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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 until age 72, if you turned 70 years old on July 1, 2019, or later. This is based upon changes that were made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Additionally, withdrawals from a Roth IRA are not compulsory until the owner of the account passes away.

Roth IRAs 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 rather, are 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. Essentially, you personally never interact with the funds.

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 TypeSponsorship2019 Contribution LimitRoth Option?Allow Gold Stocks?Allow Gold ETFs?Allow Gold Bullion
401(k)Private Employer$19,000 / $25,000YesMaybeMaybeNo
Solo 401(k)Self-employed$19,000 / $25,000YesYesYesYes
Keogh PlanSelf-employed or Unincorporated Employer$56,000NoMaybeMaybeNo
403(b)Government or Non-profit Employer$19,000 / $25,000YesMaybeMaybeNo
457(b)Government or Tax-exempt Employer$19,000 / $25,000YesMaybeMaybeNo
SIMPLE IRAPrivate Employer$13,000 / $16,000YesYesYesMaybe
SEP IRABusiness Owners & Self-employed$56,000YesYesYesMaybe
Profit Sharing PlanPrivate Employer$56,000NoMaybeNoNo
Money Purchase PlanPrivate Employer$56,000NoMaybeMaybeNo
AnnuityIndividualNoneNoMaybeMaybeNo
ESOPPrivate EmployerVariesYesMaybeNoNo
SARSEPPrivate Employer$19,000 / $25,000NoYesYesMaybe
Traditional IRAIndividual$6,000 / $7,500YesYesYesNo
Precious Metals IRAIndividual$6,000 / $7,500YesYesYesYes
Thrift Savings Plan (TSP)Government or Military$19,000 / $25,000YesNoNoNo
"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.

Roth IRA Limits

The Internal Revenue Agency (IRS) has specific contribution limits for a Roth IRA, based on filing status and income. For 2020, the IRS has increased the income phase-out range for Roth IRA contributions. Those who are singles or heads of households, the phase-out range is $124,000 to $139,000. For couples who are married and likewise filing jointly, the phase-out range is now $196,000 to $206,000. For a married individual filing separately from their spouse, the income phase-out range is $10,000 or less.

As per the 2020 IRS regulations for contribution limits to a Roth IRA, total contributions cannot exceed $6,000 ($7,000 for individuals 50 years old or older), or cannot exceed “your taxable compensation for the year, if your compensation was less than this dollar limit.”

Roth IRA Calculator

Having a Roth IRA can be a good investment option, because distributions are tax-free, therefore safeguarding your hard-earned retirement savings. Once you reach your retirement years, knowing that you have access to tax-free income can provide excellent peace of mind. 

How much you invest for retirement depends on a number of factors. To give you an idea of how much retirement savings you can have, use this Roth IRA Calculator.

Roth IRA Companies

Vanguard Roth IRA

A Roth IRA can be a great investment because your savings grow in the account tax-free, in addition to tax-free withdrawals once you reach retirement. A Vanguard Roth IRA is a popular choice for those investing in retirement because the company offers low costs and over 3,000 mutual funds with no transaction fees and exchange-traded funds (ETFs) which are commission-free. If you choose to open a Roth IRA with Vanguard, the company has a required minimum of $1,000 for mutual funds kept in an IRA.

Fidelity Roth IRA

Fidelity is one of the most well respected and highly rated brokerages in the industry, and another popular choice with those investing for retirement. A Fidelity Roth IRA offers more than 3,500 investment options including mutual funds, ETFs, stocks, and bonds. There is no minimum required investment with a Fidelity Roth IRA. However, some investment vehicles such as mutual funds do have an initial minimum investment. In addition, if you choose to open a  Roth IRA with Fidelity, you will have access to an exceptional variety of research and tools to assist with your investment decisions.

