Gold IRA investing: Dos and don'ts to know

In a time of rising inflation and high interest rates, many investors are worried about the safety of their portfolios. Stocks historically yield decent returns compared to other asset classes, but their value can fluctuate wildly in the short term. That's why it's important to include a mix of asset classes in your portfolio to balance risk and reward.

One easy way to diversify your investments is with gold. Because it tends to hold its value despite economic turmoil and market fluctuations, it's a solid hedge against inflation. It's also more liquid than assets like stocks and bonds, making it a potential source of quick cash in an emergency.

One of the many ways to invest in gold is with a gold IRA. Like regular IRAs, gold IRAs are retirement accounts that offer attractive tax advantages. Investing in a gold IRA allows you to add gold to your portfolio while maximizing your tax savings.

But, as with any financial product, there are some things to consider to ensure you get the most out of your gold IRA. In this article, we'll explore some of the main ones.

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Dos & don't of investing in gold IRAs

Keep these dos and don'ts in mind when deciding how to invest in a gold IRA.

Do compare types of IRAs

Gold IRAs come in three different types. Knowing the features of each will help you choose the best one for you. While there are several differences to consider, here's a brief overview:

• Traditional gold IRAs: Traditional gold IRAs are funded with pre-tax dollars. You can deduct contributions on your tax return. The funds are taxed when you withdraw them.
• Roth gold IRAs: Roth gold IRAs are funded with after-tax dollars. You cannot deduct contributions on your tax return. The funds are taxed when you contribute them.
• Simplified Employee Pension (SEP) gold IRAs: Like traditional gold IRAs, SEP gold IRAs are funded with pre-tax dollars. You can deduct contributions on your tax return, and the funds are taxed when you withdraw them. The difference is that SEP IRAs have significantly higher contributions (more on that in the next section). You are only eligible for a SEP IRA if you're self-employed (e.g., a small-business owner, freelancer or entrepreneur).

Don't ignore contribution limits

When it comes to investing in gold IRAs, there is such a thing as too much. IRAs have contribution limits, and investing more than these limits can result in a penalty tax.

Specifically, gold IRA contribution limits for the tax year 2023 are:

• Traditional gold IRA: $6,500 (or $7,500 if you're 50 or older)
• Roth gold IRA: $6,500 (or $7,500 if you're 50 or older)
• SEP gold IRA: Up to 25% of your self-employed earnings or $66,000 (whichever number is higher)

If your investments exceed these limits, you'll incur a 6% penalty tax on the difference. For example, if you contribute $1,000 more than the limit, you'll pay $60 in penalty tax. So, keep contribution limits in mind when deciding how much to put into your gold IRA. If you have additional money to invest, put it into a different type of account, such as a 401(k), or a different asset class, such as bonds or ETFs.

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Do choose an IRS-approved custodian

All IRAs need a custodian to hold and manage the IRA's assets and ensure the account adheres to IRS regulations. This custodian must be approved by the IRS. Brokerage firms, robo-advisors, banks, mutual fund companies and insurance companies can all be IRA custodians. Check out the IRS' list of approved custodians to get started.

Don't overlook fees

IRA custodians charge fees for managing your account. These range from annual maintenance fees to trading commissions. When comparing custodians, be sure to take these fees into account to make sure you won't spend more than you need to.

The bottom line

Gold IRAs can be a great way to add gold to your investment portfolio. But it's important to choose the right IRA for your situation and heed contribution limits to maximize your tax savings and minimize potential fees and penalties. If you're not sure what option is best for you, a tax professional or financial advisor can guide you.