Important Gold IRA Tax Rules to Keep in Mind

Precious metals have always proven their worth as the ultimate way to hedge against inflation and even global recessions. Worth noting, however, is that the Internal Revenue Service (IRS) only allows you to add gold, silver, platinum, or palladium into your retirement portfolio through a self-directed individual retirement account (SDIRA).

But as with any other IRS-approved investment, there are rules and regulations. The Gold IRA tax rules, for example, clarify the taxes and penalties to be paid, and also the types of precious metal bars and coins that are eligible.

The truth is, if a self-directed precious metals IRA is set up correctly, it can be a great way to safeguard one’s long-term wealth.

According to a Beyond The Numbers white paper published by the US Bureau of Labor Statistics in 2013, the value of gold grew exponentially between 2008 and 2012. According to the paper, the highest level of growth was witnessed in 2009 when the precious metal’s value rose by 12.8 percent.

Coincidentally, that was the time when the US economy was mired in the financial doldrums of the Great Recession crisis.

In 2010 and 2011, gold prices rose even further by 50.6 percent all thanks to the fact that people were anticipating that the US financial markets would recover. And as things started to improve, the rate of growth slowed down to 2.6 percent in 2012.

The point is, gold has been rallying since time immemorial, often defying the odds. But before you dip your fit into the world of precious metal investment it’s important that you’re aware of the prevailing federal tax issues.

Generally, precious metal IRAs are legally viewed as the purchase or ownership of collectible items. The existing tax code makes the following statutory requirements (1) Only certain types of coins can be part of an IRA (2) Gold bars must meet the defined purity standards.

Another quick point worth keeping in mind is that all coins and bars must be held by a custodian (or a trustee) not the owner.

There’s also the concept of deferred tax which effectively protects your investment such that you only pay tax when the time to withdraw the funds arrives.

Let’s delve deeper:

Types of Coins Accepted in Gold IRA

Although there are many gold coins from different parts of the world, only a handful of them can make it to your IRA account. That is because there are some strict rules in place to protect the integrity of this kind of investment.

So, the coins to invest in should generally be ones from the approved mints e.g., the West Point Mint, the Royal Mint, and the Canadian Mint.

Apart from the regulations on the mints, the coins you invest in need to be encapsulated in their original mint packaging and in excellent condition. They also must be accompanied by a certificate of authenticity.

Some examples of gold coins that are allowed for IRA investing include:

  • The American Gold Eagle Coins
  • The American Gold Buffalo Coins
  • The Canadian Gold Maple Leaf Coins
  • The Australian Gold Kangaroo Coins

If you happen to buy non-IRA approved coins out there, the best you can do is store them at home and sell them directly to the market later.

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The Acceptable Gold Bars in IRA

The IRA rules require that any bars to be safeguarded should be of the highest level of purity possible i.e., 99.5 percent purity for gold and 99.99 for silver.

Also, the bars have to weigh exactly as their weight specifications. And to protect their integrity they have to be uncirculated and totally free from any visible damage.

Lastly, only bars from the following major mints of the world are allowed under a self-directed IRA account.

  • The Canadian Mint
  • Credit Suisse
  • Valcambi Mint
  • Sunshine Mint
  • Johnson Matthey Mint
  • Perth Mint
  • MKS Pamp

Generally, only bullion bars from COMEX- or NYMEX-approved refineries or government mints are accepted for IRA investments.

The Rules & Requirements for Precious Metal IRA Custodians

No IRA owner is allowed to handle the bars and coins on their own. As such, one must find a custodian to do the job. Those who make the mistake of handling the coins on their own only risk the fines that come with a premature withdrawal of an IRA.

When it comes to choosing the right custodian for your IRA, it is important that you work with one who is aware of the relevant IRA tax rules. It is quite easy to violate the IRS requirements, and the penalties for doing the same can be hefty.

As such, you’ll want to work with a custodian who is not only aware of what the IRS prohibits so they can guide you on the same. The following are some of the key features worth considering when choosing a custodian:

1. Reasonable Fees

There are many different kinds of fees to be considered and they range from annual account maintenance fees to storage and commission fees. And just because a certain custodian has certain fees doesn't mean that all do. Maintenance fees, for instance, are not always charged. The most important thing here is to find a custodian whose fees are reasonable and one who puts your best interest first.

2. Product Selection

As we have already mentioned, the IRA rules for the types of products you can hold are pretty strict. Therefore, you want to find a custodian who is capable of supplying you with IRA-grade products.

Also, if you’re thinking of venturing beyond precious metals in the future, it might be a good idea to work with custodian who is capable of providing you with access to bonds, ETFs, and stocks as well.

3. Quality Customer Support

Nothing is as frustrating as working with a non-committal customer support team especially when a self-directed IRA is involved. So, it is important that your custodian not only has a customer support team in place but that the team is made up of knowledgeable specialists. This way, they can help you to safely navigate the murky waters of setting up a precious metals IRA without breaking the rules.

