An individual retirement account (IRA) is a type of tax-advantaged personal pension. This article will briefly overview an IRA and whether it's tax-deductible for gold investors.
In recent years there has been increased interest in investing in gold and other precious metals as an alternative asset class to bonds and stocks due to their haven status during times of crisis. Gold also has benefits other than its inherent value, such as hedging against inflation pressures and geopolitical instability.
Unlike a gold ETF or even a gold mutual fund which is "closed" and controlled by a fund manager who takes in the daily allocation, an IRA is open to anyone and can be held as an alternative asset.
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The Benefits of Gold IRAs
Investing in precious metals carries certain benefits that make the gold IRA one of the greatest assets for Tax Efficient Investment (TEI) purposes. TEI means that part of your investment can be deducted from your taxable income, making this a more effective alternative to investing outside an IRA.
Because of the "open-ended" nature of an IRA, you can deposit as much as you want, whenever you want, and there are no requirements to take your money out, and this is not true with any other investment vehicle.
For example, if you put $10,000 into a gold mutual fund in September 2009, then that is all the money you can invest in that fund for the rest of its life, and you cannot add to it, and it may be not easy to even get back out when it closes.
Although the gold IRA is not eligible for the annual $6500 tax deduction (which only applies to traditional IRAs), investors can deduct expenses from their income, such as safe-keeping fees, closing costs, wire transfer fees, etc. These deductions are currently up to 35% and can save thousands in taxes over the life of an investor's IRA.
One of the biggest advantages of the gold IRA is that it is a tax-deferred vehicle. The gold IRA only pays a tax on your investment once you start taking distributions, so you do not have to worry about boosting your income to qualify for a lower tax rate.
Example: Suppose you made $100,000 yearly and wanted to put $100,000 into a bullion IRA to invest in gold. You would meet the $100,000 annual requirement but would only be able to deduct any of your expenses from your income after you took distributions from that money which will likely be years later (5-10). When you take distributions from a gold IRA, you will pay taxes on the entire amount as if it were regular income.
In this example, our tax rate would be about 28% (15% Federal and 13% State) which is still better than the current 33% top tax rate for most Americans but doesn't come close to the 15% rate offered by traditional IRAs.
If you inherit an IRA, then there is no mandatory distribution until the year you turn 70.5 years old; even then, it is a minimum of 5% per year. The payout can occur whenever you want but must last at least five years or until death, whichever comes first.
Another advantage of the gold IRA is that the rules are much more flexible than other retirement accounts. For example, you do not have to invest your IRA solely in gold bullion. You can choose options such as coins and certificates, which generally carry higher premiums and, therefore, better profits but also carry extra costs.
Another benefit is that there are no restrictions regarding where you can store your gold IRA. Hence, it is easier for investors to invest in foreign mints or governments with no physical presence within their borders.
When you are ready to sell your gold IRA, there are no penalties. You can cash out your account with no questions asked (and no tax repercussions because of the IRA status), which is not true of other IRAs.
There are also no requirements that your IRA stay within the borders of the United States, and nothing restricts foreign investors from selling their gold as an IRA.
Another advantage of using a gold IRA is that you can roll over or transfer an existing non-IRA financial account into a gold IRA, giving investors more flexibility. If you are self-employed or have a company contributing to a SEP-IRA, you can purchase metals in your SEP and take advantage of the tax benefits.
Although an IRA is not technically tax deductible, it gives investors a hedge against inflation, a haven for their wealth, and an opportunity to diversify their portfolios without paying extra taxes. For some investors, a gold IRA can also be just as efficient as a traditional IRA since you can hold many different types of metals in your account rather than just one.
Tax Implications of a Gold IRA
As with any financial decision, it is important to understand the tax implications of an IRA. In reality, an IRA is not a tax-efficient retirement account due to the requirement that you have to have your investment in the account for a set number of years before you can receive distributions. The longer your investment time frame, the more likely you will end up paying taxes on your gains when you receive them (assuming they are still in the account).
The first step in understanding your tax liability after investing in a gold IRA is determining how much taxable income you will have. If you are single and make $50,000 annually, your taxable income is $50,000. If you are married with two children and both spouses work, your taxable income is $120,000.
