How Does a Gold Backed IRA Work?

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Most likely you will have several questions when you are selecting investments to put in your portfolio, particularly if investing is new for you. You want to ensure that your assets earn you money without suffering any significant losses.

The main focus for successful investors is ensuring that their portfolios are safe instead of looking for investments that will maximize their returns. Investing in gold is one of the safest ways to provide your investment portfolio with protection.

For centuries, people have been buying and selling gold. Gold was associated with power, wealth, and the gods by ancient civilizations.

One of the top precious metals to invest in is gold because when it is in its pure state it does not tarnish and doesn't need to be extracted from the ore.

In this article we will explain what what a gold backed IRA is and how it works.

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Gold is a Time Tested Investment

Purchasing gold is a smart and effective way of diversifying your portfolio. It also offers a safety net whenever inflation gets out of hand. In a stable economy, it is still a smart idea to make safe investments.

When a gold IRA is opened your precious metals purchases can be diversified even further. Gold IRAs are self-directed accounts that make it possible for you to buy gold bullion.

The advantages of a gold 401K retirement plan are similar to the benefits offered by traditional IRA plans. However, gold IRAs offer more stability when it comes to diversifying investment portfolios.

Purchasing silver and gold is a great way to provide your savings with protection for retirement.  Gold IRA retirement accounts also offer advantages if you would like to leave your investments to either a charity or your heirs.

Physical Gold Backed IRAs

Gold IRAs allow you to invest in such metals as silver and gold while providing you with the tax advantages that traditional IRAs do.

Gold IRAs work similarly to conventional IRAs, allowing investors to make use of their money before paying taxes to invest in precious metals like gold. A Roth IRA allows precious metals such as gold to be purchased after paying taxes.

However, there are some major differences that you need to know about.  Traditional IRAs allow you to buy stock in a gold mining company or invest in gold ETFs (exchange-traded funds). With gold self-directed IRAs, you can purchase physical gold.

ERISA 1974 (the Employment Retirement Income Security Act) allows people to open an IRA for retirement. Once the act became law, people were able to open IRAs.

Self-Directed IRAs allow for non-traditional investments such as private companies, precious metals, real estate, and bonds. Whenever there are high inflation rates or an economic downturn, gold provides stability. 

The U.S. tax code provides gold investments with the same advantages that traditional IRAs have. For gold IRAs, the IRS has very specific tax and record-keeping requirements since these are complex assets.

With gold IRAs, you are not allowed by the IRS to hold gold bullion yourself. The law requires that a custodian store your gold for you. It can include:

  • A third-party IRS-approved trustee
  • National gold depository
  • Safe deposit box at a bank

When you are getting a gold-backed IRA set up, your custodian can recommend IRS-approved facilities where your gold can be stored. Also, your custodian can handle getting your gold transferred to the facility once your gold IRA has been set up.

Gold Backed IRA Advantages

Whether you are nearing retirement or just getting started with your career, a gold IRA offers many advantages. The main reasons why a gold account should be opened include:

Precious metals and gold are a great way to diversify your portfolio for both the long and short term.

Precious metals and gold can help with risk adjustment. Planning for your retirement over the long term, the less your portfolio should have.

The risks in your portfolio can be reduced by buying gold and purchasing fewer bonds and stocks even if it is just in small amounts.

For many investors, the 2008 financial crisis was disastrous. However, people who invested in precious metals and gold fared better than individuals who invested in bonds and stocks.

Investors whose portfolios contain gold continue to do well long after a crisis is over.

Diversifying Goes Beyond Just Stocks and Bonds

A majority of people think that diversification means having different bonds and stocks in their investment portfolios. There is a lot more involved in smart investing.

Whenever you focus on investments that belong to one currency, industry, or country, there is a higher chance that you will lose money during times of high inflation or when the stock market is performing poorly.

Most retirement accounts contain bonds, stocks, and money market funds. Rates are influenced by Wall Street. The value of assets goes down when the stock market crashes.

Low market trading means that bonds and stocks cannot be sold quickly for cash.  Investing in gold helps with making the shift away from such financial assets as bonds and stocks into physical gold.

Investing in precious metals provides your investment portfolio with protection whenever there is a downward turn on Wall Street.

When stock market performance is poor gold can retain its value and keep your portfolio protected when there is a potential for recession.

Protection From Market Fluctuations

When you invest only in mutual funds, bonds, or stocks, there is always the risk of your assets becoming worthless if the companies that you invest in end up failing.

History has proven that precious metals such as gold do a great job of retaining their value. Gold is always valuable whenever the economy is not performing well.

Controlling Your Investments

Investing in a gold IRA increases the amount of control you have over your investment portfolio. You have limited options when investing in a traditional IRA.

Opening a gold IRA provides you with more control because you can choose the kinds of precious metals such as silver or gold that you want to invest in.  

One of the main benefits that this type of account provides is allowing your assets to be transferred without having to pay any tax penalties because self-directed gold IRAs are qualified retirement savings accounts. 

It is a simple process if you just want to roll over part of your regular IRA. Another option is selling some of the precious metals inside your retirement portfolio for bonds or stocks.

When you control your investments, you have the following options:

  • Knowing your retirement is secure
  • Diversifying your portfolio
  • Peace of mind

Growth Potential

A majority of financial advisors recommend that you purchase bonds and stocks to put into your investment portfolio. A high number of financial advisors are focused on the 1982-2000 stock market surge.

