When the economy is on a roll, it seems almost impossible to make a bad choice. However, with the world in a precarious spot, financially and geopolitically, you may be rethinking your portfolio's structure.
If you're planning your retirement and would like to include precious metals as a hedge against a potential financial calamity, then the ability to modify your individual retirement account is a useful tool.
Everything You Need to Know About a Conventional Roth IRA
To understand how to roll your Roth IRA into precious metals, it's imperative that you know how a Roth IRA works. Let's look at an overview of how this retirement instrument functions and some of the rules that govern its use.
A Roth IRA is a type of individual retirement account (IRA) that allows you to save for retirement on a tax-advantaged basis. For a little bit of history, the Roth IRA is named after Senator William Roth, who sponsored the legislation that created it.
One of the main differences between a Roth IRA and a traditional IRA is the timing of the tax benefits. With a traditional IRA, you can deduct your contributions from your taxable income in the year you make them, which reduces your tax bill in the short term. However, when you withdraw money from a traditional IRA in retirement, those withdrawals are taxed as ordinary income.
On the other hand, with a Roth IRA, you do not get an immediate tax deduction for your contributions. Instead, you pay taxes on the money you contribute upfront, but your contributions and any investment earnings they generate are tax-free when you withdraw them in retirement. This means that a Roth IRA allows you to pay taxes on your money now, rather than in the future, which can be beneficial if you expect to be in a higher tax bracket when you retire.
To be eligible to contribute to a Roth IRA, you must have earned income and your income must fall below certain limits. For the tax year 2021, the income limits for single filers are $125,000 for partial contributions and $140,000 for full contributions. For married couples filing jointly, the income limits are $198,000 for partial contributions and $208,000 for full contributions.
If you are eligible to contribute to a Roth IRA, you can do so up to an annual contribution limit of $6,000 for the tax year 2021 (or $7,000 if you are age 50 or older). You can also contribute to a Roth IRA if you have a traditional IRA, but you will need to pay taxes on the amount you convert.
In addition to the contribution limits, there are also income limits that determine whether you can contribute to a Roth IRA and whether you can take a tax-free distribution of your contributions and earnings. These limits are based on your modified adjusted gross income (MAGI) and filing status.
There are also rules regarding when you can withdraw money from a Roth IRA. Contributions can be withdrawn tax-free and penalty-free at any time, but earnings are subject to certain restrictions. To be eligible for tax-free withdrawals of earnings, you must meet a "five-year rule" and one of several other conditions, such as reaching age 59½, becoming disabled, or using the money to buy a first home.
How Does a Gold or Silver Roth IRA Differ from a Roth IRA?
Now that you're up to speed on traditional Roth IRAs, let's examine how a version based on precious metals differs from an account that centers around conventional asset classes.
A precious metals Roth IRA is a type of individual retirement account that allows you to invest in physical gold and silver as a way to diversify your retirement portfolio.
One of the main differences between a gold Roth IRA and a traditional Roth IRA is the type of assets you can hold in the account. While a traditional Roth IRA allows you to invest in a diverse range of assets, a gold Roth IRA, for example, is limited to physical gold. This means that if you want to invest in stocks, bonds, or other financial instruments, you would need to do so outside of your gold Roth IRA.
Another difference is the way the assets are held. In a traditional Roth IRA, your assets are typically held by a financial institution, such as a bank or brokerage firm. In a gold Roth IRA, your precious metal assets are held in a secure depository, where they are stored and insured.
Like a traditional Roth IRA, a gold Roth IRA allows you to contribute after-tax dollars to the account and earn tax-free returns on your investments. However, there are some additional rules and restrictions that apply to gold Roth IRAs.
For example, the Internal Revenue Service (IRS) has strict guidelines on the types of gold and other precious metals that can be held in a gold Roth IRA. The metals must meet certain purity standards and be in the form of coins or bars that are approved by the IRS.
How to Convert a Conventional Roth IRA into Gold or Silver
If you have a conventional Roth IRA and you want to convert it into a gold or silver Roth IRA, there are several steps you need to follow. Keep in mind that converting your conventional Roth IRA into a gold or silver Roth IRA is a significant financial decision, and you should carefully consider the potential risks and benefits before proceeding. It is also a good idea to consult with a financial professional before making any changes to your retirement account.
To convert a conventional Roth IRA into a gold or silver Roth IRA:
1. Choose a gold or silver Roth IRA provider
It is important to carefully research and compare different providers to find one that is reliable, meets your needs and has a good reputation.
2. Open a gold or silver Roth IRA account with your chosen provider
This typically involves completing an application and providing personal and financial information.
3. Transfer the assets from your conventional Roth IRA into your gold or silver Roth IRA
This process is called a "rollover." To complete a rollover, you will need to instruct your current IRA custodian to transfer the assets to your new gold or silver Roth IRA.
