Hello and welcome to our article on Gold IRA Rollovers – in this article, we will be covering the following topics:
- What is a Gold IRA?
- How do I rollover my 401(k) or other plans into a Gold IRA?
- Why should I rollover my funds into a Gold IRA?
- What are the risks involved with a Gold IRA?
Now let’s take a look at each topic in detail.
What is a Gold IRA?
Simply put, a Gold IRA is a self-directed IRA, meaning that the individual investor has full responsibility and control over all of the investment decisions related to that account. A Gold IRA is then a self-directed IRA that is invested in precious metals, with the four allowed precious metals being gold, silver, platinum, and palladium, the most common of course, being gold.
It should be noted that Gold IRAs only allow investments in the physical commodity itself, and are not allowed, for example, to be invested in gold Exchange Traded Funds, which are funds that track the gold index. When investing in such ETFs, the investor does not actually own the physical commodity. Gold owned by the gold IRA investor must also meet the following requirements:
- Must be .9950 (24 karats) pure.
- Bullion bars should be fabricated by NYMEX, COMEX, or any other ISO 9000 approved refiner.
- Proof coins should be presented with a certificate of authenticity and must be in their original mint packaging.
- All bullions must be in an uncirculated, first-rate condition.
Examples of the above include:
- American Gold Eagle bullion coins
- American Gold Eagle proof coins
- Canadian Gold Maple Leaf coins
- Austrian Gold Philharmonic coins
- Australian Kangaroo/Nugget coins
- Chinese Gold Panda coins
- American Gold Buffalo uncirculated coins (proofs not allowed)
- Gold bars and rounds produced by a NYMEX or COMEX-approved refinery or national government mint, meeting minimum fineness requirements
For the detailed IRS regulations regarding precious metals IRAs, kindly refer to relevant US Code here.
Similar to other IRAs, gold IRAs can be divided into both traditional and Roth Gold IRAs. The difference between the two lies at the point of taxation. Briefly speaking, contributions made into traditional IRAs are tax-deductible (at both state and federal levels) in the year you make the contribution while withdrawals in retirement are taxed at ordinary income tax rates. Conversely in a Roth IRA, contributions provide no tax deductions, however earnings and withdrawals are generally tax-free.
In general, if you are currently in a lower income tax bracket and expect your income to increase substantially in the future, you should consider a Roth IRA, while if you are already in a high income tax bracket and are already closer to retirement age, a traditional IRA may be a better choice. Further, if you expect federal tax rates to increase in the future, a Roth IRA may be preferable. Refer to the table below for a quick example:
How do I rollover my 401(k) or other plans into a Gold IRA?
When it comes to a Gold IRA, as it involves the holding of actual physical commodities unlike other IRA types, an investor would require a broker (to purchase the gold) and a custodian (to hold the gold). Please note that under IRS regulations, the owner of the gold IRA account is not allowed to physically keep the gold, which is why a custodian must be appointed. Hence, it is very important that an investor selects the right broker and custodian for the job. You can see our guide on finding the best Gold IRA company here.
Once you’ve selected the right Gold IRA company, you can now rollover your 401(k) or other plans, such as the Thrift Savings Plan into the Gold IRA. While the company will definitely assist you with the process, for your information, we will describe the steps in performing a Gold IRA rollover below.
Generally speaking, there are two methods in doing a rollover: direct and indirect. A direct rollover, sometimes referred to simply as a ‘transfer’, is the safest and most common method. In this method, the funds are directly transferred from your first retirement account (e.g. 401(k) or TSP) into your new selected one, in this case being the Gold IRA. The right Gold IRA company will already have done this process thousands of times before and will probably have it automated. A direct rollover is reportable but not taxable and you can perform an unlimited number of direct rollovers.
In an indirect rollover, the money from the first retirement account is deposited in your own bank account and then only into the Gold IRA. Once the funds are received, you will have 60 days to deposit it in the Gold IRA. You must also inform your IRA representative that you do not want taxes withheld as you intend to redeposit the funds within the stipulated 60-day period. If the funds are not redeposited within this period, it will be considered as a distribution and you may be hit with income taxes as well as potentially early withdrawal penalty taxes.
You are also only allowed one indirect rollover within a 12-month period; anything over that and you will be hit with the relevant taxes. Further, if you withdraw the money from your first retirement account and then decide to redeposit it into two different IRA accounts, the IRS will consider that as two indirect rollovers. In that case only one will be tax-free and the other (if you choose to deposit it in an IRA anyway) will be hit with a 6% excess contribution tax for as long as the rollover money is in the account.
Which Method Is Best For You?
Given the reasons above, it is clear that barring exceptional circumstances, such as if an investor needs to use the withdrawn funds on a short-term basis (within the 60-day period), a direct rollover is the way to go. And indirect rollover carries too much risk of being slapped with penalties which may occur due to simple human error and forgetfulness.
Why should I rollover my funds into a Gold IRA?
A Gold IRA is one of the best options out there for investing in gold. A savvy investor may want to invest in gold for 3 main reasons:
- Gold is a safe haven investment
- Gold is a powerful mechanism for portfolio diversification
- Gold has demonstrated good long-term historical returns
For a detailed look at some of the benefits of investing in gold, please refer to our why invest in gold guide.
What are the risks involved with a Gold IRA?
The main risks involved when looking into Gold IRA investing are:
Counterparty risk in this case refers to the risk in dealing with the broker and custodian. For example, in cases of fraud, the company selling you the gold may simply profess to have the gold when they do not, or they may simply claim to have more gold than they actually have. In such cases, investors may be in for a surprise if they do try to take physical delivery of the gold. Such fraudulent practices are more common among self-direct IRAs, and the SEC has in fact issued a circular warning against such scams.
In addition, there is also counterparty risk in the form of a risk of theft. This risk would of course vary depending on where the custodian elects to store the physical gold as well as the insurance coverage over such assets. Hence it is important to ensure that your chosen custodian stores its gold in a licensed depository, such as the Delaware Depository, which is licensed by the CME Group as well as the ICE Futures US. Overall, counterparty risk can be effectively managed by simply making the right choice when choosing Gold IRA companies.
As with all commodities, the price of gold is subject to market risk. In particular over the last few years, the price of gold has indeed been quite volatile and on a downward trend. However, as we have shown, on a long-term basis, gold has actually delivered good historical returns over other ‘safe’ assets. Nevertheless, all investors should perform their due diligence before making any investment decisions.
As we all know, IRS regulations can be very confusing and often subject to change, seemingly on an arbitrary basis. IRAs are currently allowed to be invested in the four precious metals (an exception as they are still classified as ‘collectibles’); however this may not always be the case. There are already numerous restrictions in place on permitted investments; for example, IRAs are not allowed to be used to invest in life insurance. While this risk is small, it is something that investors should always keep in mind, particularly when making ‘non-traditional’ investments.
Thank you for reading our guide on Gold IRA rollovers; we hope you found the information useful and helpful in making an informed investment decision that is suitable for your needs.