A precious metals IRA or Individual Retirement Account allows you to buy and hold gold, silver, and other elements. The account acts similarly to a traditional IRA, but there are a few rules and regulations to follow.
Keep up with these precious metals rules so that you can benefit from tax incentives and protect your assets from inflation concerns.
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1. Purchase Precious Metals Through a Custodian
Purchasing precious metals for your IRA isn't the same as stockpiling gold bars in a dark basement.
A legitimate precious metals IRA must have a custodian. In general, a custodian is a financial entity that can set up, transfer and manage the precious metals or gold IRA for you.
The federal government stipulates that every account must have a custodian to protect the assets. Direct customers cannot store, transfer or activate a precious metals IRA.
Most companies that offer these IRAs have custodians that come with the process. It's important to vet your chosen institution before selecting a custodian too. Research the basics about the company, such as its time in business, industry reputation, and customer reviews. You can even look up their record with the Better Business Bureau.
Professional custodians typically charge fees for their services, so look out for cost breakdowns during your research. A custodian offering free services, however, will not be considered a legitimate operation.
The IRS must approve of these custodians so that you can take advantage of the tax benefits. Approved custodians follow specific regulations and continually update their skills as needed.
A unique question to ask your potential custodian is if they buy back any metals. This service isn't offered by every custodian, but it can come in handy if you want to reduce the number of assets dedicated to precious metals in the future.
In essence, you have a way of changing your mind about an investment after the gold has been bought and secured.
With a quality custodian in mind, you can open your account. The custodian facilitates the precious metals purchasing. You fund these purchases through several methods.
Initially, roll over part of your 401(k) or another retirement account to purchase the metals. This method doesn't require a standard withdrawal, which reduces any tax burden on the funds.
Transfer other assets from a traditional IRA into the precious metals IRA. The custodian uses these funds to purchase the metals too. Make sure to move this money as quickly as possible between accounts. Holding the funds outside of either IRA for too long can result in taxes and penalties. The government considers it a distribution after a set time period.
Lastly, fund your precious metals IRA with cash. Simply deposit the funds into the IRA. Your custodian purchases as many bars or coins as possible at the current rate.
2. Select a Self-Directed IRA
Along with researching your custodian, be sure to learn more about precious metals IRAs. They're also referred to as self-directed IRAs.
These accounts are completely separate from traditional or Roth IRAs. Self-directed IRAs allow you to invest in much more than just stocks, bonds, and mutual funds.
In fact, self-directed IRAs offer even more investment opportunities compared to other accounts. Choose from gold, silver, palladium, and platinum metal bars and coins. Go above and beyond metals by looking at other options.
Real estate is also a possibility with precious metals IRAs. Always discuss your goals with the custodian. They can look over current options to diversify your portfolio.
Self-directed IRAs give you a chance to invest in assets that aren't directly linked to the stock market. Metals and real estate typically hold their value over time, including rough financial events.
3. Be Aware of Contribution Limits
The IRS understands that people want to protect their income from taxes as much as possible. The funds you put into a precious metal IRA won't be taxed until they're withdrawn.
With this fact in mind, the IRS sets limits on how much money you can put into an IRA each tax year.
Currently, you can contribute $6,000 each year to your IRA. This limit doesn't offer any exceptions. Once you reach that amount, you must wait until the next tax year to contribute more.
Keep in mind that this amount includes all of your IRAs. If you have precious metals, Roth, and traditional IRAs, only $6,000 combined can be put towards these accounts each year. As you plan out your metals purchases, consider the limit so that you end up with the assets you desire.
There's a relief for investors who're 50 years of age or older, however. Your annual contribution limit is $7,000. The IRS recognizes that you may need to catch up on your contributions as you near retirement age. The increased limit gives you a bit more room to save as an older investor.
If you've had income constraints in the past, use the $7,000 limit to your advantage. Invest that entire amount each year after age 50 so that you can have as many precious metals in your IRA as possible.
Investors who're still looking to buy precious metals over the set annual limit are welcome to do so. However, you won't be able to use the amounts as a tax break. You might simply store some gold or silver in your own safe, for instance.
It may not have the tax advantages as the precious metals IRA, but you'll still have the gold as an asset. Secure it in a safe or another area until you want to sell your gold IRA. Your precious metals IRA serves its purpose as you supplement your investments with gold that's stored at your residence.
4. Avoid Withdrawals Until Age 59-1/2
Most retirement accounts have penalties and extra taxes required on early withdrawals. Essentially, they're not to be treated like the average savings account.
Ideally, contribute your annual amount to the precious metals IRA and avoid any withdrawals until you're age 59-1/2 or older.
