Gold is a valuable asset — and not only for the reasons you might think. Of course, gold has value in itself. However, you can make the most of that value by investing it well. Investing in gold in an IRA has many benefits, including diversifying your portfolio and hedging against inflation.
The tricky thing is figuring out how you want to invest it. That is, choosing between a gold Roth IRA vs traditional gold IRA.
What Are the Differences Between Traditional and Roth IRAs?
Gold Roth IRAs and traditional gold IRAs are similar but vary in eligibility, contributions, taxation, and required minimum distributions.
Traditional IRAs have no income requirement. On the other hand, Roth IRAs have an income limit of $153,000 for individuals or $228,000 for married people filing jointly.
Your income will also determine how much of your contribution to your Roth IRA you can deduct from your annual taxes.
How you contribute to each of these IRA types also differs. Roth IRAs are self-directed, while traditional IRAs give you less power over investment decisions. For both IRAs, you can open an account and store your gold in any IRS-approved depository, but the IRS taxes contributions to Roth IRAs at the time you make the contribution. With a traditional IRA, you don’t pay taxes on contributions.
Each IRA type has different tax advantages and drawbacks. Contributions to traditional IRAs are tax-free, while contributions to Roth IRAs are not. It’s the opposite case for IRA withdrawals: You’ll pay taxes on traditional IRA withdrawals but not on Roth IRA withdrawals since you pay taxes on the contribution when you invest the funds in your account.
If you’re a low- or moderate-income investor, you might be eligible for a tax break when you contribute to either IRA account. This is called the Saver’s Credit and can earn you up to $2,000, depending on the amount you contribute.
Required Minimum Distribution
Finally, a gold Roth IRA vs traditional gold IRA differs because of their required minimum distributions. Traditional IRAs require you to start making minimum distributions from your account starting at age 72, while Roth IRAs don’t require a minimum distribution at all.
Are There Similarities Between Traditional and Roth IRAs?
Despite the differences, traditional and Roth gold IRAs share similarities relating to what metals you can invest in, where you store those precious metals, how much you can contribute to the IRA each year, and restrictions on withdrawals.
Precious Metal Investment
These retirement accounts allow for precious metal investments in physical assets like gold and silver. While inflation may make stocks risky and unreliable investments, gold prices and value are consistent and more secure over the long term. Whether you’re contributing gold jewelry, coins, or bars, precious metal IRAs help you use that value to its full advantage.
Regardless of whether you choose a traditional or Roth IRA, you will need a custodian. A custodian is a qualified professional who has been approved by the government to manage your IRA account and assets. The custodian also stores your physical gold assets and reports them to the IRS. For your custodian, you may appoint:
- Brokerage firm
- Gold IRA company
- Trust company
- Credit union
Both traditional gold and gold Roth IRA types have the same contribution limit. A contribution limit refers to the dollar amount you can contribute to an IRA account annually. While this changes year-to-year, for the 2023 tax year, that limit is $6,500. People aged 50 or older may contribute up to $7,500 a year. If you have more than one IRA, this is the amount you may contribute to all your accounts in total.
There is no age maximum or minimum when contributing to an IRA. You can begin contributing as early as you want and continue contributing well into retirement.
Prohibited Transactions and Early Withdrawal Penalties
While you can contribute to your gold IRA as early as you want, you have to hold off on withdrawing funds. Withdrawing any funds from your IRA before you’re 59.5 years old will come with a 10% penalty.
Additionally, though Roth IRA withdrawals are usually taxable, withdrawing too early means the withdrawn funds might contribute to your taxable income. Roth IRAs also require that you’ve had the account for at least five years before making a withdrawal.
Available Options for Gold Investment Within an IRA
You have a variety of options for gold investment in both gold Roth IRAs and gold traditional IRAs. You may invest:
- Physical gold (gold bars, jewelry, coins)
- ETFs (exchange-traded funds)
- Gold mining stocks
- Mutual funds
- Gold certificates
Each of these represents a different form or conversion of gold. You can stick to one form of investment or further diversify your portfolio by exploring multiple options.
Advantages and Disadvantages of a Gold Roth IRA vs Traditional Gold IRA
Each IRA type comes with advantages and disadvantages.
A Gold Roth IRA:
- Avoids taxes in retirement
- Builds wealth in the long run
- Has fewer distribution restrictions
- Is helpful for estate planning
But it also…
- Taxes your contributions
- Has income requirements
Meanwhile, a traditional gold IRA:
- Lowers your taxable income every year
- Comes with an earlier tax break
- Has no income requirement
- Is helpful for estate planning
But it also…
- Is more costly in retirement
- Often means less savings in the long run
Factors to Consider in Choosing Between IRA Types
Let’s narrow down what really matters when making the decision between a gold Roth IRA vs traditional gold IRA.
Current and Future Tax Considerations
Now that you know the implications of each IRA type in terms of taxation, you can consider what the best option for you is. If you’d rather be taxed on your contributions, consider a gold Roth IRA. If you prefer to pay taxes on your withdrawals during retirement, a traditional IRA might be best for you.
Personal Financial Goals and Retirement Plans
Due to the tax implications of each IRA, the best way to choose a type is to consider your retirement plan’s expectations. If you plan to be in a higher tax bracket in retirement, you should consider a Roth IRA so you can pay taxes now at a lower rate. The opposite is true for a traditional IRA. If you expect to be in the same or a lower tax bracket in retirement, a traditional IRA would allow you to pay taxes at that rate in the future.
Risk Tolerance and Investment Timeline
Before you commit to either type of IRA, you should be aware of the risks you face with any gold IRA. Since these are long-term investments, you won’t have immediate access to your precious metals.
Risks come with any market, and the value of precious metals may fluctuate over time. You should also keep an eye out for scams. Doing your research and never rushing into decisions can help you avoid fraudulent scammers and disreputable custodians. There are also several gold IRA fees that you should anticipate: custodian fees, storage fees, and selling fees.
Consult With Professionals
Doing your own research prepares you to decide, but consulting with a financial advisor helps you solidify the decision between a gold Roth IRA vs traditional gold IRA.