4. Choose the precious metals you want to invest in
You will have the option to invest in gold, silver or perhaps another metal like platinum, or palladium. Keep in mind that the Internal Revenue Service (IRS) has strict guidelines on the types of gold and silver that can be held in a gold or silver Roth IRA, and the metals must meet certain purity standards and be in the form of coins or bars that are approved by the IRS.
5. Monitor and manage your investments
This may involve making changes to your investment portfolio, such as adding or selling precious metals, or making contributions to your account. It is important to carefully consider your investment goals and risk tolerance when making any changes to your gold or silver Roth IRA.
Pros & Cons of a Gold or Silver Roth IRA
Investing in precious metals can be an exciting prospect, especially for those that have never considered putting funds in gold or silver. When moving forward with your precious metals Roth IRA, it's crucial that you understand the pros and cons of such an asset.
Is a Gold or Silver Roth IRA a Good Option for Your Retirement?
Young investors have the luxury of choosing to place their money in riskier asset classes. However, as you go through life's phases, such as buying a home, creating a family and building a career, you will probably seek a safe haven for your nest egg. How will you determine if a gold or silver Roth IRA is a good choice for your retirement?
Alternatives to a Gold or Silver Roth IRA
Depending on how involved you want to be with the course of your investment and the returns that you seek, there may be other ways of owning precious metals that suit your needs better.
Precious Metals ETFs
Precious metals exchange-traded funds (ETFs) are investment vehicles that track the price of gold, silver, platinum, or other precious metals. These ETFs allow investors to gain exposure to precious metals without the need to physically own the underlying assets.
Precious metals ETFs are traded on stock exchanges, just like stocks, which means that they can be bought and sold throughout the trading day. They are also relatively easy to buy and sell, as they can be purchased through a brokerage account or through a financial advisor.
There are several different types of precious metals ETFs, including those that track the price of a single metal, such as gold or silver, and those that track a basket of precious metals. Some precious metals ETFs are physically backed, which means that they hold physical gold, silver, or other precious metals in a secure depository. Others are synthetic, which means that they use financial instruments, such as futures contracts, to replicate the performance of precious metals.
One advantage of precious metals ETFs is that they offer a relatively low-cost and convenient way to invest in gold, silver, and other precious metals. They also provide investors with the opportunity to gain exposure to precious metals without the need to store and insure physical assets.
However, there are also some risks to consider when investing in precious metals ETFs. Like any investment, the value of a precious metals ETF can fluctuate based on changes in the market. In addition, synthetic precious metals ETFs may be subject to additional risks, such as counterparty risk, which is the risk that the counterparty to a financial instrument may not fulfill its obligations.
Precious metals derivatives are financial instruments that are based on the price of gold, silver, platinum, or other precious metals. These derivatives allow investors to speculate on the future price movements of precious metals or to hedge against price fluctuations.
There are several different types of precious metals derivatives, including futures contracts, options, and forwards.
Futures contracts are agreements to buy or sell a specific quantity of a precious metal at a predetermined price on a future date. They are traded on futures exchanges, such as the Chicago Mercantile Exchange (CME).
Options are contracts that give the holder the right, but not the obligation, to buy or sell gold or silver at a predetermined price on or before a certain date. Options can be bought or sold through a brokerage account.
Forwards are similar to futures contracts, but they are traded over-the-counter (OTC) rather than on an exchange.
One advantage of precious metals derivatives is that they allow investors to speculate on the future price movements of precious metals without the need to physically own the underlying assets. They also allow investors to hedge against price fluctuations, which can help to reduce risk.
However, there are also potential risks to consider when investing in precious metals derivatives. These instruments can be complex and may be subject to additional risks, such as counterparty risk, which is the risk that the counterparty to a financial instrument may not fulfill its obligations. In addition, the value of precious metals derivatives can fluctuate based on changes in the market.
Holding Physical Metals
Holding precious metals is the most straightforward way to invest in gold or silver. You buy the metal and store it in a safe place where you have ultimate control over the direction your investment takes.
One way to hold precious metals is to physically own the assets, either in the form of coins or bars. Physical gold, silver, and other precious metals can be purchased from a variety of sources, such as coin dealers, online marketplaces, and banks.
One advantage of physically owning precious metals is that you have direct control over your assets. You can store them in a secure location, such as a safe deposit box, and you have the ability to sell them whenever you want.
However, there are also some disadvantages to physically owning precious metals. These assets can be expensive to purchase and may require storage and insurance, which can add to the cost of holding them. In addition, the value of physical precious metals is subject to changes in the market, which means that the value of your assets can fluctuate over time.
Roll Your Roth IRA into Gold or Silver Today
Having skin in the precious metals game doesn't necessarily mean saving up extra funds from your current income for this purpose. You can redirect your Roth IRA into gold or silver and take advantage of a potential bull market in precious metals in the event of a recession. If a precious metals Roth IRA sounds like a retirement plan that suits your vision of a happy retirement, contact us today.