Investing
The recent banking crisis in the US has many Americans rethinking where they want to park their money. Bank deposits are decreasing, while money market funds have increased, and money is shifting around in ways that no one could have predicted a year ago.
One place Americans park their money is in individual retirement accounts (IRAs), in which they currently hold a combined $12.5 trillion. IRAs aren’t new, having been around for nearly 50 years at this point. But still many Americans don’t understand all the complexities and nuances of IRA investing.
That’s not entirely their fault, however, as there are numerous types of IRAs, and changes to IRA accounts continue to be made just about every year as Congress tries to encourage Americans to save for retirement.
One of the confusing aspects of IRA investing is the potentially confusing terminology that is used to describe various types of IRA accounts. And if you’re confused about what an IRA account does, or what kind of IRA account you can open, you’re probably going to look for alternatives to an IRA.
There are multiple types of IRA accounts with which you should be familiar. The first four are the major types of IRA accounts you can start. The last three are potential subsets of each of the first four types. Let’s explain.
When you hear people talking about IRA accounts in generic terms, they’re normally referring to a Traditional IRA. A Traditional IRA is what most people think of as the “normal” IRA account.
A Traditional IRA invests with pre-tax dollars, assets grow tax-free, and you only pay taxes when you take a distribution. And if your income is below certain thresholds, the contributions to your Traditional IRA may even be tax-deductible.
A Roth IRA is the next type of IRA account, and differs from the Traditional IRA in that it invests with post-tax dollars. Assets also grow tax-free, and you pay no taxes when you take a distribution, assuming you’re over age 59½ and have satisfied the five-year holding rule.
Contributions to Roth IRA accounts are not tax-deductible, and above certain income limits you may not be allowed to contribute money to a Roth IRA.
A Simplified Employee Pension Plan (SEP) IRA is a plan that allows employers to contribute to IRA accounts they set up for employees. Contributions are limited, and employees are not allowed to contribute to a SEP IRA. Taking a distribution from a SEP IRA is similar to taking a contribution from a Traditional IRA in that it would be considered as income, and subject to a 10% penalty if taken before age 59½.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is intended for small employers to start retirement savings plans for their employees. Both employers and employees can make contributions to a SIMPLE IRA.
SIMPLE IRA distributions are subject to general Traditional IRA rules regarding distributions and withdrawals, although if a rollover is made from a SIMPLE IRA to another IRA, it can only be after two years of participation in the SIMPLE IRA.
A rollover IRA is a term used to describe an IRA account that is funded with money rolled over from another IRA or retirement plan. You can fund a rollover IRA with money from a 401(k), TSP, 403(b), or 457 plan, or from a Traditional, Roth, SIMPLE, or SEP IRA.
Rollover IRAs will be either pre-tax (Traditional) or post-tax (Roth), and the type of rollover IRA you can start will be dependent on what kind of funds you are rolling over.
An inherited IRA, also known as a beneficiary IRA, refers to an IRA started by someone who has inherited IRA assets from someone else. In some cases when an IRA’s assets are left to you through inheritance, the funds can be rolled over into a new IRA in your name. In other cases, you must take distributions from the IRA.
This inherited IRA can be either a Traditional IRA or a Roth IRA, and the rules pertaining to this inherited IRA will vary depending on whether you’re a spouse or non-spouse of the original IRA owner, and whether the original IRA owner died in 2020 or before. If you inherit an IRA, you’ll want to look at some of the rules surrounding inherited IRAs, which are very complicated.
A self-directed IRA is an IRA in which the account holder directly manages the IRA and which allows account holders to invest in a wider array of assets than they might otherwise be able to in conventional IRA accounts.
A self-directed IRA can be Traditional or Roth, and even SEP, SIMPLE, Rollover, and Inherited IRAs can be run as self-directed IRAs. Most self-directed IRAs, and most IRAs in general, are going to be either Roth or Traditional IRAs.
If you’re setting up an IRA, one of the first choices you will make will be to decide whether you want the IRA to be a Traditional IRA or a Roth IRA.
With the Traditional IRA you gain the benefit of tax deductibility (if your income falls below the deductibility income limits), and being able to invest with pre-tax dollars. The downside is that you have to pay taxes in retirement, and at the standard income tax rate rather than a capital gains tax rate.
The Roth IRA gives you the benefit of not having to pay taxes on your distributions in retirement. And, a Roth IRA account is not required to make required minimum distributions (RMDs), unlike a Traditional IRA, for which RMDs are required once you reach age 73.
You may sometimes see self-directed IRAs compared to traditional IRAs (with a small “t”). This can be a little misleading, because normally Traditional IRA is capitalized and refers to a specific type of IRA.
When you see the small-t traditional IRA mentioned, it’s what we at Goldco like to refer to as a conventional IRA, that is, one that invests in conventional financial assets such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), etc. These conventional IRAs can be either Roth or Traditional, but in general they’re going to make up the majority of the IRAs you find at brokerages, banks, or mainstream financial institutions.
