What is a Gold IRA? (Ultimate Guide for 2023)
A gold IRA, or precious metals IRA, is a type of self-directed individual retirement account that is set up to hold actual, physical gold, silver, platinum, or palladium bullion as part of your retirement savings.
These are retirement accounts set up with an IRS-approved, gold IRA custodian that is willing to hold physical precious metals, including select coins, bars, and rounds.
A precious metals IRA may help you with diversification, allowing you to hedge your retirement savings portfolio against hazards like stock market volatility and inflation.
With tons of good reasons to own gold, let’s get into what a gold IRA is all about and how you can use this knowledge to your advantage.
Self-Directed IRAs
When you own a self-directed IRA, such as a gold or precious metals IRA, you can take more direct control of the assets in your retirement accounts.
If you own a mutual fund, a money manager makes buy and sell decisions without your input.
If you own shares of stock, the CEO also makes decisions without your direct input as a shareholder.
But with a self-directed IRA, you are empowered to take personal control of all aspects of your investments, including all the buy and sell decisions for every asset.
With self-directed IRAs, you are no longer limited to owning paper assets, like mutual funds, stocks, and bonds.
You can also own hard, physical assets, including precious metals, real estate, land, and closely-held corporations, partnerships, and LLCs within your IRA.
There are a ton of different ways to invest in precious metals: stocks, bonds, mutual funds, ETFs, and more.
Precious Metals IRA Custodians
Most Wall Street investment houses and insurance companies that offer IRA accounts don’t support gold IRAs.
This is because they aren’t set up to make money on gold or precious metal transactions.
They also aren’t set up to act as an IRS-approved IRA custodian and depository facility, which is what it would take to hold large amounts of physical gold, silver, and other precious metals.
Typically, the custodian contracts with one or more secure third-party depository vault storage facilities, which hold your coins, bars, or rounds on your behalf.
A gold IRA can be a traditional or a Roth IRA account.
You can open either type of account, or both, and contribute, as long as you meet the income limitations for contributing to a Roth IRA.
For the purposes of this article, the term “gold IRA” can be used interchangeably with “precious metals IRA.”
Both types of accounts are subject to all the same tax laws and prohibited transaction laws as a traditional or Roth IRA.
Gold IRA Advantages
A gold or precious metals IRA has all the advantages of any other IRA, traditional or Roth.
The specifics depend on the type of IRA account you set up.
All self-funded gold IRAs and gold 401(k) accounts enjoy the same creditor protection as other IRAs, which may vary depending on your state.
However, inherited IRAs don’t enjoy the same creditor protection as IRAs that you and your spouse fund yourself.
Gold Traditional IRA Advantages
Contributions to a traditional gold IRA grow tax-deferred, as long as the assets remain in the account.
Physical gold doesn’t generate dividends, so dividend taxes aren’t an issue. Capital gains taxes are also not normally an issue.
You can buy and sell an unlimited amount of gold – or anything else, for that matter – within your IRA, without incurring either income or capital gains tax liability.
You may be able to deduct contributions to a traditional IRA account, including traditional gold IRA accounts.
The amount you can deduct depends on your income and whether you are covered under a workplace retirement plan.
Check with your financial advisor or tax professional for more details, or see our post on Gold IRA Tax Rules.
Gold Traditional IRA Disadvantages
The disadvantages of gold traditional IRA accounts are the same as those for other traditional IRAs or any other tax-deferred retirement plan.
You give up the more favorable long-term capital gains rate when you take distributions.
Instead, you must pay the higher ordinary income tax rate on any amounts you withdraw.
Additionally, traditional IRAs also have required minimum distributions or RMDs. You can’t defer taxes on traditional IRAs, 401(k)s, SIMPLE IRAs and SEPs indefinitely.
Instead, you must generally begin taking an annual minimum distribution and paying taxes on those distributions by April 1st of the year after the year in which you turn age 72.
Exception: You can defer RMDs as long as you are 85 using a qualified longevity annuity or QLAC. You can use up to 25% of your IRA assets, or $135,000 (whichever is less), to purchase a QLAC).
Gold Roth IRA Advantages
A Gold Roth IRA has all the same advantages and disadvantages as any other Roth IRA.
The chief advantage for Roth IRAs (and Roth 401(k)s) is the potential for unlimited tax-free growth.
