Tax Implications of Investing in Gold Through a Gold IRA

Taxes on profits from investments in a gold IRA expire once the investor withdraws the money. The Internal Revenue Service (IRS) taxes those gains the same way as ordinary income, using a marginal tax rate. However, gold IRAs are subject to additional taxes and fees, such as the 10 percent early withdrawal penalty for those who deposit an IRA before age 60. Given current stock market valuations and the historically low interest rates of fixed-income investments, some IRA owners might be interested in moving some equity funds and low-risk securities (such as Treasury bonds and money market funds) to precious metals.

Before investing in gold, silver, or platinum, however, there are a few federal income tax-related issues to consider. Distributions from a gold IRA are generally taxable as ordinary income. This means that the investor will pay taxes on any distribution at their marginal income tax rate. However, there are certain exceptions to this rule.

In general, any gold or precious metal that is held in the IRA for a period of three years or more is eligible for tax benefits. The annualized after-tax return on gold coins is the lowest, approximately one percentage point lower than that of the gold investment fund, which receives the long-term capital gains (LTCG) treatment. A gold IRA is a type of retirement account that allows investors to keep physical gold and other precious metals within the account. When investing in a gold IRA, you can choose from a variety of different types of gold coins and ingots.

Secondary investments in gold, such as gold mining stocks, mutual funds, exchange-traded funds (ETFs) or exchange-traded notes (ETNs), can result in lower pre-tax returns. However, after-tax returns may be more attractive. A gold ETN does not physically hold gold, but at maturity it produces a return equivalent to that of an investment in gold. These investments are available in a regular brokerage IRA, meaning that you won't have to do the additional work or costs of creating a self-directed gold IRA.

Once you have opened a self-directed gold IRA, you can transfer cash to the account to fund your purchase of physical gold. As such, the transaction is characterized as a taxable distribution of the IRA followed by the purchase of the metal or currency by the owner of the IRA (you). The IRS does not allow popular gold coins, such as the South African Krugerrand or United Kingdom sovereign currencies, to be held in a gold IRA. You can invest in gold stocks, such as stocks in gold mining companies or gold royalty companies, which help finance mines.

For example, you could have an IRA that is invested in precious metal ingots and another IRA that is invested in liquid assets, such as publicly traded stocks and mutual funds. If you're interested in opening this type of account, you'll need to look for a custodian or a specialized firm that can manage all the documentation and tax reports needed to maintain a gold IRA. Profit margins on gold ingots are usually lower than those of country-specific gold coins, but both are collectibles for tax purposes. Gold has attracted investors for centuries because of its rarity and beauty; nearly half of the world's demand for gold comes from the jewelry industry (World Gold Council, Gold Investor, Vol.). These funds buy a basket of gold-related investments, such as shares in different gold mining companies.

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