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Many Americans today are looking for ways to protect their hard-earned wealth. They’re attuned to the headwinds facing the economy, and they want to make sure that their money doesn’t disappear into thin air, like trillions of dollars did in 2008.
Making that more difficult is the fact that so many people have their life savings tied up in many different types of accounts, from bank accounts to brokerage accounts to tax-advantaged retirement plans. Each type of account has its own rules and regulations, and making mistakes can be costly in terms of taxes, penalties, and missed gains.
More and more people are looking at a gold IRA as a way to protect their savings, but that brings up many important questions as well. One question that people want to know is whether or not a gold IRA is tax deductible. The quick answer to that is a definite maybe. Read on to learn more about whether your gold IRA can be tax-deductible.
What Is an IRA?
If you’re not already familiar with individual retirement accounts (IRA), an IRA is a type of tax-advantaged retirement account that came into existence after passage of the Employee Retirement Income Security Act of 1974 (ERISA). These accounts grew incredibly popular with employees, and today Americans hold over $11 trillion in assets in IRA accounts, far exceeding the $6.3 trillion they hold in 401(k) accounts.
Unlike 401(k) accounts, which are sponsored by employers, many IRA accounts are run by individuals themselves. And the types of assets they can invest in are often broader than the asset types available to 401(k) investors.
What Is a Gold IRA?
A gold IRA is a type of IRA account that holds physical gold coins or bars, rather than the more common financial assets like stocks, bonds, and shares in funds that you might expect in an IRA account. Other than that, a gold IRA acts just like any other IRA account and is subject to the same rules and regulations.
Benefits of a Gold IRA
A gold IRA can have numerous important benefits. Here are five of them.
One of the most popular advantages of a gold IRA is its ability to help diversify your portfolio. Even if you have a mix of investment accounts, you’re very likely heavily invested in financial assets like stocks, bonds, and shares in funds.
While you may think that owning a mix of stocks, bonds, and fund shares may make your portfolio well diversified, is that really the case? Or could the assets in your portfolio suffer major losses in the event of a systemic crisis?
Gold is often seen as a countercyclical asset, one that performs well when other assets don’t, and so it is often chosen to help diversify a portfolio in the event of a financial meltdown. And a gold IRA can help with that diversification.
Gold has served as a safe haven asset for centuries, as it tends to maintain its purchasing power over time. While the US dollar has lost 97% of its value since 1913, the price of an ounce of gold has increased nearly 9,000% since then.
Gold’s ability to protect wealth and gain value isn’t just reserved for periods of crisis and recession. Even during periods when markets are relatively strong, gold can make great gains. Since 2001, for instance, gold’s annualized growth rate has been 9.2%, versus 5.2% for the S&P 500 and 5.4% for the Dow Jones Industrial Average.
Gold is also commonly sought out as a hedge against inflation. When the value of fiat currencies is eroded by inflation, gold tends to rise in value. That explains part of its availability to protect wealth.
During the stagflation of the 1970s, gold’s annualized rate of growth was 30% per year over the course of the decade, a phenomenal return. If inflation becomes entrenched today, many gold owners would love to see gold return to those rates of growth.
Finally, a gold IRA offers tax advantages just like those offered by other IRA accounts. Allowing you to defer taxation until distribution can help keep your assets working for you longer. And because you can fund a gold IRA with a tax-free rollover or transfer from your existing retirement accounts, you have the ability to protect the assets in those accounts by moving them into a gold IRA.
Types of IRA Accounts
There are several types of IRA accounts, but two primary types that are available to most investors.
Most people who have IRA accounts or who have heard about IRA accounts are familiar with the Traditional IRA account. This is the type of account that most people think of when they think of an IRA account. A Traditional IRA is funded using pre-tax dollars, gains accrue tax-free, and taxes are only paid when you take a distribution.
Taking a distribution before age 59½ can incur taxes plus a 10% penalty in most cases. And assets from a Traditional IRA are subject to required minimum distributions (RMDs) once you reach age 73.
Roth IRAs are a relatively recent development, having come into existence through passage of the Taxpayer Relief Act of 1997. A Roth IRA is funded using post-tax dollars, gains accrue tax-free, and no taxes are paid at distribution.
Contributions to a Roth IRA may be withdrawn at any time, and earnings may be withdrawn after 5 years once you turn 59½. Additionally, up to $10,000 in earnings may be withdrawn tax-free to purchase a principal residence. And a Roth IRA is not subject to RMDs.
Because of these lessened restrictions, Roth IRAs have become popular with many investors. Roth IRAs are also often recommended for those who think they will end up in a higher tax bracket in retirement.
For instance, if you are in the 22% tax bracket when you contribute to your Roth IRA, but you end up in the 32% bracket in retirement, you could reduce the amount of taxes you would otherwise pay on your investment gains. And because Roth IRA distributions are tax-free, they don’t count towards your adjusted gross income.
