Traditional IRA vs. Roth IRA
Gold IRAs are becoming increasingly popular among conservative investors. Mounting federal debt and the rise of the euro and Chinese renminbi as serious competitors to the dollar as potential global reserve currencies have investors hedging against the dollar and looking to protect their retirement portfolios against inflation. Gold prices rose 24% during the calendar year 2020, and are trending upwards as of this writing in early 2021.
A Gold IRA is one way to provide important diversification for your retirement portfolio as a hedge against the dollar's possible decline.
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What Is a Gold IRA?
A gold IRA is an IRA account that allows the account owner to buy and hold gold within their retirement portfolio. While nearly any large investment company will allow you to own gold certificates, gold mining stocks, or gold ETFs within their accounts, as you would hold any other security, the term "Gold IRA" generally refers to an account that lets you own gold in physical form – coins, bars and rounds issued as bullion.
As such, gold IRAs are a subset of what investment professionals call "self-directed IRAs." These are IRA accounts you can set up with specialized companies set up to track and hold investments in non-traditional asset classes. For example, these may include rental real estate, raw land, private lending portfolios, FOREX, farms and ranches, LLCs, and closely-held corporations.
Caution: Don’t Try to Hold Gold IRA Assets Directly
However, it’s important to note that you cannot hold the physical gold directly within a gold IRA. Instead, according to IRS Publication 590, the gold must be held by “a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.”
Do not try to hold the metal in your home safe or anywhere else other than with an IRS-approved custodian. If you do, and the IRS finds out, they may disallow the IRA entirely, and you could face heavy taxes and penalties. It's important to hold gold and any other precious metal only via an approved third-party custodian.
Types of Gold IRAs: Traditional IRA Vs. Roth IRA
There are two basic types of gold IRAs: The traditional IRA, which is tax-deferred, and the Roth IRA, which grows tax-free.
As of 2021, you can contribute a maximum of $6,000 to your combined IRA accounts. Married couples can contribute up to $12,000 total to IRAs - even if one spouse isn't working and has no earned income of their own, thanks to the spousal IRA.
Both are subject to income limits, which gradually increase each year.
A traditional IRA, whether it’s a gold IRA or any other kind of IRA, works like this:
As of 2021, you can contribute up to $6,000 to an IRA account. If you are age 50 or older, you can contribute an additional $1,000 in "catch up" contributions.
If your income is low enough, you can deduct some or all of your contributions against your gross income for the year – potentially reducing your current year tax bill.
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Traditional IRA Income Limits
- For single filers covered under a workplace retirement plan, your allowable deduction phases out gradually starting at an income level of $66,000, and phases out completely at $76,000(up from $65,000 to $75,000 in 2020);
- For married couples filing jointly who are covered under a workplace retirement plan, you can deduct your entire contribution if your AGI is $105,000 or less. Once you reach that threshold, your allowable deduction gradually falls and is phased out entirely at an income level of $125,000 (up from $104,000 to $124,000 in 2020);
- For married couples not covered under a workplace retirement plan, the deduction starts to phase out at $198,000 and phases out entirely at $208,000 (up from $196,000 and $206,000 in 2020);
- If you're married but filing a separate return and covered under a workplace retirement plan, your allowable deduction phases out gradually at income levels from $0 to $10,000.
You can still make the full contribution to a traditional IRA at any income level. But some or all of your contribution may be nondeductible contributions. You don't get an immediate, current-year tax deduction for nondeductible contributions. But you still get the benefit of tax-deferred growth.
Generally, traditional IRA assets are taxed as ordinary income as you withdraw them.
Required Minimum Distributions and Gold IRAs
It’s important to remember that you cannot defer taxes on traditional IRA assets or traditional gold IRA assets forever. Once you reach age 72, the IRS will require that you begin taking distributions out of your account – and pay income taxes on the amount you withdraw. These mandatory withdrawals are called required minimum distributions, or RMDs.
This can be a critical factor with gold IRAs, because physical gold doesn't generate income or a dividend you can just pull out to meet your RMD requirement. If you hold a single large gold bar in your gold IRA, for example, you can't just slice off a chunk every year to make your RMD and pay your income taxes on it. You will need to come up with the cash some other way.
This liquidity issue is an important planning factor with gold IRAs and other types of self-directed IRAs that hold large investments, such as real estate, that is not easily reduceable.
If you are planning to hold significant assets in a gold IRA, it's important to think through the RMD issue well in advance, and have a plan to generate the cash you need to pay the RMDs.
With Roth IRAs, your contributions are after-tax. You don’t get to claim your contributions as a deduction against your income. However, once the money is in your Roth IRA, it grows tax-free. You can withdraw your contributions at any time, tax-free, and you can withdraw the growth tax-free once the assets have been in your Roth IRA account for at least five years.
Unlike traditional IRAs, Roth IRAs are also not subject to RMDs. If you choose, you can keep your assets compounding within a Roth IRA, tax-free, for as long as you live, and potentially for as long as your surviving spouse lives.
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Roth IRA Eligibility
You can contribute up to $6,000 to a Roth IRA in any given year, provided your income falls under the IRS income threshold for the year. As of 2021, your modified adjusted gross income must fall below $125,000 for single taxpayers, or $198,000 for married taxpayers. Above those levels, your allowable contribution falls off gradually and reaches zero at MAGI of $140,000 and $208,000, respectively.
Notice: The “Stretch IRA” Technique is No More
In previous years, you could name a much younger individual as an IRA beneficiary, and potentially allow assets within your Roth IRA to grow tax-free for as long as the beneficiary lives, as well – a planning technique called the "stretch IRA," which was particularly useful with Roths. However, recent changes to IRA rules under the SECURE Act require those who inherit IRAs to empty the account within ten years.
Traditional IRA vs. Roth IRA? Which is Better?
Both types of IRAs have valuable tax advantages compared to holding the asset in a taxable account.
The Roth IRA may be preferable if:
- You believe your income tax bracket in retirement will be higher than the one you are in now;
- You are relatively young, and there’s lots of time for the value of your Roth IRA to compound, tax-free;
- You expect to be subject to estate tax;
- You don’t want to have to worry about RMDs in retirement;
- You expect not to need the money in your lifetime.
- You already have lots of assets in tax-deferred accounts, such as 401(k)s, traditional IRAs, and SIMPLE IRAs, and you want to diversify your retirement portfolio against potential changes in the tax law.
The Traditional IRA may be a better fit for you if:
- You want an immediate tax deduction against your income;
- You don’t qualify to contribute to a Roth IRA;
- You don't mind the RMD requirements;
- You expect your income tax bracket in retirement to be lower than your current rate.
If you're undecided on whether you should open a traditional IRA vs. a Roth IRA, you may want to contact a gold IRA specialist directly. Review a few companies and request more information.
These companies facilitate investors with new gold IRA accounts every day and will be able to help you decide what makes the most sense for your specific situation.