Investors can choose from a list of “traditional” investment vehicles like stocks, mutual funds, and bonds with regular Individual Retirement Accounts. But you can expand your investable alternatives to include gold and other precious metals using a self-directed IRA.
These accounts are often referred to as gold or precious metals IRAs. A gold IRA can offer a long list of advantages, like investing in precious metals and the tax incentives through an Individual Retirement Account (IRA).
What Exactly is a Gold IRA or Retirement Account?
A gold IRA, which is also oftentimes referred to as a precious metals IRA, is a specialized type of retirement account. With a gold IRA, you can hold physical gold bullion or coins, as well as other approved precious metals as qualified retirement investments.42
You may already be familiar with IRAs (Individual Retirement Accounts). But you may not be aware that you can invest in financial vehicles other than stocks, bonds, and mutual funds – like gold and precious metals – in an IRA account.
Gold IRAs function the same way as a regular Individual Retirement Account (either traditional or Roth). But, instead of holding paper assets, it can hold physical gold bullion coins and bars.
There are some differences, though, regarding where you can hold the account and who can participate. For example, the IRS specifies what qualifies as a “prohibited transaction,” as well as who is a “disqualified participant.”
Why a Gold IRA and 401(k) is Different
When you set up a gold IRA or retirement account (such as a 401k), the account must be held by a particular type of IRA “custodian” that is allowed to work with self-directed accounts.
With self-directed IRA accounts, the account holder makes the decisions regarding which investments go into the account, rather than the investment advisor or the firm that is holding the account.
You cannot open a self-directed IRA account through most brokerage firms or banks because these companies don’t make a profit when you invest in alternative investments with your retirement funds. So, there is no incentive for these companies to tell you about this other option – even if doing so is in your best interest and in line with your financial objectives.
Investors who own self-directed IRA accounts have more control over the investments. They can also earn big returns by investing in alternative, or non-traditional investments. Combined with tax-deferred or tax-free growth, self-directed IRAs can offer a great way to invest for retirement.
What Can Be Included in a Gold IRA and 401(k)?
Self-directed gold IRAs can hold a wide variety of investment vehicles. These include traditional financial tools such as equities and bonds. But investors can also include gold, silver, and other precious metals in a self-directed account.
Investors can include real estate, raw and undeveloped land, promissory notes, tax lien certificates, cryptocurrency, water rights, mineral rights, oil and gas, LLC membership interests, and livestock in a self-directed IRA.43 This array of investment alternatives can make a regular IRA or retirement plan can appear limited when it is compared to a self-directed account.
Some of the financial vehicles that you may not put in a self-directed IRA account include:
- Life insurance
- Real estate that you use or reside in
Added Features of Gold IRAs and Retirement Accounts
Gold IRAs and retirement accounts come with many tax-related advantages, too, such as tax-deferred or tax-free earnings, and access to funds penalty-free in certain circumstances.
A key benefit to owning a self-directed IRA account is the ability to choose from so many different investable assets. This means that your IRA account can be invested in areas that you are knowledgeable and passionate about – such as precious metals. For instance, if you’ve collected coins for many years, you could even turn this hobby into viable investments.
Self-directed gold IRAs and retirement accounts can also be more diversified than regular IRAs. This could help you get higher returns, and to protect your capital during a stock market downturn.
Do You Qualify for a Gold IRA or 401(k)?
The IRS has some rules in place about who qualifies for an IRA account. The criteria can differ, depending on whether you opt to open a traditional or a Roth IRA. (Many investors are eligible for both traditional and Roth IRAs. So, you don’t have to choose one or the other).
Based on IRS guidelines, you can open and make contributions to a traditional IRA if:
- You (or, if you file a joint tax return, your spouse) received taxable compensation during the year, and
- You were not age 72 by the end of the calendar year
You can have a traditional, even if you are covered by any other retirement plan, such as a 401(k) through your employer. In this case, though, you may or may not be allowed to deduct your IRA contributions.
If you and your spouse both have compensation, and you are both under the age of 72, then each of you may open a traditional IRA. In fact, in this scenario, you cannot both invest in the same IRA account.44
You can open and make a full contribution to a Roth IRA if you have taxable compensation and your modified adjusted gross income (MAGI) is less than the following amounts (in 2020):
- $124,000 if you file your tax return as single, head of household, or married filing separately. If your income is between $124,000 and $139,000 (in 2020), you can make a partial contribution to a Roth IRA.
- $196,000 if you file your taxes as married filing jointly or a qualifying widow(er). If your income is between $196,000 and $206,000 (in 2020), you may make a partial Roth IRA contribution.45
According to IRS guidelines, compensation refers to:
- Professional fees
- Self-employment income
- Non-taxable combat pay
- Military differential pay
- Taxable alimony
Before you open and fund a gold IRA or retirement plan, there are some other items to be aware of, as well. For instance, because you will be directing many of the decisions with your self-directed IRA, you should have an understanding of gold and other investments. So, you should learn as much as you can about gold IRAs prior to getting started.
In addition, other than the purchase of physical gold – which can be stored and held for the long-term – you should regularly monitor the investments in your gold IRA account.
The gold and precious metals that you carry in a gold IRA or retirement account through ETFs, mutual funds, and shares of stock in gold-related companies can oftentimes fluctuate in value. So, being regularly involved with investing and managing your account can provide you with an opportunity to buy and sell investments when the time is right.
You should also be familiar with the details of the gold IRA or retirement account. There are many “moving parts” associated with a self-directed account. So, you should ensure that you have all of the necessary paperwork and other essential items in place.
This is the case both before and after you start investing. The good news is that a qualified self-directed IRA organization can help you with all of these things to make the process easier.