks is to thoroughly inspect the metals to ensure they are what they are supposed to be. It must also make sure the metals meet the requirements for IRA investments. 

The gold is inspected, weighed, photographed, and authenticated before it is accepted and placed into the vault in your custodian’s designated section for safekeeping. 

The depositories are insured and have elaborate measures in place to help prevent loss or damage. 

Some of the most preferred depositories for Gold IRA storage include:

• The Delaware Depository
• Brinks Depository
• JPMorgan
• HSBC Bank 

How To Withdraw From A Gold IRA

It’s your money in your IRA, and you are entitled to it at any time. However, it is important to understand the rules for taking a distribution in order to prevent triggering a taxable event or even incurring a penalty.

Whether your account is a traditional, a Roth, or a SEP, you can withdraw funds with no penalty after the age of 59½. Traditional and SEP withdrawals at that age and beyond are considered ordinary income and are taxed as such. Roth withdrawals are not subject to taxation, as funds are deposited into a Roth after taxes are already paid. 

At age 73, both SEP and traditional IRA owners must begin to draw down on their accounts and take required minimum distributions. RMDs are designed to gradually extract the funds over a period of years so that the eventual taxes can be paid.  

Roth owners are not subject to RMDs. 

Physical gold owners may take their distributions “in kind,” meaning they actually can opt to have their physical gold sent to them from the depository as their distribution. This allows you to keep owning the gold that you’ve acquired, and that gold can continue to work for you. 

Open A Gold IRA

Ready to open your Gold IRA? The next step is to get you started, and that’s where the experts at Advantage Gold come in. Contact us, and we will be happy to help you get started and show you how a Gold IRA works to meet your needs.