A Simplified Employee Pension (SEP) IRA allows employers to contribute to Traditional IRAs set up for their employees. Unlike a Traditional IRA, contributions to a SEP IRA are employer only, employees may not contribute to their account.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of IRA set up for small businesses to allow them to contribute money to a Traditional IRA set up for their employees. Employees have the option to contribute their own money to a SIMPLE IRA as well. Contributions to a SIMPLE IRA may be up to a 3% matching contribution from an employer, and up to $15,500 from an employee. That’s a significantly higher contribution limit than for a normal Traditional IRA.
IRAs and Tax Deductibility
For purposes of discussing IRA tax deductions, we’re going to focus on employee tax deductions, not employer tax deductions. If you participate in an IRA, the only tax deductions you may take are those you make to a Traditional IRA. Your contributions to a Roth IRA or a SIMPLE IRA are not tax-deductible.
But there are limits to that tax deductibility. For 2023, if you are single or head of household and your modified adjusted gross income (AGI) is $73,000 or less then you can deduct up to the maximum amount of your contribution limit, which is $6,500 ($7,500 if you’re over age 50). Above $73,000 and below $83,000 you get a partial deduction. And if you’re at $83,000 or above you can’t take a deduction.
For those who are married filing jointly, you can take a full deduction if your modified AGI is $116,000 or less. Above $116,000 and below $136,000 you can take a partial deduction, and above $136,000 you can’t take a deduction.
Funding a Gold IRA
Needless to say, the question of whether a gold IRA is tax-deductible is determined by what kind of IRA account your gold IRA is and how much your modified AGI is. And the type of gold IRA you decide to set up is driven by how you decide to fund it.
Many people choose to start a gold IRA to protect their existing retirement savings and tax-advantaged retirement accounts, such as a 401(k), 403(b), 457, TSP, or IRA. In these cases they will roll over or transfer funds from their existing retirement accounts into a new gold IRA.
These transfers occur tax-free, and they are not subject to the usual annual limits on IRA contributions. But because these are transfers and rollovers from existing retirement assets, they aren’t tax-deductible. The same goes for transfers from Roth accounts into a Roth gold IRA, or Roth conversions from a pre-tax retirement accounts into a Roth gold IRA.
If you wanted to start a gold IRA from scratch and fund it with pre-tax dollars, and your modified AGI was below the IRS limits, you could start a gold IRA that is tax-deductible. But you would have to be aware that the fees on a gold IRA could eat into your returns.
In general you can expect to pay about $180 a year in fees for a gold IRA, for custodial and depository fees. Like any other IRA, your assets have to be managed by a custodian, and your gold has to be stored in a bullion depository. This fee is a flat fee, so if you have $10,000 in assets or $100,000 in assets, you’re going to pay the same amount.
Because this fee takes up a larger percentage of smaller accounts, we generally require a $25,000 minimum when starting a gold IRA. This means that the annual fees might max out at 0.72% of your assets, which isn’t a huge amount. If you were to start a gold IRA with the $6,500 maximum annual contribution, a $180 fee would be 2.8%, a much higher percentage.
While it’s certainly possible to start a tax-deductible gold IRA from scratch, it may not be ideal due to the fees. And that’s why we offer direct sales of gold coins for those who have less than $25,000 to devote to a gold IRA, so that you can still gain the benefits of owning gold but without the fees that could eat away at your assets.
IRA Laws & Regulations
Like any other IRA account, a gold IRA is subject to laws and regulations governing what it can invest in, when distributions may be made, etc. No IRA account is allowed to own collectibles. While the tax code defines any coin or metal as a collectible, it makes exceptions for Gold and Silver American Eagle coins, as well as any coin or bullion that meets minimum fineness standards for futures markets.
What this means in practical terms is that popular bullion coins like Swiss 20 Franc pieces or South African Krugerrands aren’t eligible for a gold IRA because they don’t contain the minimum gold content necessary for an IRA to own them. Most bullion coins minted today, however, are minted to the 99.5% minimum gold content required to be IRA-eligible.
Goldco offers a wide variety of these gold coins to our customers. And because we work directly with mints to source these coins, we can guarantee that you’re receiving 100% authentic gold coins.
Your gold IRA is also subject to the same rules and regulations regarding distributions. Distributions from a Traditional gold IRA before age 59½ are subject to taxes and potential penalties. You must begin taking RMDs at age 73.
One of the most important rules to remember is that all the assets owned by your gold IRA must be managed by a custodian and stored at a depository. While there are some outfits that claim to allow you to set up a gold IRA that allows you to store your gold at home, that’s not actually legal. Trying to do that could result in the IRS treating your retirement savings as having been distributed, meaning that you would be subject to taxes and penalties.
If something sounds too good to be true, it probably is. This is why it’s important to work with trusted partners like Goldco who have a long track record of satisfied customers.
Learning More About a Gold IRA
If the idea of a gold IRA intrigues you, call the experts at Goldco to learn more. Whether you’re looking to protect your existing investments, move funds out of underperforming investments, or hedge against the possibility of recession and loss, a gold IRA can be one more tool in your investment arsenal.
With thousands of satisfied customers and over $1 billion in precious metals placements, Goldco has established a reputation for customer service and customer satisfaction that is among the best in the industry. Call us today to learn more about how you can benefit from a gold IRA.
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