Gold IRA tax rules are vital things prospective gold investors need to know about to ensure they are correctly protecting their retirement.
Precious metals have been a fascination for thousands of years, starting with silver and gold and expanding into platinum and palladium.
Although they have a deep and rich history, putting money in gold is as popular today as ever for individual retirement.
Instead of investing your retirements in volatile accounts subjected to inflation, self-directed IRAs can be preferable.
Before you begin allocating your investments, let’s explore the tax rules surrounding actual gold IRAs and what you can expect from owning one.
- What Are the Different Types of Direct Gold Investments?
- How Taxes and Non-IRA Gold Work
- How Taxes and Gold IRAs Work
- Other Important Gold IRA Tax Rules
- Maximizing Your Basket of Gold
What Are the Different Types of Direct Gold Investments?
With the investment option of holding tangible precious metal coins, you have the potential to increase your savings and hedge against inflation at the same time.
Even as recently as 2010, gold outperformed the stock market, speaking to its reliability.
When you begin looking for an entrance into gold investing, you will find that most custodians offer different types of accounts.
The three most popular are traditional gold IRAs, Roth gold IRAs, and SEP gold IRAs.
Traditional Gold IRAs
Traditional gold IRAs are the most standard asset for retirement investing that you fund with pre-tax dollars.
All your contributions will grow using a tax-deferred structure. When you retire and make your withdrawals, that is when you’ll face your taxes.
Roth Gold IRAs
Unlike traditional gold IRAs, Roth gold IRAs are funded using after-tax eligible contributions.
You won’t get an immediate tax advantage, such as tax-deferred deposits. Also, account owners will pay taxes when they make withdrawals of their annual returns at retirement.
SEP Gold IRAs
Another popular gold-related investment account is SEP gold IRAs. They are only available to self-employed individuals or those working for small businesses.
With these accounts, you are taxed on retirement withdrawals rather than contributions.
It is also important to note that there are IRS contribution limits for SEP gold IRAs. You can contribute 25% of your compensation or $61,000 (for 2022) annually, whichever is less.
How Taxes and Non-IRA Gold Work
Of course, any investor first wants to choose a vehicle that will make them the most money with gold prices.
However, with exposure to gold, it is also important you choose an investment that won’t take away from your savings due to incredibly high tax bills.
To avoid losing more money than you accounted for, you must first examine how the IRS (Internal Revenue Service) treats physical non-IRA gold.
The first thing to know is that the IRS looks at non-IRA investments in gold similarly to any other collectible investment.
You will find your gold ownership is akin to collecting art or even incredibly rare coins or comics.
That said, there are several tax concerns to consider when investing in non-IRA physical gold bullion.
Short-Term Capital Gains
The first thing to consider is the length of time you want to hold gold as an investment.
If you know you will need it for a short time, be prepared to face taxes as if your gold was a short-term capital gain.
There are also instances where the IRS could classify your investment as ordinary income, especially if you buy and sell within a year.
The second scenario you could face when investing in gold is taxing it as if it were ordinary income. Your investment will be subjected to a regular income tax rate in these cases.
However, your tax rate is likely capped at 28%, a considerable hit depending on how much you’ve invested.
When you buy non-IRA gold, it is easy to see there are a few significant tax concerns to be wary of.
This brings many investors to the realm of gold IRAs, which can be a better alternative for investing your income.
Not only will you have fewer tax penalties to consider, but your investments will also likely give you a reasonable return on investment.
How Taxes and Gold IRAs Work
IRAs were initially developed in 1974 and have quickly become one of the fundamental retirement investment vehicles of choice.
One of the largest benefits of a traditional IRA is that the investments are only taxed when money is withdrawn.
This meant that investors could delay their tax payments (tax-deferred) while reducing capital gains simultaneously.
Gold IRAs are structured relatively the same, with many accounts being tax-deferred until it is time to withdraw.
They are an attractive option and long-term solution to begin building retirement savings to help fund your future.
They are a great option for futureproof investors, but gold IRAs also help offer better after-tax returns than standard Roth IRAs.
Before opening your gold IRA, there are a few different tax transaction costs. Let’s look at the most common scenarios.
While maintaining a gold IRA, you will not be responsible for any gains taxes on your total savings.
However, when you withdraw the funds early, there are additional fees you’ll be responsible for.
This is why they are not the ideal vehicle for short-term investments, as there’s an additional 10% fee for early withdrawal.