Charles Schwab Roth IRA

Charles Schwab has been an industry leader for decades and can be a good fit for those looking to open a retirement account. A Charles Schwab Roth IRA offers many benefits that come with being a trailblazer as a discount broker. The company offers thousands of mutual funds with no transaction fees that have no or low required investment minimums. This is advantageous for retirement investors looking to save on the transaction and commission fees. Also, Schwab’s investment options include ETFs, CDs, stocks, bonds, amongst others. In addition, some of the other benefits you have with a Charles Schwab Roth IRA include having access to numerous retirement planning tools, various retirement income strategies to help you maximize your savings, and investing insight and assistance should you request it.

Roth IRA FAQ

How to open a Roth IRA?

Opening a Roth IRA is simple. Most IRA companies that offer traditional IRAs, also offer Roth IRAs. You will need the following things to open a Roth IRA:

  • Some form of photo ID 
  • A Social Insurance Number 
  • Your checking or savings account number, in addition to your financial institution’s routing number. 
  • An optional item will be the name and contact information of your employer. 
  • The name and Social Insurance Number of your beneficiary or beneficiaries who will inherit your Roth IRA.
When did the Roth IRA start?

The Roth IRA was introduced through the Taxpayer Relief Act of 1997, although initially, it was called an “IRA Plus”. Roth IRAs get their name from Senator William Roth.

How does a Roth IRA work?

A Roth IRA is a tax-advantaged individual retirement account. Roth IRA distributions are tax-free and contributions are made with after-tax dollars.

How much can I contribute to a Roth IRA?

The 2020 IRS regulations for contribution limits to a Roth IRA are total contributions cannot exceed $6,000 ($7,000 for individuals 50 years old or older), or cannot exceed “your taxable compensation for the year, if your compensation was less than this dollar limit.”

When can you withdraw from a Roth IRA?

You can withdraw money from a Roth IRA tax-free if you are over 59 ½, and have owned your Roth for at least five years.

If you are under 59 ½, and have not owned the retirement account for at least five years, then your earnings may be subject to taxation and a 10% penalty for early withdrawal. However, there are exceptions to this penalty including a first-time purchase of a home, the birth of a child, and other situations.

Who can open a Roth IRA?

Anyone can open a Roth IRA, however, you must have earned income.

How old do you have to be to open a Roth IRA account?

There are no age restrictions for who can open a Roth IRA.

What is a Roth IRA basis?

A Roth IRA basis is essentially the contributions to date that you’ve made to your Roth IRA account. You can figure out your Roth IRA basis by adding up all contributions to the account, then subtract any previous withdrawals (if any) from the Roth.

How to rollover a 401k to a Roth IRA?

It is important to know that if you choose to rollover a 401k to a Roth IRA, you will be taxed on the money that was rolled.

First, choose an IRA custodian who will ask you simple questions like birthdate and Social Security Number. It is highly recommended that you choose a direct rollover instead of an indirect rollover. Indirect rollovers have withholding requirements and run the risk of incurring early distribution penalties. You simply ask your 401k administrator to put the money into your new Roth IRA account. You then select the investments that you want to be included in the Roth IRA (ie. mutual funds, stocks, bonds, etc.).

How many Roth IRAs can you have?

You can have several Roth IRAs. However, as per IRS regulations, your total contributions cannot exceed $6,000 ($7,000 for individuals 50 years old or older), or cannot exceed “your taxable compensation for the year, if your compensation was less than this dollar limit.”

How to calculate earnings on excess Roth IRA contributions?

The IRS has specific contribution limits for a Roth IRA, based on filing status and income. For 2020, the IRS has increased the income phase-out range for Roth IRA contributions. Those who are singles or heads of households, the phase-out range is $124,000 to $139,000. For couples who are married and likewise filing jointly, the phase-out range is now $196,000 to $206,000. For a married individual filing separately from their spouse, the income phase-out range is $10,000 or less.

Excess Roth IRA contributions are when your income was too high to qualify, or you exceeded the IRS total contributions limit. Excess contributions are subject to 6% “excise tax”. However, the IRS has provided a specific formula to calculate earnings on excess Roth IRA contributions.