4. Security & Insurance

First off, it is important that whoever you entrust with your investment is capable of safeguarding it. The coins and bars should always be stored away from the rest i.e., in segregated storage as opposed to commingled storage where they might end up mixing up with those from other investors.

Besides that, as a long-term investment, it is imperative to work with storage service providers who work with credible insurance companies. This can act as a last line of defense for your investment should anything happen to your coins and bars while under storage.

Types of IRA Accounts and Their Tax Rules

Each IRA account type has its own taxation rules and regulations. Knowing these rules can help you choose the account that suits you better.

Traditional IRA

Traditional IRA accounts are categorized as tax-deferred meaning your money will not be taxed prior to the maturity date. That said, a $6,000 limit for those under 50 and a $7,000 one for those over 50 does exist. 

In general, funds in your traditional IRA are never taxed until the moment when you make a withdrawal.

It is also worth noting that withdrawals are generally taxed as regular income as opposed to capital gains. That means, the tax to be paid is charged as per your tax bracket at the time of making your withdrawal.

Roth IRA

Roth IRA is normally an excellent way to safeguard your assets especially in preparation for your sunset years. Just like traditional IRA, Roth allows you to nurture your savings in a tax-free environment. What’s more, it enables you to make tax-free withdrawals of all your contributions (although you’re not allowed to do so on your earnings).

Under exceptional conditions, Roth IRA can allow for tax-free earnings withdrawal. Some of those exceptional circumstances include being disabled or when one attains 59 ½ years of age.

In general, the terms of Roth IRA work best for anyone who expects to be earning at a higher income bracket by the time they need to make a withdrawal. Vice-versa is true for those who opt for traditional IRA.

Self-Directed Gold IRA Tax Rules

A self-directed IRA is a good choice if you are looking for extra flexibility. Indeed, these types of IRAs enable you to venture beyond the usual securities so you can experiment with precious metals or even real-estate.

Of course, the returns from such undertakings can be highly lucrative. But likewise, self-directed IRAs come with greater risks.

Worth noting is that just like traditional IRAs, self-directed IRAs are tax-deferred meaning you don’t get to pay tax until when you’re making a withdrawal.

However, it is important to keep in mind that the IRA tax benefits can easily evaporate if you don’t stick to the rules. For example, how you transition from a 401k to a self-directed IRA matters a lot. One slight mistake and you might find yourself paying costly penalties.

How To Legally Avoid Paying Your Gold IRA Tax

The good news is that there are several ways to minimize your tax burden even when running a self-directed gold IRA. Generally, tax-free withdrawals are allowed for hardship exceptions and generally circumstances such as the following:

-Buying Your First Home

The IRS allows for a penalty-free early withdrawal of a maximum of $10,000 for those seeking to purchase a home for the first time. To be considered a first-time homebuyer you should not have owned any other residence within the past two years. One interesting thing about this exemption is that the $10,000 limit applies to individuals (not families). Therefore, couples can make a $20,000 withdrawal for a down payment.

-Combat Zone Withdrawals

If you are a military person who has been in active duty for at least 180 days, you can make a tax-free withdrawal from your IRA. Note that this withdrawal can only be done when you are in active duty, not after.

-Health Insurance

If it happens that you have lost your job and you want to purchase a health insurance cover, the IRS waives the penalty tax for your IRA withdrawal. This is, however, subject to you receiving state unemployment compensation for more than 12 consecutive weeks.

-Disability

The Gold IRA tax rules are that if you would like to make a penalty-free withdrawal for disability you have to prove that your disability is total and permanent. The IRS defines this as the kind of disability that leaves you completely unable to engage in any gainful work. Also, the disability has to be of indefinite duration.

-In Case of Death

In case you die and leave an active gold IRA behind, then your next of kin will be exempt from the 10 percent early withdrawal penalty even if you were yet to attain the age of 59 ½. 

The only exception to this rule is if the deceased’s IRA account is less than five years old. For accounts below 5 years, the contributions may still be withdrawn tax-free but any earnings on them will be taxable.

Other situations when an IRA may be eligible for tax-free or penalty-free early withdrawals include: withdrawals for college expenses, withdrawals for medical bills, or if the IRS places a tax lien on one’s property.

Conclusion

A gold IRA account can protect your retirement and stabilize your financial security for the long-haul. However, early withdrawals are subject to penalties and accrued earnings are normally taxed. This is unlike the case when one has a Roth IRA in place (with Roth you pay the tax in advance).

There are, however, certain exceptional circumstances under which you can be exempted from some of the rules. These include cases of disability, active military service, first-time home buying, and even the death of the principal contributor.

Luckily, if done right, an investment in gold can pay for its own penalties and tax deductions at maturity. And this is why it makes perfect sense to find a good gold IRA company to act as your reliable partner in this undertaking.