Marginal Tax Rate
As mentioned, when collecting non-IRA gold, investors are responsible for paying a collectible tax rate capped at 28%.
With gold IRAs, you’ll be on the hook for a marginal tax rate, depending on your income tax bracket.
Individuals could pay over 28% in taxes if they are in a higher income tax bracket.
One of the most important things to note that is often forgotten about gold funds is loss write-offs.
If your investments experience losses, the losses cannot be deducted. However, they can be written off.
Other Important Gold IRA Tax Rules
Now that you have a good idea of the basic tax rules you need to know before opening a gold IRA, let’s look into a few other regulations.
Not being aware of these restrictions could put you in a situation where you’re paying extra fees and penalties you hadn’t expected.
Annual Contribution Limits for a Self-Directed Gold IRA
When comparing traditional and gold IRAs, you’ll find many fundamental tenets to be the same for your long-term capital gain.
However, although your assets will be notably different, you must still abide by annual contribution limits for a self-directed gold IRA.
The IRS now has gold IRA contribution limits of $6,000 for 2022, the same as 2021.
If investors are over 50 years of age, they can contribute an extra $1,000 to their accounts.
Additionally, those with gold investment vehicles can take distributions from their accounts without penalties after 59.5 years of age.
Any withdrawals made before that time will be subjected to a 10% additional tax.
The type of gold you choose to invest in is another essential factor when opening a gold IRA.
Account owners can’t put their money into any precious metal; they must be IRA-eligible, also known as IRS-approved.
Regardless of the gold IRA company you work with, they should give you guidance in this area.
Approved gold IRA companies will only offer IRA-eligible gold for you to buy and sell.
There are strict requirements these types of gold investments must meet as well, which include:
- Have a purity or finesse above 99.5% (American Eagles are an exception)
- Be held in a secure depository by an IRA custodian
- Be previously approved by an accredited manufacturer or national government mint
- Silver coins must be 99.9% pure
- Platinum and palladium coins and bars must be 99.95% pure
- The gold bullion must be graded by a certified organization
There are many requirements your gold transactions must meet to be approved for an IRA, and this is where gold IRA companies and custodians are helpful.
Using their services, you can purchase IRS-approved gold directly, ensuring it meets all the required criteria.
An added benefit of using a custodian is that they can set up your IRA account for you and facilitate the purchase, transport, and storage process.
Precious Metal Storage
One of the largest myths about investing in gold coins and bullion is that you have the option to keep your precious metals in your physical possession.
The IRS strictly prohibits this, as it is not only safe but is also impossible to insure and protect.
As a result, if you have a gold IRA, your precious metals must be stored at an approved depository or facility, not safe deposit boxes.
When working with a custodian or gold IRA company, you will have a choice of several approved storage solutions.
These facilities often have state-of-the-art security and high insurance policies to protect your investment.
Whether you choose a depository or follow your custodian’s recommendation, the facility must be IRS-approved.
When it comes time to withdraw from your gold IRA, there are two common options account owners consider.
The first is to sell your gold in your IRA for cash, which can offer quick liquidity. However, choosing this method will result in paying income taxes on the amount you withdraw.
Alternatively, you can choose to liquidate the precious metals you hold for physical gold, silver, and more.
Choosing this method can help you avoid withdrawal penalties, and it allows you to sell them at a later date.
Some account owners prefer this method, as it gives them a failsafe in the event of emergencies.
That said, the IRS recommends you do not withdraw from your gold IRA until you are 59.5 years of age.
Otherwise, you could be subjected to the penalties we explained above (10% early withdrawal and 28% capital gains tax on profits).
Waived Penalties and Fees
There are certain instances where you could avoid paying additional tax-related penalties and fees when withdrawing from your gold IRA.
Many account owners don’t have to pay a 10% early withdrawal fee if they use their gold IRA to purchase a new home.
You can also avoid the penalty if you become disabled or create annuity payments per your life expectancy.
Maximum Age of Withdrawal
The final gold tax rate rule to note with this vehicle for retirement is age and mandatory distributions.
Every gold IRA owner must start taking distributions from their accounts when they reach 72 years of age.
You could face a 50% maximum collectibles tax rate each year if you don’t.
Maximizing Your Basket of Gold
When learning about gold IRA tax rules, there are plenty of things to digest, especially as a first-time account owner.
It’s best to go over the specific requirements for your retirement fund with your chosen financial advisor or gold IRA company.
Using their guidance, you will have a clear idea of your responsibilities regarding tax payments.