Gold is always a nice thing to have, especially when fiat currencies are threatened by financial crises or other such events. This is why many people are now converting some parts of their fortune into gold, be this in coins, bars, or bullion.
The Internal Revenue Service initially prohibited collectible coins and precious metals as part of Individual Retirement Accounts investments, but this changed with the Taxpayer Relief Act of 1997, which introduced changes to allow the inclusion of gold as well as several other precious metals to shore up IRAs.
However, there are still rules of the IRS that people have to abide by.
What is an IRA?
First up, what is an IRA? An IRA is a tax-deferred financial scheme used by employed workers who can opt to deposit a certain amount per month from their income. These deposits can be tax-deductible and investment earnings are not taxable until they are withdrawn. You are not allowed to access IRA assets before you turn 59 and a half unless you are willing to pay a penalty.
Assets are allowed in an IRA, these include stocks, bonds, mutual funds, money market accounts and even real estate. Precious metals and coins were previously prohibited, but with the Tax Payer Relief Act of 1997 an investor can now put gold into an IRA account to improve the flexibility of his or her holdings and also for added security.
You can open an IRAs with certain banks, insurance companies, or other financial institutions. However, remember that not all of them can accommodate a gold IRA, so be sure to ask your IRA custodian first. Some institutions allow for gold to be added to your IRA, others may require you to open a new account for this purpose.
Adding gold to your IRA
A gold IRA actually refers to an IRA held at a custodian who offers investments in precious metals, including but not limited to gold. Gold can be added to most types of IRAs, including the traditional IRA accounts and Roth accounts. However, as some IRAs were not initially designed to accommodate investing with gold, so you should meet with your IRA custodian first to see if this can be arranged.
You don’t purchase the gold yourself and turn it over to your IRA custodian; instruct your IRA custodian to use the funds in your account to invest in the gold and other precious metals.
With a gold IRA you have two choices:
- you can liquidate the gold and withdraw it from your IRA
- you can just take the gold and liquidate it later.
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.
What is allowed and what is not?
Under IRS regulations antiques, artwork, gems, stamps, alcoholic beverages and certain other tangible personal property are prohibited as IRA investments as well as collectible coins and precious metals.
However, there are exceptions to US 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. Collectible coins are not permitted.
US-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. Bullion that are acceptable by IRS regulations are those made of either gold, silver, platinum or palladium.
The custodian’s role in a precious metals IRA is paramount, the IRA investors themselves are not allowed to have possession of the coins or precious metal assets. Again investors not even allowed to purchase gold to turn over to their IRA custodians. Investor possession of such will be considered distribution under IRS regulations and can be considered as fully taxable.
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 investors to order the custodian to buy more gold or sell more gold as you see fit.
The items must be kept in an IRS-approved depository specifically for precious metals. This depository should have an annual storage fee, paid from your IRA account, there it will be held secure until you cash it in or trade it for another type of investment.
Contribution limits to the IRA
Funding the IRA must be made with cash. This can come in an annual contribution of up to $5,000 annually. This can increases to $6,000 when you turn 50. You can opt to fund your IRA by a rollover or transfer from another qualified plan, but be sure to consult with your IRA custodian about this because the IRS has strict procedures regarding transfer procedures.
As soon as you decide to do a rollover, 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 therefore they 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 in any law there are exceptions, where the “no touching of IRA” assets before you are 59 and a half is void when:
- The IRA owner is disabled for whatever reason.
- If an IRA beneficiary starts to withdraw money after the original owner of the IRA dies.
- If the IRA owner has to be hospitalized and has neither the money nor the insurance to cover the costs.
- If the IRA owner is unemployed and cannot cover the cost of insurance.
- The IRA owner or a member of his or her immediate family needs money to pay for qualified education. This rule applies not just to the study itself, but also for tuition, room and board, books and other materials.
- If the IRA owner withdraws in an equal series of “substantially equal periodic payment” during their life expectancy.
- The IRA owner can also use $10,000 from the IRA to buying his or her first home.