During this time the stock market had an average annual growth of around 17 percent. However, since this time frame, the stock market has not experienced a similar rate of growth.

Financial advisors earn money from the fees charged on stock trades and asset management. When individuals invest in such precious metals as platinum, silver, or gold, they are investing for the long term.

Financial advisors and stockbrokers charge a percentage on every transaction and earn annual management fees for the assets they manage.

When precious metals are owned long-term it means that your assets are safe and secure and you won't have lots of out-of-pocket costs.

It is critical to weigh all of the options that are available to you. Annuities offer a guaranteed income. However, the problem with annuities is it ties up your assets for several years. To get your money back, you may need to pay large penalties.

For precious metals, you don't have to worry about paying penalties.  If you invest your money in an annuity, you might end up missing out on significant gains whenever the market is performing at a high level. 

Gold is much more stable compared to paper asses. To access your funds, some of your gold can be sold or transferred into different kinds of investments.

Similar Tax Advantages to Traditional IRAs

Gold-backed IRAs offer tax benefits that are similar to those provided by conventional IRAs, including the following:

  • Defer having to pay taxes until your assets are taken out
  • Rolling existing asses over without incurring tax penalties
  • Using a Roth IRA to invest in gold before paying taxes or after

Another benefit that a gold IA can provide is that your yearly contributions may be tax deductible. Gold IRAs are subject to the same rules that conventional IRAs are.

If you withdraw money from your IRA early, you might be required to pay a 10 percent penalty and income taxes.  Once you are 72 years old, you must take a minimum distribution out of your account every year.

A gold IRA allows you to contribute $6,000 every year. Once you are over 50 years old, the amount is increased to $7,000. When withdrawing asses, you can ask for gold or cash.

Many individuals investing in silver or gold prefer to work with a traditional broker instead of a mint because they receive a higher return on their investment. There is also the option to defer tax payments.

Tips for Getting Started

When transferring assets into a gold IRA, your account can be opened without having to make a deposit. The best thing to do is work with a custodian who specializes in investing in precious metals.

Make sure you only work with a reputable partner by checking first with a consumer rating agency. Once you have found a precious metals company to work with, proceed by doing the following: 

Complete all required documents. Roll over or transfer money from your current retirement account or IRA. You can make annual contributions which result in a new account being opened.

Provide your financial adviser with your completed documents, then you can open up a new gold IRA account.

Choose the precious metals you want to invest in. Buy your precious metals or gold.

Standards for Precious Metals Backed IRAs

Before choosing any precious metals or gold for your portfolio, make sure it meets the standards and guidelines for IRA eligibility.

If you purchase precious metals or gold that don't meet the eligibility requirements for investing in a gold IRA, then you may need to pay penalties and taxes on your purchase.

Purity Levels for Meeting Gold IRA Guidelines:

  • Palladium - .999
  • Platinum - .99955
  • Silver - .999
  • Gold - .995

The kinds of gold coins that you can buy for a gold-backed IRA include the following:

  • Canadian Maple Leaf
  • Australian Gold
  • American Eagle
  • American Buffalo

Being able to meet IRA guidelines might depend on where your coins were issued. Some coins do not meet the purity standards for a gold IRA that might be eligible still for investing in a gold-backed account.

The precious metals get held in your account until you have retired. Once you are 59 1/2 years old you can begin to take out gold from your account or sell your precious metals.

Some kinds of gold coins cannot be put into a gold-backed IRA. South African gold Kuggerands and United Kingdom sovereign cons cannot be put into a gold IRA.

You will need to discuss what different options are available to you with your custodian before investing in anything. For example, gold collectible coins are not allowed. If you make a transaction that is not allowed by the IRS, it is considered to be a withdrawal.

That means you would be required to pay income tax on your gold items. You would also be required to pay an extra 10 percent penalty if you are not 59 1/2 or older.

Important Things About Gold Investing You Need To Know

Before investing in precious metals, you should learn as much as you can about price fluctuations within the gold market and gold IRAs. The best way to ensure that assets inside your investment portfolio are protected is to buy gold. 

Gold IRA Expenses  

Although you will have some expenses with your account, your assets will maintain their value and be secure. The following custodian fees will need to be paid with a gold IRA but not with a traditional IRA:  

Opening Your Account  

Your gold IRA custodian might charge upfront fees for opening your account. The amount charged by the custodian can range from $50 up to several hundred dollars.

You probably will not have any upfront expenses if you deposit a large amount of money into your account.

Annual Maintenance Fee 

Usually, the custodian will charge an annual fee for covering the maintenance and paperwork costs for your account. The maintenance fee will normally be a flat rate and will vary depending on what the amount is in your account. 

Seller Expenses  

A markup fee might be charged by the seller, depending on what the market prices are. You might also be charged standard handling fees ad commission fees on every transaction. 

Storage Costs 

You are required to store the gold in your IRA account in a secure location. The fee might be a flat rate or a percentage of the total amount inside your gold account. 


On a gold IRA, insurance and storage expenses usually cost $100 to $300 per year.

Wire Transfers 

Whenever you receive or send money using a wire transfer, you will need to pay a standard $25 handling fee. 

Cash Out Fees 

If you close a gold IRA account, a final amount of around $250 will be charged by your custodian.

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