Precious Metals in a Roth IRA – How It Works
When you think of buying precious metals – gold and silver – you may think of buying gold and silver coins and bars And you may think of buying them from a coin store or from an online...
Investing
Over the past year, many Americans have begun reassessing their financial situations. After high inflation, turbulent markets, and bank failures, many more people now realize the potential fragility that their retirement savings could be subject to. Many people who have diligently saved and invested in workplace retirement plans such as 401(k)s are now looking at ways to protect the money they have earned.
One way that they’re doing that is by exploring the option of 401(k) to IRA rollovers. Rollovers aren’t anything new, but they’re a way to expand your options by moving funds from one tax-advantaged account to another without having to pay taxes or penalties.
For anyone who has ever explored the rollover option, it starts with you starting an IRA. And the first question you have to ask yourself when starting an IRA is, should this be a Traditional IRA or a Roth IRA? That question is the same both for IRAs at traditional brokerages and financial firms as well as for self-directed IRAs such as gold IRAs.
How much do you know about the differences between Traditional IRAs and Roth IRAs? And if you’re exploring alternatives such as a gold IRA, what are the differences between a Traditional gold IRA and a Roth gold IRA?
A Traditional IRA is what most people think of when they think of an IRA. It’s an IRA account that is funded with pre-tax dollars which then accrue gains tax-free. Taxes are paid when you take a distribution, and are subject to normal income tax rates.
A Roth IRA is a relatively new type of IRA that first began in 1998. It allows you to invest with post-tax dollars instead of pre-tax dollars like a Traditional IRA. The benefit then is that when you take a distribution, those distributions aren’t taxed.
A gold IRA is a type of self-directed IRA, an IRA in which you as the account holder take a direct role in managing what your IRA invests in. A gold IRA requires you to find an IRA custodian who is willing to administer your gold assets, but you determine exactly how much gold, what types of gold coins or gold bars, what sizes of coins, etc., your gold IRA owns.
Gold IRAs can be either Traditional IRAs, funded with pre-tax dollars, or Roth IRAs, funded with post-tax dollars. When funding a gold IRA, it is common to fund them with a rollover from an existing retirement account such as a 401(k).
A Traditional gold IRA can be funded with a rollover from a standard 401(k), while a Roth gold IRA can be funded either with a Roth conversion from a standard 401(k) or a direct rollover from a Roth 401(k).
IRAs were specifically set up to provide numerous advantages to American workers to help them save for retirement. Here are a few of them.
The primary advantage of IRA accounts is tax-advantaged investing. With a Traditional IRA you don’t pay taxes until you take a distribution. And with a Roth IRA you don’t pay any taxes when you take a distribution.
Compare that to a standard brokerage account. Let’s say you’re invested in an S&P 500 index ETF but you want to sell that to buy shares of Apple and Tesla. Then six months later you want to sell some of those shares to buy shares of Nvidia.
Each of those sales incurs a tax liability, some sort of capital gains tax. Within a brokerage account, you would have to pay capital gains tax on those sales, short-term or long-term depending on how long you held the assets. But within an IRA, you don’t owe any capital gains taxes on those sales.
Your assets continue accruing tax-free and your trades don’t incur any tax liabilities. The only time you would have to pay taxes is when you take a distribution.
While IRA accounts aren’t intended to be used for short-term trading, the ability to make changes to your portfolio and to sell assets without incurring tax liabilities can save you significant amounts of money over the course of your lifetime. Of course, that’s also why annual contribution limits to IRA accounts are so low, because the government doesn’t want people to be able to shelter 100% of their investment activity from taxation.
Still, the ability to protect your gains against taxes that can eat away at your gains is a great thing to take advantage of.
Imagine a hypothetical saver who invests $5,000 a year into an investment account. Let’s assume that one possibility is to invest that into a brokerage account, with an 8% annual return, but in which enough trades are made every year that half of those returns are subject to a 15% capital gains tax. The other possibility is to invest that money in an IRA with the same rate of return.
After 30 years of investment, the IRA would end up with 12% more money in it, over $65,000 more, just from not having to pay taxes. That’s not something to sneeze at.
A little known tax credit is the Retirement Savings Contributions Credit, also known as the Saver’s Credit. It’s a tax credit that you can take for making contributions to your IRA or to an employer-sponsored retirement plan.
There are income limits that determine how large the credit is, and you can take 50%, 20%, or 10% of your contribution as a tax credit, depending on your income level. The credit disappears for those married filing jointly making over $73,000.
IRA accounts have significantly lower contribution limits than 401(k) accounts, $6,500 for IRA accounts and $22,500 for 401(k) accounts. Yet Americans have more money in IRA accounts than in 401(k) accounts. How does that work?
Well, once you have assets in a tax-advantaged account you can roll over or transfer those funds into another tax-advantaged account, subject to IRS rules and regulations. IRS has a handy chart detailing which accounts can roll over into which.
So if you have a 401(k), and your account administrator allows in-service withdrawals, you can roll over those funds into an IRA. This method of rolling over funds from a 401(k) into an IRA is one of the most popular methods of funding a gold IRA.