Your next step is to find out what tax bracket you fall into. In the US, there are a total of 5 tax brackets; 10%, 15%, 25%, 28%, and 33%. As you can see from the chart below, incomes lower than $8500 fall into the lowest tax bracket (10%). If your taxable income falls within this bracket, you do not have to pay taxes on long-term capital gains (which include profits from investments such as precious metals).
For example, if you invest $5000 into a gold IRA, your taxable income is only $44,500 ($50k-$5000) and will be taxed at 10% if you are in the 10% tax bracket. From this example, we can see that the tax implications of a gold IRA are far different than those of a traditional IRA. For example, investors cannot deduct any expenses associated with their investment, so the after-tax value of their investment is only $4500 ($5000-$100).
If your income falls within the 25%-33% tax bracket, you will pay taxes on long-term capital gains. Taxes are also likely if you have a high income and your investment is held within the IRA for a short period.
If you are fortunate enough to make more than $106,000 per year, your entire investment will be taxed at 15%, depending on how much you invest and how long you intend to hold it. The tax rate for capital gains (including gold) climbs from 15% to as much as 25% as your income increases. In addition, single taxpayers who make more than $89,350 and married couples earning a combined total of $178,650 or more can expect to pay the highest rates on their capital gains (20%).
For example, if you invest $5000 into a gold IRA, your taxable income is only $78,350 ($50k-$5000) and will be taxed at 15% if you are in the 15% tax bracket.
Other Considerations of the Gold IRA
If you are self-employed or have a company, you will likely be unable to contribute to an IRA and, therefore, won't be able to buy gold IRAs. If this is the case for you and your employees, consider setting up a SEP-IRA, which can save almost 5% in taxes.
It is also less likely that gold will be sold as an investment directly to investors and more likely that it will be sold through a financial advisor. Investors will also likely want precious metals to be held in a physical storage deposit, which allows the investor to avoid paying any storage fees (or make more profit).
Another important consideration for investors is that the price of gold may rise for another five years or so before it starts to fall again, so you should consider holding your gold in a low-risk ETF until a suitable opportunity arises.
Gold ETFs vs. Physical Gold
Most major gold market observers agree that gold will eventually break in either direction, which means the price of gold is extremely volatile, and there is no guarantee that you can hit a specific level. Although some investors may not like this, they should remember that they are gambling with their money and are willing to take risks to make more money.
One alternative to buying physical metals is investing in one of the many gold ETFs, such as GLD or IAU. With an ETF, you can invest in physical metals and other investments such as stocks or bonds. Since these ETFs are traded on the major stock markets, investors do not have to worry about their gold being stolen, but it does mean that they will pay transaction fees and bid/ask spreads when they make a purchase or sale.
The advantages of investing in physical gold include that your investment's value is more stable than other investments (such as stocks) and the option to buy and sell directly from a refinery, assayer, or bullion dealer with no transaction fees.
However, it is important to remember that not all metals are created equal, so you should conduct thorough research before deciding whether to buy physical gold or one of the many gold ETFs.
Investing in gold to pay a higher-than-average return on your money while avoiding taxes is not a strategy. An investment taxed at long-term capital gains rates will decrease your return (since you are paying taxes now instead of future tax periods) and subject you to the risk that your investment will be stolen.
How to Buy Gold IRAs
Instead of buying physical gold, it is possible to invest in gold by purchasing one of the many gold IRAs (or "Gold Setups") available from numerous investment firms. A gold IRA is created by a private company and allows you to buy gold without paying sales tax or taking possession of the metals. Instead, your money will be invested with the gold IRA company, and they will keep track of your transactions.
Most gold IRAs offer very few investment options, including physical metals, bullion coins such as the American eagle, silver coins such as the American eagle silver or Canadian Maple Leaf, and ETFs. There is no guarantee that you will receive a particular metal or coin you wish to purchase, so you should select an investment firm that can provide you with what you want (or are willing to settle for).
