If you have a Traditional or Roth IRA, chances are that you already understand the importance of retirement savings and diverse investment choices. IRAs are extremely useful, but there are inherent limitations concerning earned income and contribution limits. This is why so-called “spousal IRAs” can be a major boost to a household’s retirement planning.
If you have already set up a spousal IRA, good work! Have you considered taking the next step and adding physical assets — like gold and silver bullion — to your portfolio? Here, we’ll go over the differences between standard IRAs, spousal IRAs, and self-directed IRA accounts. We’ll also introduce you to how precious metals investing works, and how to safeguard your savings against stock market or currency collapse.
What is a Spousal IRA?
Traditional Individual Retirement Accounts (IRAs) were established in 1974 through the Employee Retirement Income Security Act, or ERISA. IRAs are tax-advantaged investment vehicles designed for retirement savings; money contributed to an IRA is not taxed and grows tax-free until a withdrawal is made.
Unlike 401(k) plans, Traditional IRAs are not sponsored by an employer. Rather, individuals need to qualify in order to open and contribute to their own IRA, although the qualifications are quite simple: earn taxable income and be under the age of 70 1/2. That’s it.
In 1981, Congress enacted legislation that increased the contribution limit to $2,000 for IRAs, but set a limit on spousal contributions at $250. Since a non-working spouse has no earned income — and is therefore ineligible to open a normal IRA — households with only one working adult were placed at a significant retirement disadvantage. Finally, in 1997, the Taxpayer Relief Act was passed to allow non-working spouses to open their own IRAs with the same contribution limits as a Traditional or Roth IRA.
One drawback of an IRA (relative to other retirement accounts) is that they have fairly low contribution limits. As of 2014, individuals under the age of 50 can only contribute $5,500 per year, while those age 50 and above can contribute $6,500. With a spousal IRA, however, a married couple can effectively double their IRA contributions.
Spousal contributions can come from the working partner’s income, from inheritance, or in the form of a gift. Contributions are tax deductible as well. In order to make a spousal IRA contribution, the contributor must meet the following requirements:
Must be married;
Must file a joint income tax return with their spouse;
Must have earned income of at least the value contributed to their IRAs.
Spousal IRA Rollover Rules & Limitations
A spouse can receive a rollover directly from a deceased participant’s IRA, so long as they were named as the beneficiary. Spouses who have stopped working prior to retirement can also roll over assets into a spousal IRA from their old retirement accounts as well.
Spousal IRAs can be set up as Traditional, Roth, or self-directed. The normal rollover rules for each of those accounts apply to the spousal IRA as well.
There are penalties for taking distributions in cash prior to retirement age. Additionally, if you are going to attempt a rollover, it is highly recommended to elect to perform a direct rollover instead of an indirect rollover. Indirect rollovers have withholding requirements and run the risk of incurring early distribution penalties.
IRA-to-IRA transfers are the most common method of establishing self-directed IRAs with exiting qualified funds. A new account is established with an IRS approved IRA custodian who, with your consent, requests the transfer of IRA assets from your existing spousal IRA. The custodian will then be able to accept the money and invest the assets according to your instructions.
Traditional IRA vs. Self-directed IRA vs. Roth IRA vs. Other Retirement Accounts
The retirement options available through your spousal IRA will depend on what type of IRA you choose to establish it as. Here is a table which illustrates how a different IRAs compares to other tax-advantaged retirement savings vehicles:
“Maybe” indicates that gold investment options are at the discretion of the plan provider. For example, certain 401(k) plans offer gold mutual funds or ETFs, while others do not.
Types of Gold You Can Invest in Through a Spousal IRA
As mentioned above, spousal IRAs have plenty of investment options but can be limited by the IRA type, IRA custodian, and IRS rules. These are the types of investments that a standard IRA owner (not self-directed) should be able to invest in:
Individual bonds (corporate and government)
Mutual fund shares
Exchange Traded Fund (ETF) shares
Certificates of Deposit (CDs)
Money Market Fund shares
In short, this means that you cannot invest in physical gold bullion (or any other approved investment metal) through a Traditional or Roth spousal IRA. If you initially establish the spousal IRA as a self-directed IRA, however, you can invest in physical gold, silver, platinum, and palladium bars.
The simplest way to invest in gold through your Traditional or Roth spousal IRA is to purchase stocks in gold mining companies or to purchase a mutual fund that includes mining company stocks. This strategy is referred to as buying “paper gold.” There are also gold ETFs (GLD) and mining ETFs which provide indirect access to gold investing.
Investing in Physical Gold vs. “Paper Gold”
So-called “paper gold” stocks are the shares of companies that mine, produce, and explore for gold ore. There are literally hundreds of gold stocks to choose from, and the larger companies are listed on major gold indices like the Gold Miners Index (GDX) or the BUGS Index (HUI).
Gold stocks tend to be more risky than owning physical gold. This is because, historically, gold stocks will appreciate quickly when gold spot prices rise but fall much more dramatically when the price of gold declines.
Gold stocks are also exposed to additional kinds of risk. Some examples include:
Regulatory Risk – mining and exploration companies are subject to increased regulation and taxes.
Cost of Production Risk – mining equipment depreciation, rising land values, labor cost increases, etc can all negatively impact a mining company’s valuation.
Management Risk – mismanaged or overly leveraged companies can, and do, declare bankruptcy or close shop completely.
Fiat Currency Risk – when you sell securities like gold stock or shares of gold mutual funds, you are going to be compensated in a fiat paper currency. In the event of currency collapse, you may be left holding a worthless asset.
The value of physical gold has never hit zero and has retained value for thousands of years. In terms of staying power, physical gold beats “paper gold” hands down.
Benefits of Dedicating 5-20% of Your Retirement Portfolio to Precious Metals
Gold investments are a simple, safe way to diversify your retirement portfolio. Gold (along with other investment metals: silver, platinum and palladium) will help to protect your assets against stock market volatility and inflation.
Not only is gold a great hedge, but gold offers plenty of growth potential. In fact, many investors purchase gold for its growth prospects, and many analysts predict gold to continue to see gains in the future.
The total amount of precious metals in your retirement portfolio will depend on your own risk tolerance and retirement horizon. One of the best ways to set up a diversified retirement portfolio (and receive tax benefits) is to open a self-directed IRA.
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