At this age, you have full control over how much you want to withdraw. You haven't been taxed on these assets before, so every withdrawal will be taxed. These taxes, however, will be the average amounts for retirement income.
You're welcome to take physical possession of the gold at this time. Stock it at home for quick access, for example. If you're experiencing hard financial times, trade this gold in for immediate cash.
Don't forget about willing the precious metals to your heirs. Being in physical possession of the metals means you can pass them on to loved ones as you see fit.
Many people sell their precious metals in exchange for cash when they make withdrawals. You'll be paid the current value of the metals. Historically, precious metals tend to go up in value over many years. It's possible to see a profit on your investment.
If you're considering withdrawing the gold before age 59-1/2, it's critical to understand the penalties involved. An automatic, 10-percent early withdrawal penalty applies to each draw on the account. You'll also be required to pay a 28-percent capital gains tax on the profits made from that gold's sale.
For most investors, these penalties add up to a large part of the withdrawal. They're encouraged to keep that money in the bank as a result.
Be aware of specific exemptions to the early withdrawal penalty too. Becoming disabled allows you to take withdrawals from the precious metals IRA, for example. Being a first-time homebuyer is another exemption.
The federal government may offer other exemptions over the years. Each tax year can have some differences, so always verify your options with a tax advisor.
For example, creating an annuity with your life expectancy as a deciding factor can exempt you from the early withdrawal penalty. These types of withdrawals are considered beneficial to the industry and retirees, so the government offers some lenience here.
When it comes to late withdrawals, there are penalties in this case too. Be sure to take your mandatory distributions by the age of 72. After this age, you'll have an excise tax of around 50 percent taken out of your investments.
You don't have to turn all your precious metals into cash at age 72 either. Simply take possession of the metals on your own. They are your property; they just have to be withdrawn promptly from the depository.
5. Choose an Appropriate Depository
When you open a checking or savings account, your cash is essentially stored as a digital number attributed to your name.
Opening and building wealth with a precious metals IRA requires real storage of these coins, bars, or bullion.
The IRS requires each investor to have a depository where the metals remain stored and secured. If you were allowed to hold onto your precious metals, this action equates to taking a distribution. The metals must be invested by being held by a third party. Depositories fill this need, which allows the metals to be used as IRA assets and tax incentives.
A basic transaction requires the custodian to take physical possession of the precious metals. They place the metals in the depository on your behalf. You keep track of the metals with paperwork filed by the custodian.
This transaction keeps the precious metals secured, which appeases the federal government. Without this process, the IRS could not approve precious metals in an IRA account.
Each depository must be IRS-approved to be considered for tax benefits. When you work with your custodian, these professionals will have industry contacts that include IRS-approved depositories.
As a consumer, you should verify the depository's status with the custodian and your own research. Ideally, the facility should be secure with a solid reputation. You should also receive information about their policies and insurance details. There will be storage fees associated with your account too, so look for a cost breakdown before settling on a depository.
6. Buy Federally Approved Precious Metals
The biggest advantage to having a precious metals IRA is the tax incentives. To reap these benefits, however, you must follow their rules regarding metal types.
The only metals allowed into these IRAs must be in specific forms, such as coins, bars, or bullion. Your custodian can go over the rules in detailed form during the purchasing process.
For example, IRS-eligible gold must have a purity of more than 99.5 percent. Trusted types include Credit Suisse-approved gold bars, American Buffalo coins, and Australian Kangaroo coins.
There's one exception to the purity rule, however. American Eagle coins with a 91.67 percent purity are allowed. The IRS always offers an extensive list of approved gold so that investors have a clear picture of their options.
Collectible gold that's graded cannot be held in a precious metals IRA. If you have coins graded by the Professional Coin Grading Service, for instance, these cannot be held in your IRA. You're always welcome to collect gold coins on your own without depositing them into the IRA. They might be of value on their own, but the IRS doesn't approve of them as a tax break.
Additionally, the IRS also approves of very pure silver, platinum, and palladium metals. For example, silver bars and coins should have a purity of 99.9 percent or more. Palladium and platinum bars and coins must be 99.95 percent pure. All of these specifications protect your assets so that the metals remain valuable over time.
Remember the main goal of your precious metals IRA is to have a diversified portfolio that can give you steady income when you withdraw the assets in the future. These IRS laws may be strict, but they pay off after several decades of investing and saving.
Once you're familiar with these rules, holding a precious metals IRA can be a lucrative way to hedge against inflation and grow wealth. Discuss any tax concerns with your personal advisor.
Although laws may have some changes year to year, these accounts remain safe from market volatility as you enjoy the financial benefits.
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