Gold IRA companies will offer different amounts of metal per gram and may offer slightly different currencies, such as the Canadian Gold Maple Leaf. The cost per gram and exchange rate will vary to buy/sell your metals. For example, you may be able to purchase some metals at a 20% markup while others may be priced at only a 10% markup.
Most gold IRA companies will charge fees based on the total amount of gold that is held within your account, with some firms charging monthly fees while others charge monthly fees for all transactions.
Choosing a Custodian
There are several issues that investors must think about before choosing one gold IRA company or making an investment in one of these accounts. The main issues that investors need to consider when purchasing or investing in a gold IRA are:
If you want to invest in a gold IRA account, it is important to find a company that can provide you with the service you wish. Some companies offer more benefits, such as worldwide storage, and others will require documentation to accept your investment.
Other Ways to Invest in Gold
You can purchase gold and gold investments in many other ways. For example, some companies will offer to buy physical gold from you, and this may be a good way to earn some quick money if your gold is of high quality or over-stocked. You can also trade silver or platinum, though there is much less information available online about these two metals than there is for gold.
Another option is trading stocks that invest in precious metals and mining companies. These stocks will only give you partial ownership of an investment, so they should not be viewed as a direct replacement for physical gold.
You should also be aware that if there is a large amount of inflation in the future, then gold prices will also rise. This means you should consider having gold as part of your investments, particularly before an economic crisis hits the US dollar.
Why Gold is Good for Your Wealth Preservation
Many people consider gold the best way to invest their money because of its limited supply and relative scarcity, which means that the price of gold will tend to go up over time as more and more people purchase it. Over time, this means that your wealth will be able to increase substantially. According to many experts, if you have your money in gold and silver, even if the United States goes through a severe economic crisis that destroys its currency and economy, you are in a good position to protect your wealth.
Gold is considered to be the most secure way of storing your money. Gold is good for the following reasons.
Gold can be easily protected in a safe deposit box or vault because it cannot be destroyed by fire or water. Gold is highly resistant to corrosion, and many purchase coins from nearly pure gold. You can also store gold as jewelry as long as you wear it daily, adding another layer of protection for your assets. Most gold is stored in a vault, so gold may still be valuable even if all of the gold is stolen from a bank.
Gold is not subject to inflation because it is a rare metal that man cannot produce. Because of this, you should always consider buying gold as it will continue to grow in value over time. You should also remember that if the US dollar loses its value, there will be less demand for gold, which will cause the price to decrease significantly.
Gold may hold its value less highly if the US economy collapses because there will be less demand for it, and it will therefore become less valuable. Many investors have lost millions of dollars due to their investments in businesses such as Lehman Bros. and bail-outs of the US government. However, these were other investments that were less strong than gold. You should also consider your future health, wealth, and overall well-being when deciding if gold is a good option for your money.
Some of the reasons why gold may be considered a poor investment include the following.
Gold will not keep its value in the future, just like stocks and bonds can lose their value over time because many people are cautious about it gaining this new status completely because there is less demand for it than other investments. As mentioned earlier, there is also less use for gold than other commodities such as oil or silver.
Gold is not an investment that makes you instant profit, and you will not be able to sell your gold the same day you buy it and make a lot of money from the transaction. Gold can also lose much of its value if there is a financial crisis or the US dollar collapses.
Gold is not a guaranteed return on investment. Because you do not own any stocks or bonds in your gold IRA, you will have to pay management fees and custodian fees which are the same charges you would pay if you were investing in a stock when you use a gold IRA. Gold is slightly higher priced than bonds, so finding an investment that uses gold and bond may be challenging.
Despite the few challenges gold has, its positives outweigh the negatives. You should consider how you might benefit from gold and why it is a good investment.
Gold can be used to purchase other investments, so you have more options once you get your gold coins or bars into an investment account. This means less risk is associated with investing in gold than other investments such as stocks or bonds. Gold can be easily stored in anything you can put it into, so it's okay to store some of your money away in gold should you decide to invest in something else.
Regarding IRA investments in gold, you won't have to pay the 28% collectable tax rate. There is also no physical limit to the amount of gold you can have in your IRA when investing in a self-directed gold IRA. You will also be able to add more gold if you wish, and it will not change the performance of your investment.
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