Investors often turn to a gold Roth IRA as a hedge against market volatility, economic uncertainty and inflation.
A gold Roth IRA can be a strategic addition to a retirement portfolio, as it allows individuals to hold physical gold within a tax-advantaged structure.
What Is a Gold Roth IRA?
A gold Roth IRA is a qualified, self-directed retirement account that allows savers to invest in physical gold bullion or other approved precious metals.
As with any Roth account, a gold IRA provides tax-free growth and withdrawals after age 59 1/2, said Alex Ebkarian, chief operating officer and co-founder of precious metals company Allegiance Gold in Los Angeles, in an email.
It adds the potential benefits of investing in gold, including portfolio diversification and hedging against inflation.
“With a Roth gold IRA, investors can purchase physical gold bullion or certain types of gold-related assets,” Ebkarian said.
[Read: How to Open a Roth IRA.]
How Does a Gold Roth IRA Work?
Precious metals purchased for a Roth gold IRA must meet specific purity requirements established by the Internal Revenue Service.
“Gold coins and bars must have a minimum fineness of 99.5% purity, or 995 parts per thousand, with the exception of the Gold American Eagle that has a 91.67% purity,” Ebkarian said. “Eligible coins must also be produced by accredited refiners. This includes American Gold Eagles and Canadian Gold Maple Leafs, as well as gold bars.”
In addition, a gold Roth IRA account must be set up with a registered custodian specializing in physical precious metals, he added.
Companies That Offer Gold Roth IRAs
Due diligence is critical for investors selecting a company for their gold Roth IRA. Reliability, transparency and security of your investments are important considerations.
Investors should research the company’s reputation, track record and accreditation to guard against potential scams or fraudulent schemes. That’s important when selecting any investment manager or custodian, but it takes on even more importance where precious metals are concerned.
“Investors should be on alert as there has been fraud in this industry,” said Jaime Raskulinecz, CEO of Next Generation Trust Company in Roseland, New Jersey, in an email.
“There has been fraud with gold dealers, either charging too much for the product or absconding with the metals,” she said.
“Any of the gold IRA companies that you may see advertised on TV often say that the IRA owner can hold the gold at home. This is a prohibited transaction and there are serious financial penalties,” Raskulinecz added.
[READ: 10 Reasons to Save for Retirement in a Roth IRA]
3 Steps to Setting Up a Roth Gold IRA Account
If an investor meets the eligibility criteria outlined by the IRS, including having earned income, they can open a self-directed Roth gold IRA with a registered IRA custodian specializing in physical precious metals.
“Per IRS compliance rules, the registered IRA custodian must manage it,” Ebkarian said.
“You can transfer or roll over an existing account instead of opening a new one,” he said.
Investors must keep the account’s inception date in mind because there are tax consequences if the Roth IRA hasn’t been active for at least five years. That’s a rule for all Roth IRA accounts.
The second step is to fund the Roth gold IRA account, and the third step is to select and purchase the metals for the account.
“Once the account is funded, your precious metals will be acquired and shipped, fully insured for your benefit, to your chosen depository for safe storage in a high-security facility,” Ebkarian explained.
[SEE: 8 Things to Know Before You Invest in Gold.]
Traditional Gold IRAs vs. Roth Gold IRAs
A traditional gold IRA enables a person to buy gold or other precious metals within a traditional IRA and to take a tax deduction each year for the amount of money invested into the IRA, according to Gaby Mechem, president of NIM Retirement Group in Irvine, California.
“When withdrawals are taken from the traditional gold IRA, those withdrawals are fully taxed,” Mechem said in an email. “With a Roth gold IRA, the annual contributions into the IRA are not tax-deductible, but withdrawals after age 59 1/2 are tax and penalty-free, assuming the IRA has been open for at least five years.”
Gold ETFs vs. Gold Roth IRAs
Investors wanting to own gold or precious metals have options besides a gold Roth IRA. One common way of owning precious metals is via an exchange-traded fund and owning it in either a Roth or traditional IRA. It could also be held in a brokerage account without any tax advantages.
Mechem said buying a gold ETF within a Roth IRA has fewer expenses than buying physical gold within a Roth IRA. “In many cases, gold ETFs can be purchased and sold for zero commissions,” she said.
She noted that investors who own physical gold in a Roth IRA usually have to pay storage fees.
“If you are planning to make annual purchases of either physical gold or a gold ETF within your Roth IRA, choosing to buy a gold ETF each year can, over the years, save the investor a considerable sum of money,” Mechem said.
Although investors frequently like gold as a hedge against equity market volatility, they should keep in mind the long-term track record of a stock portfolio.
Mechem noted that historically, the stock market has significantly outperformed gold as an asset.
“For example, people who purchased gold in 1980 and held it until today made much less money than people who purchased a major stock market index fund in 1980 and held it until today,” she said.
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What Is a Gold Roth IRA? originally appeared on usnews.com
