Most of the money in the world, including the US dollar, is “fiat currency.” Fiat currency is a currency that a government declares legal tender, but which is not backed by any physical commodity. Fiat money will always be threatened by inflation or unexpected financial events like the 2008 subprime mortgage crisis.
Given this vulnerability of the US dollar, many savvy investors are interested in diversifying their retirement holdings with physical assets like gold and silver. For a long time, this was not possible. But that changed with the Taxpayer Relief Act of 1997, which finally allowed citizens to shore up their IRAs with gold and other precious metal investments in the form of coins, bars, and bullion.
But like everything related to taxes and retirement accounts, there are stringent rules for your precious metals IRA to remain compliant with the IRS. The following article will give you an overview of the most important of these rules.
What Are The Rules for My Gold or Precious Metals IRA?
The custodian’s role in a precious metals IRA is paramount as IRA investors themselves are not allowed to have possession of the coins or precious metal assets. Again, investors are not allowed to purchase gold themselves to turn over to their IRA custodians — doing so would be considered a withdrawal, and you would be taxed.
The rules set by the IRS also state that you cannot buy gold directly – The custodian will handle all transactions. It is the IRA custodian who has to purchase gold to be placed into the gold IRA account and his or her responsibility to store it in a third-party depository.
It is up to you as the investor to give the custodian instructions as to the gold or precious metals you want to purchase, and the company will then purchase the metals, invoice you, and ship the purchases to an approved depository.
The IRA custodian must have a depository to hold your gold. The depository will inventory and protect your holdings. When you are ready to make a withdrawal, you can give orders to the account administrator to either sell your gold or ship it to you via insured delivery.
What Can and Can't I Put in My Precious Metals IRA?
There are strict rules for what you can and can’t put in your precious metals or gold IRA.
There are exceptions to U.S. minted coins – The coins must contain one, one-half, one-quarter or one-tenth ounces of gold. One-ounce silver coins are also accepted if they were minted by the US Treasury Department.
U.S. minted gold coins with a purity of 24 karats are also acceptable, but a special exemption was granted to the US Gold American Eagle coin, which is a 22-karat coin.
Other valuables are not allowed as investments including antiques, artwork, gems, stamps or alcoholic beverages. Additionally, collectible coins and precious metals are prohibited as IRA investments.
How Much Can I Contribute to the IRA and When Can I Withdraw My Gold?
Always check with your IRA custodian about what the current maximum contribution is. Since 2014, it has been $5,500 a year, rising to $6,500 a year once you reach 50. There are two ways to fund the IRA: a rollover/transfer from another qualified plan or a simple check written to the account administrator.
As soon as you decide to do a rollover (from your existing 401(k), traditional IRA, or Roth IRA), the contributions to your IRA account will be transferred to you. If you don’t transfer these assets to your new IRA account, the IRS is going to regard this transfer as a withdrawal. This rollover should be done within 60 days; otherwise, you will have to pay tax as the IRS has regarded this transfer as a withdrawal and will tax you like you received an income. A rollover can be done once a year, but transfers are free of any such rules.
Like other IRAs, you cannot touch the funds in your account until you reach a certain age. As of right now, this is 59½ years of age. If you take a distribution before then, not only will you have to pay income tax on the amount you withdrew, but you will also incur a 10% early withdrawal penalty fee.
Nothing says you have to start taking distributions right away when you reach 59½. Once you reach 70 years of age, however, you will begin to receive automatic withdrawals.
There are two ways to take a distribution or withdrawal from your gold IRA:
- You can liquidate the gold and withdraw it from your IRA
- You can take the physical gold and liquidate it later
Essentially either you can ask the administrator to sell your gold and give you the proceeds, or take physical possession of the metals yourself. The first option is often the best, as you don’t have to deal with melting down and selling the gold yourself. Gold buyers or pawnshops often include steep markups to sell your gold. This is one reason why it’s important to choose a firm with an excellent buyback program.
Note that if you liquidate the gold before withdrawing it, the normal IRA tax rules apply. That being you pay income tax upon withdrawal, but if you take physical possession of the gold, you must pay the income tax on the value of the metal at the time you withdrew it. You also have to pay a 28 percent capital gains tax on the gold when you liquidate it in the future.
As with everything, there are some exceptions. In a number of cases, you can make an early withdrawal without incurring the 10% penalty.
Here are the main circumstances which constitute an exception:
- If you become disabled.
- If you become hospitalized, and lack insurance or the money to pay your medical bills.
- If the owner of the IRA dies, his or her beneficiaries can withdraw the funds without penalty.
- If you become unemployed and cannot cover the cost of insurance.
- You can take a withdrawal from your IRA to pay for your or your family’s education. In addition to tuition, you can also use the money to pay for room and board, books, and other related expenses.
- You can withdraw up to $10,000 from your IRA to buy your first home.
Want to Know More? Here's How to Get Started…
Starting a gold or precious metals IRA can be a great way to help ensure you get the retirement you deserve. But like everything related to the IRS, there are a lot of complicated rules and regulations.
Now that you have learned all of the rules about placing precious metals into your IRA account, it is time to get in contact with our recommended IRA custodian to set up or transfer your current IRA or 401(k) to one that is backed by precious metals.
To help you navigate these complexities, we created our Gold IRA Investment Guide. If you want to know more, click the link below to download a free sample to learn more about this unique way to diversify your retirement portfolio.