If you have a Roth IRA, you most likely have a grasp of how important it is to save for retirement effectively and just how difficult and uncertain that can be. The current global economy has caused more investors to look for a more stable and safe place to store their money. Many of those looking to diversify and protect their retirement assets have turned to gold; however, investing in gold is a tricky process.
We are here to help you learn more and make the best decision for your financial future. Below is some basic information on how to safely invest in gold through a Roth IRA.
What is a Roth IRA?
A Roth IRA is a tax-advantaged individual retirement account that has a few key differences from their precursor: traditional IRA accounts. Whereas traditional IRAs have tax-free contributions and tax-deferred growth, Roth IRA distributions are tax-free and contributions are made with after-tax dollars. You will not be able to deduct contributions to your Roth IRA on your tax return, although those Roth distributions are not taxable when you retire. If you have a Roth IRA, you can continue to contribute after you reach 70 years of age. You also do not have to take withdrawals, which is required for a traditional IRA at a certain age.
Roth IRA’s get their name from Senator William Roth, although they were initially called an “IRA Plus”, and were introduced through the Taxpayer Relief Act of 1997. Like traditional IRAs (and unlike 401(k) plans), Roth IRAs are not sponsored through an employer but are rather available to wage earners independent of where they work. There is a maximum income restriction for Roths, however, that is not shared by traditional IRAs. As of 2014, only individuals earning less than $129,000 or couples earning less than $191,000 are eligible to make Roth contributions.
Roth IRAs do have fairly low contribution limits (relative to other retirement accounts). For 2014, those under age 50 can only contribute $5,500 annually to a Roth, while those over age 50 can add $1,000 to that in a “catch-up provision.” Like other qualified plans, there is a 10% penalty for withdrawals made too early and a 6% penalty for all income contributed in excess of the annual limit.
Investment choices for both Roth and traditional IRAs tend to be much greater than for employer sponsored accounts, although the IRA custodian can still limit what types of assets can be selected. Standard Roth IRAs may not invest money in physical assets like real estate or precious metals bullion.
Roth IRA Rollover Rules & Limitations
Roth IRA funds can be rolled over or transferred between financial institutions without incurring tax penalties, although rollovers are limited to one per 365 days. You can also use existing Roth IRA money to fund a self-directed IRA.
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 Roth IRA. The custodian will then be able to accept the money and invest the assets according to your instructions.
Roth IRA vs. Traditional IRA vs. Self-directed IRA vs. Other Retirement Accounts
Here is a table to compare different retirement accounts with tax-advantages. Since several different types of retirement accounts feature “Roth options” (Roth technically refers to the tax treatment, not the account type), Roth IRAs will have the same benefits and limitations as traditional IRAs for the purposes of this table.
|Plan Type||Sponsorship||2016 Contribution Limit||Roth Option?||Allow Gold Stocks?||Allow Gold ETFs?||Allow Gold Bullion|
|401(k)||Private Employer||$18,000 / $24,000||Yes||Maybe||Maybe||No|
|Solo 401(k)||Self-employed||$18,000 / $24,000||Yes||Yes||Yes||Yes|
|Keogh Plan||Self-employed or Unincorporated Employer||$53,000||No||Maybe||Maybe||No|
|403(b)||Government or Non-profit Employer||$18,000 / $24,000||Yes||Maybe||Maybe||No|
|457(b)||Government or Tax-exempt Employer||$18,000 / $24,000||Yes||Maybe||Maybe||No|
|SIMPLE IRA||Private Employer||$12,500 / $15,500||Yes||Yes||Yes||Maybe|
|SEP IRA||Business Owners & Self-employed||$53,000||Yes||Yes||Yes||Maybe|
|Profit Sharing Plan||Private Employer||$53,000||No||Maybe||No||No|
|Money Purchase Plan||Private Employer||$53,000||No||Maybe||Maybe||No|
|SARSEP||Private Employer||$18,000 / $24,000||No||Yes||Yes||Maybe|
|Traditional IRA||Individual||$5,500 / $6,500||Yes||Yes||Yes||No|
|Precious Metals IRA||Individual||$5,500 / $6,500||Yes||Yes||Yes||Yes|
|Thrift Savings Plan (TSP)||Government or Military||$18,000 / $24,000||No||No||No||No|
"Maybe" indicates that gold investment options are at the discretion of the plan provider. For example, ceratin 401(k) plans offer gold mutual funds, while others do not.
Types of Gold You Can Invest in Through a Roth IRA
As mentioned above, Roth IRAs have plenty of investment options but can be limited by the IRA custodian and IRS rules. These are the types of investments that a standard IRA owner should be able to invest in:
- Individual stocks
- 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 standard Roth IRA. The simplest way to invest in gold through your 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 even 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 like Gold or Silver Bullion
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.
Choosing a Gold IRA Company for Your Roth IRA Rollover into a Self-directed Gold IRA
Our visitors often ask us about which companies we recommend for Precious Metals IRA rollovers and bullion purchases. Since we are an independent website, and none of us work with or have any shares of any gold IRA company, we are able to conduct impartial reviews of more than 70 companies. These reviews are based on existing customer feedback and ratings from authority review bureaus such as the Better Business Bureau (BBB), the Business Consumer Alliance (BCA), and TrustLink.
Here are some company reviews we conducted in 2016 to help you make a decision: (we encourage you to do your own diligence and call multiple companies)
(Rating A+ to F)
(Rating AAA to F)
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