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What is a gold IRA?

A gold IRA could be the right investment solution for you

Profile picture of Danni White
by Danni White ConsumerAffairs Research Team
stacks of gold coins with calculator and pencil

As you think about investing, you may decide that you want to invest in gold. However, physical gold can be hard to manage and costly to transport and store. A gold IRA is a better option for many people. It works much like a traditional individual retirement account (IRA) and provides some key additional benefits.

Not all individual retirement accounts (IRAs) allow for gold investments, but those that do can be worth exploring. This type of self-directed IRA allows you to invest in physical gold and, in some situations, other types of metals.

Types of gold IRAs

There are several types of gold IRAs, and you should consider working with a retirement advisor to determine which one may be right for you. In general, gold IRAs mimic their nongold counterparts, except they're self-directed. This means they can invest in alternative assets.

Take a look at the most common types of gold IRAs below.

Traditional gold IRAs

A traditional gold IRA works much like a traditional IRA that holds paper assets. It's a tax-deferred retirement savings account. This means the funds going into the account are pretax contributions, so you don’t have to pay taxes on them until you withdraw them.

There are limitations on how much investors can contribute to these accounts each year. However, contribution limits can change year to year.

Roth gold IRAs

Likewise, a Roth gold IRA works much like any other Roth IRA, meaning contributions are taxed initially but not when they’re withdrawn. The goal is for the funds to grow over time in a tax-advantaged way. When it's time to use those funds, you can do so without having to pay taxes on your initial contributions as they come out.

SEP gold IRAs

Another option is a Simplified Employee Pension (SEP) gold IRA. This is available to business owners and people who are self-employed. It works much like a traditional IRA, meaning that contributions are not taxed initially. You pay the taxes as you withdraw money, usually during retirement. One of the differences here is that contribution limits are often higher with a SEP IRA, which means you might be able to contribute more during your lifetime.

What is IRA-eligible gold?

Make sure your precious metals are IRA-eligible before purchasing

There are some restrictions on what types of gold or precious metals can be used in IRAs. These restrictions are set by the Taxpayer Relief Act of 1997 and administered by the IRS. The revenue service allows only four types of metals to be used in an IRA as an investment:

  • Gold
  • SIlver
  • Platinum
  • Palladium

The IRS also states that only certain forms of these precious metals can be included, including ingots, coins, bars and rounds. The reason for this is that the IRS likely wants to ensure people only use investment-grade products that can be traded easily. Having precious metals that meet these requirements helps the IRS ensure long-term value is maintained.

Precious metals must also meet certain standards:

  • Gold must be at least 99.5% pure.
  • Silver must be at least 99.9% pure.
  • Platinum and Palladium must be at least 99.95% pure.

Roth vs. traditional IRAs

Roth IRAs and traditional IRAs are both retirement accounts that offer tax advantages. The difference between these accounts is in how they're taxed. As you think about how gold is taxed in an IRA, you may need to take into consideration these specific styles of accounts. It's always best to work closely with your financial advisor when trying to make a decision about which type of account is best for your needs.

A traditional IRA is a pretax retirement account. This means you deposit funds into the account prior to paying taxes on that income. One easy way to do this is through a payroll deduction. The funds are deposited before taxes are applied, and the funds go into the gold IRA and remain there. The value grows from contributions and the growing value of the account. The taxation on this type of IRA comes later, when you start to take distributions on the account during your retirement.

A Roth IRA has a similar setup in that there are tax benefits. The difference is that the funds are deposited after taxes are paid on the funds, which means your employer took taxes out of your income, then you invested the funds into the account. The funds grow in the account over time. When the time comes to take funds out to use during retirement, you’ll pay no taxes. That’s because the taxes are paid at the start instead.

Which one is better for gold investment? It’s not really about the gold but about your tax bracket. If you're in a high tax bracket now, meaning you're making a significant amount of money, a pretax investment may be better. Many people pay fewer taxes later in life as their income decreases. If you believe you'll earn more later (and therefore be in a higher tax bracket), using a Roth IRA may be best.

How to start a gold IRA

If you're ready to invest in a gold IRA, the process begins with understanding what type of account is right for you. It may be worth working with an experienced professional to get help making an educated decision.

  1. Open a self-directed IRA: The first real step is to open a self-directed IRA. This is sometimes called an SDIRA. Your custodian is a financial institution approved by the IRS to watch over your account. This may be a bank, brokerage or one of various other types of companies.
  2. Get a gold dealer: You also need to find a precious metals dealer. This person will make the gold purchases on behalf of your gold IRA. Most of the time, a custodian that’s familiar with gold IRAs can help you in this area, and many gold IRA companies can help you open your IRA and fill it with gold.
  3. Deposit gold: Once you’re set up, you need to deposit funds into the account. You can make direct contributions if you like, in which case your custodian and metals dealers should handle the transaction for you. However, if you have an existing retirement account you wish to roll over or transfer funds from, you can do this as well. Be sure you know the contribution limits that apply to your situation.

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    Bottom line: Is a gold IRA a good investment?

    There are many benefits to a gold IRA. Some of these are tax benefits that come with any type of individual retirement account. Other benefits come from the perceived properties of gold as an investment and the ease of keeping gold in an IRA. However, all investments have some risk. Consider your situation and consult a financial advisor to see if a gold IRA is a good investment for you.

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    Profile picture of Danni White
    by Danni White ConsumerAffairs Research Team

    As a member of the ConsumerAffairs research team, Danni White is committed to providing valuable resources designed to help consumers make informed purchase decisions. Danni specializes in content strategy and development, with over a decade of professional writing and research experience.