A gold IRA is an attractive option for many investors. When they see how it affects their taxes, however, they wish they had never made this move. What should a person know before opening this type of account?
What is a Gold IRA?
Gold or precious metals IRAs are retirement accounts where you can add gold, silver, palladium, and platinum items for investment purposes. An IRS-approved custodian stores the metals for you, and this account must follow the same rules as other IRAs. With a gold IRA, you can make contributions and write them off on taxes, and the funds will grow tax-deferred. When you make withdrawals, then you pay taxes. While precious metals may bring comfort during an economic crisis, what tax implications do you need to be aware of before opening a gold IRA?
Tax Treatment of Contributions
Contributions made to a gold IRA may qualify as either traditional or Roth IRA contributions. Traditional IRA contributions are generally tax deductible if you meet income eligibility requirements. Roth contributions are not deductible but allow for tax-free growth and withdrawals in retirement if certain conditions are met.
One major tax advantage gold IRAs share with traditional IRAs is that any appreciation of your precious metals holdings and other investments grows tax-deferred within the account. You won’t owe capital gains taxes each year on the rising value of your gold, silver, platinum, or palladium, like you would if held in a taxable investment account. However, withdrawing funds from your gold IRA, including precious metals distributions, are taxed similarly to other IRA asset distributions. The annual contribution limits for gold IRAs are the same as other IRAs, which is $6,500 for those under age 50 and $7,000 for those 50 or older in 2023.
Required Minimum Distributions
Traditional gold IRAs are subject to required minimum distributions (RMDs) beginning at age 72. The amount of the RMD depends on your account balance and life expectancy. Failure to take RMDs can result in a 50% excise tax on the amount not distributed as required. Roth gold IRAs are not subject to RMD rules during the account owner’s lifetime.
Early Withdrawal Penalties
Withdrawing funds from a gold IRA before age 59 1/2 will usually incur the same ten percent early withdrawal penalty that applies to other IRA funds unless a penalty exception applies. This penalty is in addition to regular income taxes owed on the distribution.
Gold Coins are Taxed Collectibles
While gold bullion is taxed as capital gains when sold outside an IRA, collectible coins held in an IRA are subject to less favorable taxation. Gains on collectible coins, which include most gold coins, are taxed at 28% rather than the usual long-term capital gains rate. This higher rate applies even if you hold the coins for over one year.
60-Day Rollover Rule
Investors are allowed only one 60-day IRA-to-IRA rollover per 12-month period. This means you can only do a tax-free transfer of funds from one IRA to another IRA once per year. This rule applies across all your IRAs, including gold IRAs. Violating the one rollover per year limitation can result in taxes and penalties on the amount you rollover over the limit.
Reporting Requirements
Gold IRA custodians are required to report precious metals holdings on Form 5498 each year. While your gold is not reportable for IRS purposes until taken as a distribution, you must report the fair market value of your gold IRA on Form 8606 for any years you make regular, non-deductible IRA contributions. A financial advisor or accountant can help you with this.
Consult a Tax Advisor
The tax rules around gold IRAs can be complex. It’s important to consult a qualified tax professional or CPA when considering a gold IRA to ensure you understand the tax implications for your personal situation. Proper reporting is required to avoid costly tax penalties. With professional guidance, a gold IRA can be a tax-advantaged way to diversify your retirement savings.
The Drawbacks of Gold IRAs
Gold IRAs come with few drawbacks. The biggest disadvantage in the eyes of some investors is the storage requirements seen with this investment opportunity. They want to be able to hold the precious metals in their hands, but the IRS doesn’t allow this.
Diversification is key to successful investing. All investors need to consider opening a gold IRA as part of a larger portfolio. Doing so comes with the benefits outlined above.