What You Need To Know About IRA Tax Rules
People have been fascinated with precious metals for thousands of years. Silver and gold took the form of coins and they were used as currency. Very rare metals ended up being used as decorations, as well as turned into jewelry.
It wasn’t that far in the past when the majority of the world’s economies were relying on the Gold Standard for valuing the currency.
Gone are those days, but gold is still around and it’s more relevant than ever. Gold is a commodity that is traded around the world, and it is one of the most popular alternative investments. During the early 2000s, gold’s price skyrocketed and potential investors flocked to it.
At one point, gold was outperforming the stock market. However, in 2010 the trend reversed. Around that time was when gold investors started to lose money.
Fast forward to the present day, gold is still appealing to investors who want to diversify their portfolios. Annual returns are only a small part of investing. Many investors also care about maximizing their profits after they pay taxes on their investments. Every investment decision you make should be done with taxation in mind.
Below is a guide on the different types of gold investments. We’ll also discuss how gold is taxed in an IRA. Additionally, we’ll discuss how investors can lower the gold tax rate.
The Different Types Of Gold Investments
In the past, investors would have to buy gold bars or gold coins. They’d need to hold onto their physical gold until they could sell them at a profit. These days, there are several ways to invest in gold.
The traditional way of investing in gold is by purchasing gold bullion and gold coins. Investors can buy those from a registered broker, and they can store them in a safe deposit box in a bank or at their own homes. Another way to store them is by paying a fee to let the broker keep hold of them.
Physical gold ETFs are a combination of investing in physical gold, but with stock market principles. The way it works is you buy ETF shares. Each share is worth the equivalent of physical gold’s weight.
CEFs are similar to EFTs. However, CEFs are structured differently. Essentially, CEFs are trusts.
You can invest in non-physical gold vehicles, such as gold mining ETFs, gold mining stocks, and gold mutual funds to name a few.
Such investment vehicles allow you to invest in gold without actually owning any physical gold. The returns on these kinds of investments are related to gold prices, trading activity, worldwide production, and borrowing cost.
It doesn’t matter what type of investment you decide to do, know that they all have risks and benefits. Do as much research as you can into your investment options. You want to choose an appropriate investment option.
Investing In Gold: The Cost
Before discussing taxation on gold, we want to go into other costs associated with investing in the metal. When fees and expenses quickly pile up, your returns can become drastically reduced.
Improving your bottom line requires keeping an eye on how much it’s costing you to invest in gold. Plus, doing this will minimize your overall chances of experiencing big losses.
Storage is one of the main fees people pay when they invest in gold. The cheapest option for storing gold is to store it at your home. However, there are major risks associated with storing physical gold at your home, but there are several alternative options available.
This includes paying a fee to your broker or you can pay a bank to store it in one of their safe deposit boxes.
Another cost to consider is transaction fees. Some brokers charge fees when you buy and/or sell gold, but fees do vary from broker to broker. If you invest in gold funds, then expect to pay an annual fee for trading and management of your portfolio. It’s a good idea to estimate what your returns will be after you have paid fees and costs.
For most investors, taxes are the largest expense they’ll pay. When they cash in on their gold IRAs, they will likely have to pay taxes. We’ll go more into this a little bit later.
Investors who decide to store gold in their homes will need to protect their investment. This is why they’ll want to buy an insurance policy, which is an additional cost. However, it’s better to be safe than sorry, especially when it comes to storing gold on your own.
Taxes & Gold
The first thing you need to do when it comes to investing in gold is chosen which type of investment will make you the most money. At the same time, you don’t want to be hit with a massive tax bill. You must look at gold classification and tax treatment.
The Internal Revenue Service treats gold investments the same way they treat collectible investments. Essentially, investing in gold is treated the same way as investing in comic books or pieces of art. There is a whole host of challenges associated with investing in gold, at least from a tax perspective.
Investors face two main scenarios, with the first one being you buy gold and you sell it after holding it for less than a year. In this case, your transactions will be treated as short-term capital gains or as ordinary income.
In the second scenario, you buy gold and sell it after you have had it for over a year. In this case, your transactions will be taxed as ordinary income, but the tax rate will be capped out at 28 percent.
For most gold investors the above will be a huge tax hit. For many years investors have looked for alternative vehicles for putting their money in gold to lower their tax bills and increase their bottom line. At the time of this writing, investing in gold via an IRA is one of the most affordable options out there.