Most IRA custodians only offer these conventional financial assets to IRA account holders because they don’t want to have to manage alternative assets. In order to open a self-directed IRA, which allows you to invest in precious metals, real estate, commodities, and other alternative assets, you’ll have to find an IRA custodian that specializes in managing these assets.
Goldco works with self-directed IRA custodians to ensure that our customers can find custodians who will be able to manage their self-directed gold and silver IRA accounts.
Like any other IRA account, a self-directed IRA is subject to the same rules and regulations as other IRA accounts. Because self-directed IRA accounts are often set up specifically to invest in alternative assets, the rules that have to be followed are ones that most conventional IRA account holders might not normally pay attention to.
One of the most important is the prohibition on self-dealing. This is a prohibition that applies to all IRA accounts, but can be particularly important for self-directed IRA account holders.
Self dealing means engaging in financial transactions that benefit you personally. All transactions made with an IRA must be at arm’s length, meaning they can’t involve purchasing assets owned by you or a family member.
Take, for instance, an IRA that wants to buy real estate. You can use IRA assets to buy a house. But you can’t use it to buy a house you already own. And if you use your IRA assets to buy a house, you can’t live in it yourself and you can’t use your own personal assets to maintain the house.
Or in the case of precious metals, let’s say that you set up a gold IRA so that you can buy physical gold coins or bars. You cannot use the assets from your gold IRA to buy gold coins that you already own, you have to buy them from someone else. If you engage in self-dealing it is considered a prohibited transaction and will subject you to taxes and penalties.
Self-directed IRAs that are gold IRAs, silver IRAs, or other types of precious metals IRAs also have to make sure that they don’t run afoul of the prohibition on purchasing collectibles. Collectibles as defined in the tax code include coins and metals, with a few exceptions, as outlined in 26 U.S.C. 408(m)(3).
These exceptions include United States Mint Gold American Eagles and Silver American Eagles, as well as any coins or bars that meet certain minimum fineness criteria. Goldco ensures that the precious metals products it offers its customers for gold and silver IRAs meet the minimum fineness requirements for IRA eligibility.
It’s important to remember that the gold coins in a gold IRA or silver coins in a silver IRA must be managed by an IRA custodian and stored in a bullion depository. You may have read about so-called “home storage IRAs” that purport to allow you to buy gold or silver through a precious metals IRA and store them at home.
If that sounds too good to be true, that’s because it is. Attempting to use IRA assets to buy gold or silver coins or bars that you store at home could subject you to significant taxes and penalties. Some people have tried it before, and paid the price. So always be sure to abide by the rules so that you don’t squander your hard-earned money.
IRA accounts are also limited in the amount of money that can be contributed to them annually. For Traditional and Roth IRAs, the annual contribution limit is $6,500 per year, or $7,500 if you’re over age 50. This is the total you can contribute across all the IRA accounts you hold.
Rollovers, however, do not count towards that annual contribution limit. So if you want to roll over $10,000, $100,000, or even $1 million from a 401(k) into an IRA, you can do it.
Finally, self-directed IRAs are subject to the same rules and regulations surrounding distributions as any other IRA account. That means that for a Traditional self-directed IRA, any distributions made before age 59½ will be subject to a 10% penalty, and at age 73 you’ll have to start taking RMDs.
For a Roth self-directed IRA, contributions can be withdrawn at any time, and earnings can be withdrawn tax-free after age 59½ and satisfying the five-year holding rule. Roth IRA accounts are not subject to RMDs.
The decision about which type of retirement account or which type of IRA to open is your choice to make and should take into account your financial situation and financial goals. You aren’t limited to just a 401(k) or just an IRA either.
It’s possible to have a 401(k), a Traditional IRA, a Roth IRA, a Rollover IRA, and a self-directed IRA all at the same time. Yes, that might seem like a lot to manage, but if you’re looking to maximize your retirement savings, a single retirement account might not be sufficient.
But perhaps more important than figuring out what types of retirement accounts to have is figuring out what they’re going to invest in. And if you want to invest in precious metals like gold and silver in order to benefit from their safe haven status, their use as an inflation hedge, or their potential for price growth during a recessionary environment, a self-directed gold or silver IRA is the only way you’ll be able to do that.
Goldco has years of experience, thousands of satisfied customers, and over $2 billion in precious metals placements. Our customers trust us to help them get their gold and silver IRAs up and running and full of gold and silver. If you think you may be interested in opening a self-directed gold or silver IRA, call Goldco today to learn more about the many benefits of gold and silver.
Free Precious Metals Guide
Complete the Form Below
Free Precious Metals Guide
Complete the Form Below
Gold and silver have been popular investments for centuries, safeguarding investor wealth through economic ups and downs One of the most popular ways to invest in gold and silver today is through...
What a wild ride it has been for gold so far this year While gold ended last year on a strong note, having hit new all-time highs late in the year, no one expected gold to go on such a tear so...
Anyone who has been alive long enough has seen the operation of business cycles The euphoria of the boom phase gives way to the recession of the bust phase, and the cycle repeats itself This...