What is the difference between an IRA and a Roth IRA?

There are a few key differences between traditional IRA and a Roth IRA. 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.

What types of gold can you invest in with a Roth IRA?

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) 
  • Options 
  • 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.

What is the difference between 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 a riskier investment 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 types 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 its value for thousands of years. In terms of resilience, physical gold beats “paper gold” hands down.

What are the 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 (in addition to other investment metals like 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.

What is IRA-approved gold or silver?

The IRS has strict guidelines when it comes to the kinds of gold and silver allowed in an IRA. Only certain bullion coins and bars are approved by the IRS for investment within these retirement accounts. This pertains to the purity level and issuing mint. The American Eagles, Canadian Maple Leafs, and Austrian Philharmonic are examples of bullion coins of high purity levels that are issued by recognized governments. Collectible coins and numismatics are NOT approved for IRA investments. Be careful when you shop around for Gold IRA companies, because many of the less reputable ones are known to push collectibles and numismatics to their clients to raise their profit margins. A reputable and trustworthy IRA company should only recommend bullion coins that are IRA approved.

What is a Gold IRA Company?

A Gold IRA Company or Custodian is a company that specializes in the process of setting up Gold IRAs from beginning to end. This includes everything from account setup, an IRA rollover/transfer, the purchase of qualified metals, and storing them with an accredited IRS-approved depository. A reputable Gold IRA Company should be able to handle the entire process for you and answer any question you may have at any step of the process. Gold IRA Companies typically form strategic alliances with traditional IRA custodians, accredited depositories, and wholesale metal dealers. Example: Regal Assets partners with New Direction IRA, Dillon Gage and Brinks Worldwide for the Precious Metals IRA setup. They also partner up with Lloyds of London for insurance and have other partners for their other alternative investments.

What are some recommended Gold IRA companies for a 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 and 2017 to help you make a decision (we encourage you to do your own due diligence and call multiple companies):

Company Review Table

RankCompanyBBB
(Rating A+ to F)
BCA
(Rating AAA to F)
TrustLinkFull Review
1
Regal Assets
www.regalassetsbullion.com
1-877-205-1104
2
Advantage Gold
www.AdvantageGoldIRA.com
(310) 800-2473

3
American Bullion
www.AmericanBullionOnline.com
1-888-895-6950

4
LEXI Capital
www.lexicapital.com
(800) 473-1213

5
Cornerstone Bullion
www.cornerstonebullion.com
(800) 558-4671

How do I choose the best Gold IRA company to invest with?

That completely depends on what factors are most important to you. Be it ratings, customer support, availability of other alternative asset options, physical location, storage options? Once you decide which factors are most important to you, make a shortlist of a few companies that meet your criteria, and either give them a call, or request their free gold kits to learn more about their company and products.

What is an IRA Rollover?

While some people tend to call any movement of funds from one retirement account to another a rollover, the IRS makes a clear distinction between a rollover and a transfer. In a rollover, the money being moved is paid to you and you then deposit the funds in the other account.

What are the IRS rules for an IRA Rollover?

The IRS has stringent rules pertaining to an IRA Rollover. As per the IRS regulations if you were to do a Gold IRA rollover, you would have 60 days from the date you receive the funds to deposit the money in the Gold IRA company or Custodian you have chosen. If you do not complete the transaction within this period, the money becomes a taxable withdrawal and you will face the 10% early withdrawal penalty if you are under 59 1/2. If you are withdrawing from a personal IRA for a rollover to another IRA, there is no tax withholding. But you can do only one rollover per year.

What are the IRS rules for an IRA Transfer?

In a direct custodian-to-custodian IRA transfer, you do not have to worry about the 60-day transfer rule since you never receive the money. The transfer may is usually accomplished by wire transfer directly between the respective IRA custodians. The original IRA custodian can also accomplish the transfer by issuing a check made out to the custodian of the receiving IRA and mailing it out. This is the easiest way to invest in gold through your IRA since it is all handled in the background by your existing and new custodian.