One reason so many people choose 401(k) rollovers into an IRA is because IRA accounts often allow a greater variety of investment choices than 401(k) accounts. Many 401(k) plans only offer at most a few dozen types of funds to invest in. But IRA accounts can allow you to invest in individual stocks, many types of bonds, and in the case of self-directed IRAs like a gold IRA, even precious metals like gold and silver.
Aside from the advantages offered by IRA accounts in general, Traditional IRAs have a few additional advantages that can be beneficial for those who are able to take advantage of them.
As long as you have earned income, you can contribute money to a Traditional IRA account, and there are no income limitations. The only limitation is the annual contribution limit of $6,500 ($7,500 if you’re over age 50).
Compare that to a Roth IRA account, which starts phasing out your ability to contribute at $218,000 in income for those filing jointly and $138,000 for single filers, and forbids contributions from married joint filers making over $228,000 and single filers making over $153,000.
Contributions to a Traditional IRA can also be tax-deductible, depending on your income and whether or not you’re covered by a retirement plan at work. If you’re covered by a retirement plan at work such as a 401(k), single filers making over $83,000 a year and married filing jointly making over $136,000 a year are no longer eligible to deduct IRA contributions from their taxes.
The fact that there are both Roth and Traditional IRA accounts means that both types of IRA accounts are popular. And there are some benefits to a Roth IRA account that make them advantageous for many people.
The first and most obvious advantage of a Roth IRA is that distributions are made tax-free, assuming you’re over age 59½ and have satisfied the five-year holding rule. The five-year holding rule means that you can’t withdraw earnings tax-free until it’s been at least five years since you contributed to a Roth IRA account.
So if you’re 63 when you open your first Roth IRA account, you wouldn’t be able to take tax-free distributions until five years later, when you’re age 68. If you tried to take contributions at age 65, you’d still have to pay taxes, even though you’re over age 59 ½, because you hadn’t satisfied the five-year holding rule.
It’s important to remember, however, that contributions to Roth IRA accounts can be withdrawn at any time, unlike contributions to a Traditional IRA account, which can incur both taxes and penalties for early withdrawals.
The other advantage to Roth IRAs is that they’re not subject to required minimum distributions (RMDs). Traditional IRA accounts require RMDs at age 73, a limit that will eventually rise to age 75.
The RMD calculations can be difficult for some people, and they can require intricate tax planning to ensure that you don’t take more money than you need in RMDs and thus subject yourself to paying more taxes than you want to. Because Roth IRAs aren’t subject to RMDs, they can be a popular way of maintaining the maximum amount of retirement assets well into retirement.
Of course, as with any financial account there are drawbacks that go along with the advantages. Here are a couple of them that are important to keep in mind.
In a brokerage account, you can add or withdraw money whenever you want to. The only thing you’ll have to take into account would be potential capital gains taxes. But it isn’t that easy with IRA accounts.
Traditional IRA accounts feature a 10% early withdrawal penalty for taking distributions from your account before you turn age 59 ½. There are numerous exceptions to that, however, including death or disability of the IRA owner, and withdrawals for certain medical and education expenses. But in general, don’t expect to be able to draw on your IRA funds for routine emergency spending.
There are early withdrawal penalties from Roth IRA accounts as well. In general, IRS levies the penalty on any part of a distribution that has to be included in gross income. There are certain exceptions for penalty-free withdrawals from Roth IRA accounts for those under age 59 ½, including withdrawals for first-time home purchases.
The other drawback to IRA accounts is their low annual contribution limits, which are currently $6,500 for 2023 (or $7,500 for those over age 50). That can make it difficult to build up a sizable nest egg, particularly if you’re late to the party in starting to save for retirement. That’s especially the case when compared to the much higher contribution limits for 401(k) accounts, which are $22,500 ($30,000 for those over age 50).
But that can be overcome through rollovers from 401(k), 403(b), TSP, and similar retirement accounts into an IRA. These rollovers aren’t subject to the annual contribution limits.
Many times people have retirement accounts from previous employers that are just sitting around doing nothing. Those funds could be rolled over into an IRA.
Other times people might want more investment options than what they have available through their 401(k) account, so they roll over assets from their 401(k) account into an IRA. While low annual contribution limits may be a drawback, they’re not an insurmountable obstacle to building up retirement savings in an IRA.
The decision about what type of gold IRA is best for you is dependent on your unique financial circumstances and your financial goals. If you’re like most people, your 401(k) is probably your primary employer-sponsored retirement account. So if you want to fund a gold IRA with a 401(k) rollover, you would most likely roll that over to a Traditional gold IRA.
But there might be instances in which a Roth IRA might make sense for you, in which case you might want to do a Roth conversion and roll over funds from your 401(k) to a Roth gold IRA. And for those with assets in a Roth 401(k), any rollover to an IRA would have to be to a Roth IRA. With new retirement rules coming into effect that will likely increase the amount of money flowing into Roth 401(k)s, rollovers from Roth 401(k)s to Roth IRAs could end up becoming more common.
At the end of the day, the decision about what to do with your money is yours to make. But if you think that a gold IRA is right for you, it’s good to know that you have options.
At Goldco we have helped thousands of customers benefit from owning gold. With over $2 billion in precious metals placements and over 5,000 5-star reviews, Goldco works hard to provide you with top quality gold products and exemplary customer service.
If you’re thinking about protecting your retirement savings with gold, call the experts at Goldco today to learn more about the gold IRA options available to you.