The tax advantages of gold IRAs: How they can boost your retirement savings
When planning for your retirement, it is a good idea to explore different possibilities for investments to include in your portfolio. While many of the traditional investments, such as stocks and bonds, are a good idea, it would also be worth your while to consider different types of investments that might help you diversify your portfolio and add stability.
Gold IRAs are one way to do this. This article will explain what gold IRAs are, the advantages of including them in your retirement plan, and also cover some of the potential risks involved.
Understanding gold IRAs
In 1997, the government expanded the types of IRAs that people can hold to include precious metals as part of the Taxpayer Relief Act. A gold IRA is a type of IRA that includes gold as a qualified retirement investment. Gold IRAs can include the ownership of either physical holdings, such as bullion or coins, or precious metals securities.
Gold IRAs bear some similarities to traditional retirement accounts. They involve some of the same rules such as contribution limits and distribution amounts. However, these IRAs are distinct accounts and owners must keep them separate from their other retirement accounts.
Rules to follow in opening a gold IRA
If you choose to invest in a gold IRA, be sure that you are familiar with the rules for doing so. First of all, you should open a self-directed IRA. This will allow you to add assets other than the standard ones such as stocks and bonds. In addition, it will provide you with certain types of tax benefits, which we will discuss below.
Another thing to keep in mind is that the type of gold you buy must meet certain requirements in order to be in compliance with IRS standards. This includes the following criteria:
- Gold must have a purity level of 99.5%
- It must be held in a depository by a licensed custodian
- It must be produced by either a national government mint or an accredited manufacturer
You must purchase your gold through a designated financial institution that will likely act as a custodian of your purchase. You can either purchase gold by means of depositing cash, transferring other types of assets, or rolling over a 401(k) or other type of retirement account.
Tax advantages of gold IRAs
Gold IRAs vary from type to type, but some of them offer tax incentives when depositing or withdrawing funds.
If you have a conventional gold IRA, you will be able to deduct contributions from your tax up to a certain amount on an annual basis. Once you initiate your retirement, tax will then become due on your distributions. Some people see this as a preferable option because they believe they will be in a lower tax bracket upon retirement.
You might also choose to get a Roth IRA. A Roth IRA is taxed when you make contributions, but not when you make withdrawals. Some people consider this a preferable option because they want to have a predictable amount of money available when they retire.
Diversifying your retirement portfolio with gold
Including gold in your larger retirement portfolio can be a very wise move. There are a number of benefits that gold has which make it a reliable inclusion into any given portfolio, particularly when other assets are subject to potential market volatility. This includes the following:
- Gold is historically seen as a hedge against inflation. Because of the intrinsic value that it holds as a precious metal, it is known as being a solid investment in times when currencies become volatile.
- When other investments start to become problematic, gold tends to rise in value
- Buying gold does not require fulfilling a lot of requirements. Anyone who can afford it can invest.
For these reasons, it is a good idea to include some form of gold investment in your retirement portfolio. Ideally, you want your portfolio to be diverse and also include other types of investments, as well.
Different types of retirement portfolios
While there are different portfolios recommended for different ages, the overall idea is that you should include a mix of cash, stocks, and bonds in some proportion. This is also assuming that you will receive social security benefits. However, it is best not to rely on Social Security alone.
Experts recommend three stages to build your retirement portfolio:
- Growth portfolio. Towards the beginning of your career, devote a greater percentage of your investments towards stocks. Although this carries a certain amount of risk, it also offers the greatest potential for growth. A growth portfolio can also include alternative investments, but the focus should be on increasing the value of your assets.
- Balanced portfolio. In the middle of your career, experts suggest having an even balance of stocks and bonds (in addition to your other assets) to level out the balance of risk versus stability. Having gold and/or other precious metals as part of your portfolio can be instrumental in lending it a stable component.
- Income portfolio. Towards the end of your career, and leading into your retirement, you should have the balance of your investments in assets that are as stable as possible. This includes a greater balance of bonds over stocks, as well as any other stable assets that you include. If you calculate this correctly, you will not risk facing any major losses once you are past working age.
Risks and considerations
For all of the benefits that gold IRAs provide, there are some downsides, as well. Keep in mind the following considerations:
- Gold does not typically yield high returns. As mentioned above, it is known as being a stable asset, but not a dynamic one. It is for this reason that diversification is recommended.
- There are fees involved in setting up and maintaining an account. This includes a set-up fee, a storage fee, and possibly a management fee, which can cost several hundred dollars.
- Gold IRAs have annual contribution limits, which vary in amount from type to type. You cannot simply put as much into them as you want.
- If you choose to withdraw from your gold IRA before the age of 59 ½, you will face a penalty. This includes taxation on your withdrawal, plus (depending on the type of IRA you have) a possible 10% penalty.
Getting started with a gold IRA
To get started with a gold IRA, you should look for the right company to help you set up the account. The company you choose, which will likely be the custodian of your account, will also help you choose your gold.
In order to open your account, you will need some form of ID, as well as information about your existing retirement accounts if you want to transfer money from one of them into your new account.
You can then start to fund your account, either with cash, transfers, or rollovers from existing retirement accounts. Once your account has been funded, you can begin looking for gold, and also other types of precious metals.
The initial process of opening an account is usually very easy and only takes a few minutes. The process of transferring from other accounts can take several days, depending on your custodian.
Conclusion
Investing in a gold IRA can be a reliable way to secure stability in your retirement plan. While you don’t want to rely on gold alone, its long history as a stable asset serves as proof of its secure value, regardless of the state of the economy. Its intrinsic value, historical proof as a hedge against inflation, and ease of purchasing make it a popular investment choice for many people in their retirement planning.
