A Roth IRA is a type of IRA that offers more tax benefits than the traditional IRAs. If you own a Roth IRA or are planning to open one, you will agree that the tumultuous economic situation worldwide makes it highly imperative for investors to diversify their retirement savings into holdings that are safer and more stable than stocks, bonds, and other products on the stocks market.
Gold has been the most attractive alternative investment of choice over the years, and many investors seek refuge in the stability and safety provided by gold during times of economic instability. In this article, you will learn how to invest in gold with your Roth IRA. But first, a quick look at what is a Roth IRA.
What Is A Roth IRA?
The Roth IRA was named after Senator William Roth and is similar to the classic IRA but with some remarkable differences.
- While traditional IRAs allow tax-free contributions and tax-deferred increments, you can only make contributions into your Roth IRA with after-tax dollars, and the distributions are tax-deferred.
- A Roth IRA doesn’t permit contributions from your tax returns, but Roth distributions are tax-free when you retire.
- Unlike traditional IRAs, you can continue making contributions into your Roth IRA after the age of 70, and you don’t have to make withdrawals from the account, an obligation in a traditional IRA when you reach a particular age.
The Taxpayer Relief Act of 1997 introduced both the Roth IRA and Precious Metals IRA. Roth IRAs are self-sponsored, i.e., it is opened by wage earners without the input of their employers. However, a Roth IRA has a maximum income restriction which determines the amount of your contribution, whereas a traditional IRA doesn’t have one. For 2018, you must earn less than $120,000 to make the maximum contribution in your Roth IRA.
Compared to other retirement plans, Roth IRAs have a low contributions limit. You can only contribute $5500 per year to your Roth IRA if you are under 50 years, but people who are above 50 years of age can increase their contribution by $1,000. The Roth IRA also stipulates a 10 per cent penalty for early withdrawals as well as a 6 per cent penalty for contributions that exceed the annual limit.
Roth and traditional IRAs offer more investment options than employer-sponsored retirement plans such as the 401(K) plan. However, the number of options you can hold in your Roth IRA depends on the types of assets your IRA custodian supports. The regular Roth IRAs cannot invest in precious metals such as gold or real estate, but you can still invest in gold and other precious metals indirectly with your Roth IRA.
How To Invest In Gold With Roth IRA
If you wish to invest in precious metals with your Roth IRA, there are two options to make this happen. The first is to invest your Roth IRA funds in gold-backed stocks, a strategy known as investing in paper gold.
You can also invest in gold by rolling over your Roth IRA funds into a self-directed precious metal IRA.
Roth IRAs and other types of compatible retirement plans can be rolled over from one financial institution to another or used to fund a self-directed IRA without suffering any tax penalties, although you can only roll over your funds once in 365 days.
If you want to rollover your Roth IRA funds into a self-directed IRA, it’s advisable to perform a direct rollover. This is because indirect rollovers have withholding requirements and you may be penalized for early distribution.
To roll over your funds from a Roth to gold IRA, the first step is to open a gold IRA with an IRS-approved IRA administrator. The gold IRA custodian will request for the transfer of your funds from the Roth IRA to the new gold IRA on your behalf. When the money has been transferred, your custodian can invest the funds in your gold IRA in any precious metals of your choosing.
If you want to invest in gold directly through your Roth IRA, it can be a little tricky as the IRS allows only individual stocks, individual bonds, options, mutual funds shares, ETF shares, MMF shares, and Certificates of Deposits in a Roth IRA. The only way to invest your Roth IRA funds in gold is to buy the stocks of gold mining companies or to buy the stocks of gold-backed mutual funds or ETFs.
Should You Invest In Gold Shares?
Gold stocks, popularly known as paper gold refer to the shares of companies that explore, mine, and produce gold products. While there are hundreds of gold stocks you can buy into, and the most prominent gold companies are listed on leading gold indices such as the BUGS Index (HUI) or the Gold Miners Index (GDX).
However, like regular company stocks, gold stocks also respond to the dynamics of the gold market, making it riskier than the possession of physical gold. Here are some reasons why paper gold investments are riskier than physical gold:
- Traditionally, when the spot price of gold increases, gold stocks also appreciate. But they suffer more significant falls when gold prices dip.
- The valuation of gold mining companies is impacted negatively by factors such a depreciation of mining equipment, rising cost of production, rising land costs, etc.
- When you liquidate your gold stocks or gold-backed mutual funds, you will receive your compensation in paper currency. This brings you to the same problem you are trying to avoid–volatility of fiat currencies.
- Mining companies face higher taxes and regulatory scrutiny, which can impact their stocks negatively.
- Political instability, wars, natural disasters, and civil disturbances in gold-mining regions can affect the performance of a gold company’s stocks.
But physical gold will always retain its value and can be kept safe from the volatility of the stock market. Historically, physical gold makes a better investment choice than gold stocks.
Why Hold A Percentage Of Your Retirement Portfolio In Precious Metals Such As Gold
The United States has a history of financial market crashes, and these pose a serious threat to investors and their wealth. Over the years, people have come to trust gold and other precious metals as alternative stores of value that can be trusted during times of economic instability. Gold and other precious metals are safe and simple ways of diversifying your retirement portfolio, helping to protect your investments against inflation and the volatility of the stock market.
Additionally, gold retains its value and also grows over time. In fact, gold has witnessed unprecedented growth ever since the gold standard was removed from the American monetary system, and is now valued at over $1300 an ounce.
How Much of Your Retirement Portfolio Should Go into Gold?
The percentage of your retirement funds that you decide to invest in gold and other precious metals depends on your risk tolerance and your retirement plans.
Should You Invest Indirectly In Gold Through Your Roth IRA?
It’s better to open a gold IRA and roll over your Roth IRA portfolio into the self-directed IRA. This way, you can invest in physical gold or any other type of precious metals allowed by the IRS in a self-directed IRA.
When choosing a self-directed IRA custodian, make sure to inquire about the investment options they support as well as custodian fees, depository fees, and other related charges. Also, seek the professional guidance of an experienced financial adviser and a tax lawyer before making any investment decisions concerning your Roth or self-directed IRA, except when you are knowledgeable in that area.
Due diligence should always be done when investing in gold or any other type of investment to avoid losing your retirement funds.
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