As long as the assets are in the Roth IRA for at least five years, the money grows tax-free.
Once you are over age 59 1/2, you can withdraw any amounts in your Roth IRA penalty-free for tax-free income.
This allows you to possess your gold IRA physically.
Another advantage of Roth IRA accounts, including precious metals IRA accounts, is that since income from Roth distributions isn’t taxable, it also doesn’t count against you for the purposes of calculating taxes in Social Security income in retirement.
Unrelated Debt-Financed Income Tax (UDIT)
If you have your IRA borrow money (employ leverage) to buy gold or other assets within your gold IRA, you may incur a current-year tax liability for a portion of your profits.
This tax is called unrelated debt-financed income tax, or UDIT.
It only applies to income or capital gains attributable to the borrowed money, rather than that attributable to your own contributions.
Gold IRA UDIT Example
Here’s how UDIT works in the context of a self-directed IRA account.
If you buy $100,000 worth of gold bars, gold coins, or other bullion for your gold IRA – 60% of it with your own money and 40% of it with borrowed money, and the value of your gold increases to $120,000, and then you sell it, you will incur a capital gains tax liability for 40% of your profits, or $8,000.
Assuming you held the gold for a period of at least one year (thus qualifying for more favorable long-term capital gains rates), you would have to pay up to 15% of the $8,000 in capital gains tax on your gold IRA – unless you had some capital losses to offset them with.
However, the IRS would not assess any tax on the proportion of gain attributable to your own contributions.
The normal IRA tax rules on sales within your IRA account or other retirement plans would apply.
Gold IRA Rollovers
Many people choose to roll a portion of their retirement savings in existing IRA, and 401(k) accounts into a gold IRA, silver IRA, or other precious metals IRA.
Done properly, there are no negative tax consequences to doing a gold IRA rollover.
Here’s how it works:
1. Open Your New Gold IRA Account.
Open your new Gold IRA account with a precious metals dealer or self-directed IRA company.
2. Fund The Account.
You can have your existing investment company or brokerage firm write you a check, which you must deposit in your new IRA within 60 days.
Expect your existing 401(k) custodian to withhold 20% of your funds and forward them to the IRS to pay expected income taxes.
However, you must still transfer 100% of your distribution to your new IRA or face taxes and penalties on the amount not transferred.
Alternatively, you can set up a “trustee-to-trustee transfer between the two financial institutions.
With this arrangement, your old investment company, brokerage firm, or custodian transfers the funds directly to your new account.
You never take possession of the funds.
So there’s no 60-day deadline to worry about, and your old investment custodian will not withhold 20% of funds to forward to the IRS but transfer the entire amount to your IRA.
3. Work With A Reputable Precious Metals Dealer.
Work with a reputable precious metals dealer and decide what gold bullion, silver bullion, platinum, and palladium bullion you want to own in your IRA account.
4. Ensure Everything Is Legal.
Make sure everything you consider for purchase within your gold IRA is a legally permitted investment.
5. Send Instructions.
Send your new gold IRA custodian or third-party administrator written instructions on what precious metals dealer you want to purchase from, what assets you want to purchase, and at what price.
6. Monitor.
Monitor your statements to ensure the transaction is carried out correctly.
Precious Metals IRA Allowable Investments
Section 408(m) of the Internal Revenue Code limits the types of precious metals you can hold as an IRA investment.
Specifically, you can only own bullion coins, bars, or rounds that are manufactured in a qualifying facility or a national government mint.
These bullion products must meet specific standards for purity and fineness, described below.
You cannot use an IRA to hold coins, bars, or rounds that don’t meet the minimum IRS fineness requirements.
You also cannot use your IRA to own non-bullion collectibles or numismatics.
Moreover, you cannot own life insurance, collectibles, or S-corporations within a self-directed IRA of any type.
The prohibition on collectibles also applies to coins, bars, and rounds, other than bullion coins of sufficient purity.
Gold bullion coins, bars, and rounds must generally be at least 99.5% pure to qualify.
Exception: The law makes an exception for Gold American Eagle coins, which are only 92.7% pure gold mixed in an alloy with silver and copper called “crown gold.”
Pure 24-karat gold is a very soft and malleable metal, prone to scratches and scuffing.
