During periods of economic turmoil when experts can’t predict the probable behavior of the dollar, converting your cash to gold is an effective way of safeguarding your wealth. It is for this reason that many people are now converting a proportion of their financial assets into gold. It could be bullion, bars, or coins, but gold in any form is extremely valuable no matter the prevailing economic or political atmosphere.
The Taxpayer Relief Act of 1997 lifted the Internal Revenue Service’s directive which prevented people from investing in precious metals and collectable coins as part of their Individual Retirement Accounts (IRA). With the enactment of the Taxpayer Relief Act, citizens can now invest in gold and many other precious metals to secure their IRAs. To avoid a situation where people will abuse this law, the IRS has provided some guidelines that must be followed when you want to invest in gold and other precious metals as part of your IRA.
But first, a quick look at what an IRA is all about
An IRA refers to a tax-deferred financial scheme which allows employed people to deposit a specific percentage of their income every month. While the deposits in an IRA are tax-deductible, the investments earnings are tax-free until the depositor makes a withdrawal. By law, depositors can only access their IRA assets after they turn 59 and a half years old, except they agree to pay a ten per cent penalty. But at age 70, you must start making withdrawals from your IRA account.
Initially, the assets allowed in an IRA included mutual funds, stocks, bonds, money market accounts and real estate. However, with the passing of the Tax Relief Act of 1997, IRA holders can now put precious metals such as gold in their investment portfolio. This was done to provide greater flexibility and protect depositor’s savings against the unpredictability of fiat currencies.
How To Open An IRA Account
An IRA account can be opened with specific banks, insurance companies, and some financial institutions. But not every financial institution that supports an IRA account may provide cover for a gold IRA. So if you intend to add gold to your IRA account, make sure the institution you open the account with supports a gold IRA.
How To Add Gold To Your IRA
When you open a gold IRA account, your IRA is managed by a custodian who facilitates investments in precious metals such as gold and silver. You can add gold to most types of IRAs, and even the traditional IRA accounts support gold. But some IRAs were not created with the ability to invest in gold. To add gold to your IRA account, you inform your custodian to use the deposit in your IRA account to invest in gold or any other precious metals.
If you have gold in your IRA account, you have two options:
- You can take the gold and liquidate it in the future.
- You can liquidate the gold and withdraw it from your gold IRA account.
If you take the gold without liquidating it, you are required to pay the income tax on the value of the gold at the time of withdrawal, and you must also pay a 28 per cent capital gains tax on the metal whenever you liquidate it. However, if you liquidated the metal before you withdrew it from your IRA, you only need to pay an income tax after the withdrawal.
What Is Permitted In An IRA Account?
According to the rules of the IRS, bullion made of gold, palladium, platinum, and silver are allowed as investments in the IRA. The IRS permits only 24 karat gold coins and one-ounce silver coins minted in the US and some select countries, but the 22 karat purity American Eagle coin is exempted. However, US-minted coins must contain, one-tenth, one-quarter, one-half, or one ounce of gold before they can be accepted as an investment in an IRA.
The IRS regulations prohibit the inclusion of alcoholic beverages, antiques, artwork, gems, stamps, collectable coins, and some other personal belongings as IRS investments.
The custodian is the administrator of an IRA account, and they play an important role regarding investing in precious metals with your IRA. It is the custodians who buy the precious metals and store them in a third party depository on behalf of IRA investors as IRA holders are not allowed to buy or take possession of precious metals. Your job as an IRA investor is to instruct your custodian to buy or sell off more gold to improve the outlook for your account.
The precious metals will be stored at a depository approved by the IRS, and you are required to pay an annual storage fee which is deducted from your IRA account. The precious metals will remain in the depository until you trade it for another type of investment or cash it in.
Contributing Limits To An IRA
You can only fund your IRA with cash, and it’s limited to an annual contribution of $5000 per annum. When you turn 50, the limit increases to $6000. You may also fund your IRA with a transfer or rollover of funds from another plan that’s compatible with the IRA such as a 401k plan. Discuss with your administrator before going ahead with this as the IRS rules on rollovers are stringent.
When you open a new IRA and you intend to rollover funds in another retirement plan, you must do a rollover within 60 days, after which the IRS will tax you as the transfer will be regarded as a withdrawal of your income.
While the general rule is that IRA account holders can’t access their funds before they turn 59 and a half years, the IRS makes some exception when:
- The IRA account holder becomes disabled
- The IRA owner becomes ill and does not have the money or insurance to cover hospital bills.
- The owner of the IRA dies, and the beneficiary starts to withdraw funds from the account.
- The IRA holder is out of unemployment and has no money for insurance.
- The IRA holder or a member of the holder’s immediate family need funds to finance qualified education. This rule covers tuition, instructional materials, room and board, and others.
- The IRS holder withdraws the same amount of money called substantially equal periodic payments throughout their life expectancy.
- The IRA possessor is allowed to withdraw up to $10,000 from the account to finance the purchase of his or her first home.
The information contained in this piece is a brief overview of what you need to know about the rules guiding the gold IRA account. The next course of action is to find a reputable custodian to help you invest in your gold IRA account.
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