Precious Metals in a Roth IRA – How It Works

precious-metals-in-a-roth-ira-–-how-it-works

When most people think of buying precious metals – gold and silver – they think of coins and bars. They may have visions of buying coins from a coin store, or from a bullion vault, or even from an online vendor. Little do they know that they can buy precious metals with an IRA.

Even those who are aware of a precious metals IRA tend to think of a Traditional IRA. But did you know that you can also invest in precious metals with a Roth IRA?

Buying gold and silver with a Roth IRA isn’t much different than buying precious metals through a regular gold IRA or silver IRA. And it can be an important tool in your arsenal when it comes to saving for retirement.

What Is a Roth IRA?

If you’re not already familiar with a Roth IRA, a Roth IRA is an IRA that is funded using post-tax dollars. Gains made within a Roth IRA accrue tax-free, and no taxes are paid when you take a distribution.

Roth IRA vs. Traditional IRA

The primary difference between a Roth IRA and a Traditional IRA is in tax treatment of investment funds. A Roth IRA uses post-tax dollars to invest, while a Traditional IRA uses pre-tax dollars.

Gains made in both a Roth IRA and a Traditional IRA are made tax-free. But while you pay taxes on distributions from a Traditional IRA, you don’t pay taxes when you take a distribution from a Roth IRA.

There are a few other important differences between a Roth IRA and a Traditional IRA. With a Traditional IRA, for instance, you are required to take required minimum distributions (RMDs) at age 72. There are no RMD requirements for a Roth IRA.

Contributions to Traditional IRA accounts are also tax-deductible, up to a certain income limit. Contributions to a Roth IRA are not tax deductible. But you can only contribute to a Roth IRA if your income is below a certain threshold, whereas there are no income limits for contributions to a Traditional IRA.

Maximum annual contributions to IRA accounts are $6,000 in 2022 and $6,500 in 2023 ($7,000 and $7,500 respectively for those over age 50.) And there are additional differences in distributions from Roth IRA accounts versus Traditional IRA accounts that are outside the scope of this article. If you want to learn more, you can read about it at the IRS website or consult with your tax advisor.

Conventional vs. Alternative Assets

Investors in the US have socked away trillions of dollars in IRA accounts. And it’s safe to say that the majority of those assets are likely invested in conventional financial assets like stocks, bonds, mutual funds, or various other index or exchange-traded funds.

For investors looking for alternatives, however, some IRA accounts offer additional options. Among these are precious metals like gold, silver, platinum, and palladium.

Precious Metals IRA

A precious metals IRA is an IRA account that invests in precious metals. Precious metals IRAs are an example of a self-directed IRA, a type of IRA that opens up a whole new array of investment options to investors.

Because a self-directed IRA puts you in control of your investments, you can choose from a wide range of investment options, including precious metals. And one of the most popular precious metals to invest in is gold.

Gold IRA

A gold IRA is a type of precious metals IRA that invests in physical gold coins or bars. As the owner of a gold IRA, you choose which coins or bars you own with your gold IRA. And when you want to take a distribution you can either take it in cash or you can choose an in kind distribution and take physical possession of the gold coins or bars in your IRA.

Advantages of a Gold IRA

A gold IRA has numerous advantages. Here are three of them.

Wealth Protection

Gold has a long and well deserved reputation for protecting wealth through times of financial turmoil and economic uncertainty. Numerous paper currencies have come and gone, but gold has withstood the test of time.

It’s no wonder, then, that gold is one of the first assets to start rising in price when the economy starts to take a turn for the worse. Investors who are looking to protect their assets rush to gold, sending its price skyrocketing.

We’ve seen examples of this in the past, as when the gold price rose at an annualized rate of over 30% throughout the 1970s. Or in the aftermath of the 2008 financial crisis, gold nearly tripled in price, setting all-time highs. With recession potentially on the horizon in the near future, more and more investors are turning to gold today to help protect their wealth.

Asset Growth

Gold doesn’t just help protect your assets during times of turmoil, it can also help you grow your assets even when markets are behaving normally. Since 2001, for instance, gold’s annualized rate of growth has been 9%. And since President Nixon closed the gold window in 1971, gold’s annualized rate of growth has been around 7.5%. That’s pretty solid long-term performance that many investors would love to see in their portfolios.

Diversify Your Portfolio

Finally, gold plays a useful role in diversifying an investment portfolio. Investment isn’t supposed to be like gambling, where you’re waiting for a hot tip so you can strike it rich. It’s a long-term method of growing and maintaining your wealth.

How many people do you know who invest in a handful of stocks or bonds and think that they’re well diversified? How much you want to diversify is up to you, but many experts recommend investing across a diversity of asset types, classes, and regions.