Combining gold with silver and copper in the crown gold alloy gives the coins much more durability and resistance to wear and tear.
Note that the American Eagle coin is the only Gold coin in the world that is an approved IRA investment below 99.5% purity.
The South African Krugerrand, although made from the same crown gold alloy and contains the same percentage of pure gold as the American Eagle, is not approved for retirement investment in IRA accounts.
Gold Coins Approved for IRA Investment
- American Gold Eagle bullion coins
- American Gold Eagle proof coins
- American Gold Buffalo coins (not proof coins)
- Canadian Gold Wildlife Portrait Series
- Canadian Gold Maple Leafs
- Austrian Gold Philharmonic coins
- Australian Kangaroo/Nuggets
- Chinese Gold Pandas
You can also invest IRA assets in Gold bars and rounds manufactured in a national government mint or an NYMEX or COMEX-certified facility that meet the minimum IRS fineness requirement of 99.5%.
Examples of gold bars commonly available through your precious metals dealer that are authorized for your gold IRA account include:
- Royal Canadian Mint Gold Bars
- UBS Gold Bars
- Valcambi Gold CombiBars
- Valcambi Gold Bars
- Sunshine Mint Gold Bars
- Credit Suisse Gold Bars
- Credit Suisse Gold Bars
- Johnson Matthey Gold Bars
Silver Coins Approved for IRA Investment
You may consider investing in physical silver bullion bars or rounds as part of your IRA retirement funds if you find the price of gold to be a little too high.
You can invest in the following types of bullion for your silver IRA:
- American Silver Eagle bullion coins
- American Silver Eagle proof coins
- Canadian Silver Wildlife Portrait Series
- Canadian Silver Maple Leafs
- Austrian Silver Philharmonic coins
- Australian Silver Kookaburra coins
- Chinese Silver Pandas
- Mexican Libertads
You can also invest IRA assets in silver bars and rounds produced by an NYMEX or COMEX-approved refinery or national government mint, meeting the minimum IRS fineness requirement for silver bullion of 99.9%.
Platinum Coins Approved for IRA Investment
The following forms of platinum bullion are approved for investment in individual retirement accounts.
- American Platinum Eagle coins
- American Platinum Eagle proof coins
- Canadian Platinum Maple Leafs
- Isle of Man Noble coins
- Australian Platinum Koala coins
- Australian Platinum Emperor Penguins
- Various Platinum bars and rounds are made in national mints or NYMEX/COMEX-approved refiners and assayers, meeting the minimum IRS fineness requirement of 99.95% pure platinum.
Palladium Coins Approved for IRA Investment
You can invest IRA assets in the following types of palladium bullion:
- American Eagle palladium coins
- Palladium Canadian Maple Leaf
You can also invest in palladium bars and rounds of sufficient purity (minimum fineness of 99.95%) produced by a national government mint, or by an NYMEX/COMEX-certified or approved refinery. These include:
- Valcambi Suisse palladium bars
- PAMP Suisse Fortuna palladium bars
Beware of Home Storage Gold IRAs
Again, you cannot take personal possession of IRA-owned physical gold or other precious metals at any time, unless you take a distribution.
Instead, you must have your gold IRA companies send your physical gold investments and other physical bullion directly to an IRS-approved depository facility via your IRA custodian.
Otherwise, the IRS may disallow your entire IRA, force you to take a taxable distribution on the entire amount, and assess other penalties.
Do not attempt a home storage gold IRA or anything similar.
Always store your IRA gold investments and other physical metals in your IRA with an IRS-approved custodian.
Other Ways to Own Gold
You can also gain exposure to gold as an asset class indirectly by purchasing gold ETFs (exchange-traded funds) or mining stocks.
But gold ETFs are run by third-party managers who may commit fraud or otherwise not act with your best interests in mind.
Owning physical gold, silver, platinum, and palladium, either in your retirement portfolio or in your own name, allows you to take direct, personal control of this part of your financial picture.
Further reading on AdamEnfroy.com: Knowing how to invest in gold is a great skill to have.
Furthermore, if you want to learn more about how IRAs are being used in conjunction with some of the best investment practices today, here’s my post on the best crypto IRAs to buy and hold right now.
In addition, here’s another post on the best investment apps to consider right now.
