Gold IRA Rules defined in the US Tax Code
The Tax Payer Relief Act of 1997 has made it possible to diversify your retirement savings by allowing gold to be added to an IRA account. It removed the barriers in the U.S. tax code that had previously prevented such investments and gave investors an option to traditional IRAs that typically only hold stocks and bonds. This law outlines the gold IRA rules for backing retirement savings with precious metals, including, of course, gold. It is important to fully understand these rules before rolling over your 401K and adding gold or silver to your IRA.
Self-Directed IRAs Investment Options Limits
According to gold IRA rules, not just any IRA can hold precious metals. Instead, a self-directed IRA is needed. Self-directed IRAs allow you to combine traditional investments with gold or silver, or a number of other investments. It is important to note, however, that not all self-directed IRAs are created equally.
The custodian you chose for your IRA will determine your options when it comes time to choose your investments. Some banks offer what they call self-directed IRAS, but then offer only a short list of options for investment. These usually include stocks, mutual funds and annuities, but leave out nontraditional investments. Others let you to invest in anything allowed by section 408 of the U.S. tax code, which outlines the gold IRA rules. This is the custodian you will be looking for if you want to back your retirement savings account with gold or another metal.
The tax laws list only what cannot be included in a self-directed IRA, and any other investment is allowed as long as it meets the other stipulations in the code. You can invest in approved metals, bank certificates of deposit, real estate, mortgages, energy investments, LLCs and other private businesses, corporate debt and even promissory notes. Section 408 only makes it illegal to hold art, antiques, collectibles, gemstones or life insurance in an IRA.
Only Investment Grade Metals Are Allowed
According to the U.S. tax code self-directed IRA’s can be backed by gold, silver, platinum or even palladium. The quality of the metals, is heavily regulated due to IRA law. Gold must be at least 99.9 percent solid gold, for it to be included in this type of investment vehicle. Since most common coins do not meet this requirement, gold IRAs are typically backed by bullion bars or bullion type coins that do have this level. The only exception is the American Eagle coin which is only 91.6 percent pure gold, but is allowed. These are the only U.S. Mint gold coins that can back an IRA. Silver must be at least 99.5 percent pure, which rules out most coins aside from silver American Eagles or silver Canadian Maple Leaf coins, or those with similar content.
Tax Advantages of Self-Directed IRAs
Because an IRA is designed to be a tax-deferred retirement savings account, gold IRAs have the same tax advantages as a traditional IRA. These advantages allow you to transfer or rollover holdings from a 401K or IRA into a metals IRA without having to pay taxes on your investment or incurring other penalties. At the same time, you cannot deduct losses in your account from your taxes.
There are some differences from traditional investments, though. You lose the option of capital gains treatment when you make a withdrawal of profits in a gold IRA. You can, however, choose to take possession of the physical gold that backs your investment when your term ends. This is not an option in a traditional IRA.
Importance of Choosing a Gold IRA Custodian
The tax code states that an investor must work through a third-party custodian, meaning that just like with any other IRA, one needs to work with a third-party custodian with a Gold IRA. There are a number of custodians available, and it is important to find one that not only understands this business but is also trustworthy. Checking reviews and ratings on Trustlink and the Better Business Bureau, or other sources available, should be the minimum research done before choosing a custodian.
It is also important to select a custodian who offers all the alternative you are looking for. Not only will you need a custodian who offers gold-backed IRAs, but you will also need to decide how, and if, you want to back your IRA with metals. Some custodians use gold bullion and coins while others purchase exchange-traded funds that hold only allowed precious metals. The advantages and disadvantages to each type of investment need to be weighed before you decide which is best for you.
Avoiding Fraudulent Investments
Even though the tax code and rules are designed to protect investors, there can be some drawbacks to investing in a precious metals IRA, with the possibility of fraud being one of the biggest potential issues. In fact, both the Securities and Exchange Commission and the North American Securities Administrators Association have warned investors about the heightened risk for fraud when you direct your own investments. Some unscrupulous companies and individuals prey on uneducated investors, and the self-directed nature of these IRAs often make their owners easy targets.
The key to investing safely is to due your due diligence and ensure that you know exactly what it is you are investing in. You must ensure that fraudulent schemes cannot take advantage of your lack of knowledge, which can be a challenge. You can check with the SEC and the various state securities groups and discuss your options at length with a financial planner before you choose how to invest. Properly looking into a background and history will help, but not entirely prevent, your will becoming a victim of fraud.
Gold, and in fact all precious metals, allow you to diversify your savings while appreciating the relatively steady value of gold, silver, platinum or palladium. Since 1995, using these metals to back a self-directed IRA has been an option for many. With the uncertainty of the current economic situation in the United States and worldwide, this is becoming a more and more popular way to ensure your investment is not lost. It is important, though, to know and understand the codes, rules, and regulations surrounding this type of investment before you rollover a traditional IRA or 401K or transfer funds from an existing IRA into a self-directed IRA. By doing your research on these rules, you can make a more informed about your investments.