A self-directed precious metals IRA can help you achieve those diversification goals, as the range of investment options open to you is far greater than in most conventional IRA accounts. And a gold IRA can be one part of diversifying your portfolio.

Starting a Precious Metals Roth IRA

Most of the material you’ll read about precious metals IRAs or gold IRAs focuses on Traditional IRAs. That’s understandable, because Traditional IRAs are perhaps the most common method of IRA investing. But Roth IRAs have their uses too, and can play a role in your retirement and investment planning.

If you’re looking to start a precious metals Roth IRA, there are three primary ways you can do that.

Starting From Scratch

The first way is to start a precious metals Roth IRA from scratch. This means opening up a brand new Roth IRA account and starting to fund it from zero. If you decide on this method of action, you’ll be limited to the maximum annual contribution amount for IRA accounts, which is $6,000 for 2022 and $6,500 for 2023 ($7,000 and $7,500 respectively for those over age 50.)

It’s important to note that precious metals IRA assets are managed by a custodian, and the actual physical precious metals you own are held by a depository. As you can imagine, the storage fees can eat into your returns. This is why many precious metals IRA firms recommend that you start with at least $25,000 when you’re starting a precious metals IRA.

You can start a precious metals IRA with less money, but you need to be aware that you’ll probably have at least four years worth of storage fees that could eat into your gains. If you’re okay with that, and if you can find a custodian who is okay with that, you can start your precious metals Roth IRA from the ground up. Otherwise, there are other methods you may want to consider.

Roth IRA Rollover

One method of funding a Roth IRA is through a rollover. It’s important to remember that because a Roth IRA is an after-tax account, you can’t do a direct rollover from a 401(k) account to a Roth IRA. That’s called a Roth conversion, which we’ll get into later.

Instead, if you have an existing Roth 401(k) account that you want to roll over into a Roth IRA, or if you have a Roth IRA that you want to transfer into a precious metals Roth IRA, you can perform that rollover. This ensures that you’re moving funds from one post-tax funded retirement account to another one.

Moving funds from a Roth 401(k) account to a Roth IRA can be beneficial because it can open up a wider variety of investment options. One of those is a precious metals Roth IRA.

Roth IRA Conversion

The final method of funding a precious metals Roth IRA is through a Roth conversion. This entails rolling over or transferring funds from a 401(k), TSP, IRA, or similar retirement account into a Roth IRA.

Because 401(k), 403(b), 457, TSP, Traditional IRA, and similar retirement accounts are funded using pre-tax dollars, and a Roth IRA is funded using post-tax dollars, rolling over funds from those accounts into a Roth IRA means that you’ll have to pay taxes on your gains before you can put the remaining funds into a Roth IRA.

There are many reasons to do a Roth conversion, many of which have to do with expected tax burdens or retirement planning. You’ll want to consult a tax advisor when thinking about a Roth conversion, both to make sure that you’re familiar with the process as well as to ensure that a Roth conversion is the right choice for you.

Is a Precious Metals Roth IRA Right for You?

There are numerous reasons to choose a Roth IRA. Among the most common are protecting yourself against future tax increases or ensuring that you have tax-advantaged assets to pass on to heirs. Roth IRAs also have different and less restrictive rules for withdrawals, including being able to take withdrawals of your Roth IRA contributions at any time.

Roth IRAs make sense for many investors, whether they’re looking to start one from the ground up, looking to roll over or transfer assets from other Roth accounts, or looking to do a Roth conversion. And if you’re looking to start a precious metals Roth IRA, it can offer advantages as well.

Since distributions from a Roth IRA are made tax-free, you can take your distributions without having to worry about how to calculate taxes. And if you decide to take your distributions in kind, you can take delivery of your gold coins or bars without having to worry about paying taxes on your gains.

If you have assets that are already in Roth accounts that you want to protect, a precious metals IRA can help you do that, giving you the benefits of investing in physical precious metals that are available through a gold IRA or silver IRA. And if you want to pass along tax-free assets to your heirs, it might also be worth looking into a Roth IRA.

In short, a Roth IRA can be a powerful tool for retirement planning and investing. And coupling a Roth IRA with the safety and security of precious metals can give you additional safety and security.

If you’re looking to start a precious metals Roth IRA or just want to learn more about a precious metals Roth IRA, call the experts at Goldco today. With over $1 billion in successful precious metals placements, Goldco’s representatives can help answer your questions and help you navigate the precious metals purchase process.

Don’t let your hard-earned retirement savings remain unprotected any longer. Learn how you can protect your wealth with a precious metals IRA today.

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About the Author: Paul-Martin Foss