We will go over gold IRAs in the following section, and we will talk about how you can improve your return-on-investment after taxes by choosing to invest in an IRA.
Gold IRAs & Taxation
Individuals were first offered IRAs back in 1974. They were touted as an investment vehicle for retirement. One of the key benefits of IRAs was that investments were taxed when the investor withdrew them from their IRA.
What this meant was IRAs were great because investors were able to delay tax payments, while lowering their capital gains.
When IRAs first arrived, collectibles were not allowed to be investments. In 1986, things changed when the IRS started to allow Americans to invest in silver and gold US coins. In 1998, the IRS expanded that, and bullion was included, as long as its purity was 99.5%.
However, 2007 was when the biggest shift came. That year was the year the IRS announced that gold ETFs via IRA investments were not classed as investing in collectibles. This has remained an option to this day, and many investors still take advantage of the option.
IRS does have restrictions in place when it comes to people investing in gold via IRAs. For starters, you can’t have physical possession of the gold you’re investing in, which means your gold needs to be stored in an approved intermediary.
What this also means is you will be paying an annual storage fee. Don’t worry though because gold IRAs are still a great investment vehicle.
There are several factors to consider if you’re going to invest in gold through an IRA. For starters, most gold investments are offered by traditional IRAs. They also offer better returns after-taxes than what Roth IRAs offer.
When you cash out your investment from a gold IRA, then you will pay taxes on your gains shortly afterward. Gold IRAs face additional fees and taxes. This includes paying a 10% fee if you withdraw early.
When it comes to IRA investments in gold, you won’t have to pay the 28% collectible tax rate. You will be subjected to the marginal tax rate. This also means you’ll pay over 28% in taxes if you fall in a high-income tax bracket.
The above means your income bracket determines how much you’ll pay in taxes. Furthermore, if you take losses on your investments, you can write them off because they aren’t allowed to be deducted.
One more thing to remember is you have to take distributions from your Individual Retirement Account by the time you turn 70 and a half.
Getting A Better Return On Your Gold
Just because you make massive gains as gold increases in value, does not mean you’ll enjoy massive returns after taxes. Collectible taxes might be required to be paid out if you buy physical gold, such as bullion and coins. The same goes if you decide to invest in gold via an ETF.
The good news is you can hold your gold for over a year. By doing this, you will pay long-term capital gains taxes. You can ensure your gold receives long-term capital gains treatment by investing in it via an IRA.
ERNS and mutual funds, as well as gold mining stocks, can produce lower returns before taxes. However, your returns after-taxes might be more impressive. For this reason, you might want to consider investing in gold via gold CEF.
Recently, gold has experienced a dip in prices. It is not a 100% safe investment, but the truth is all investments carry risks. This is why you need to consider the potential risks associated with investing in gold.
Bear in mind that results are determined mainly by several things. This includes your mix of losses and gains from your investments, as well as your tolerance to risk or your risk profile. The good news is tax planning can go a long way when gold starts to lose its value, as well as when it increases in value.
There are many factors on how your after-tax returns will be affected if you hold your investment for over a year. This includes whether or not your investment will be subjected to a maximum collectibles tax rate or if you’ll receive long-term capital gains treatment.
If you invest in physical gold, then you might need to pay for insurance, as well as for storage.
The majority of gold investments can be held in an IRA, short for an individual retirement account. In turn, this can significantly increase your returns after-taxes. However, be prepared to pay a fee for administration and for storing your gold through a trustee of an IRA.
Gold mining stocks, various funds, and ETFs are other ways you can indirectly invest in gold. This is whether you choose a traditional IRA and/or a Roth account or even via a brokerage account.
If you hold your mutual funds, stocks, and gold mining ETF for more than a year, and you make a profit from holding them and then selling them; you can expect to pay long-term capital gain taxes.
Generally speaking, you can receive a higher rate of returns after-taxes if you hold gold in a traditional Individual Retirement Account than you would if you held gold via a brokerage account or even a Roth IRA.
Gold mutual fund investments via brokerage accounts might provide you with high returns after-taxes than gold futures ETF or gold coins.
Do you want to add something different to your portfolio, such as gold? If so, then consider gold IRAs because they offer you both flexibility and better returns after you have paid taxes on them. This is especially true when you compare gold IRAs to other gold investment vehicles.
Are you interested in learning more about what your options are? If so, then feel free to look around our site. Eventually, you’ll find the right gold IRA partner.