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To the new investor who wants to expand their portfolio to cover gold, gold IRA tax rules can feel intimidating and confusing. It doesn't have to, though! We're going to break down everything you need to know about current 2022 tax laws, including where to invest, which IRA to choose, how to handle capital gains taxes and more.
Gold & Taxes
The Internal Revenue Service (IRS) categorizes gold as any other collectible investment. Much like stamps, coins, rugs, precious metals, antiques, ETFs, and artwork, gold is a collectible asset that holds value. It is usually worth more than its initial sale price.
Two primary tactics to consider are short-term and long-term strategies when investing in gold.
A short-term gold investment strategy entails purchasing and then selling within one year. Short-term investors can turn profits more quickly but at the expense of a higher tax rate than those who hold long-term. This tax works precisely the same as ordinary income. Your income tax bracket will determine how much you'll pay on your capital gains.
A long-term gold investment strategy means purchasing the gold and holding it for more than one year before selling it. Like other long-term investments, patience is required, but the reward is a more favorable tax rate.
The long-term capital gains rate here is 28%. This rate is higher than most other long-term capital gains rates, which usually run between 15% to 20%. Gold (and other similar items) are taxed higher because they are considered collectibles.
Individual Retirement Accounts (IRAs) are one of the best vehicles for minimizing your tax expenses.
Gold IRA Tax Rules
A Gold IRA is a specialized IRA that allows users to hold gold in their retirement investments. You can open a gold IRA through a broker-dealer or another custodian. You must hold this account separately from a traditional retirement account, but the contribution limits and taxes are the same.
You must have an earned income to contribute to Traditional and Roth IRAs.
As of 2022, people under the age of 50 have a contribution limit of $6,000 per year. Those aged 50 and older have an annual $7,000 contribution limit. This earned income must also be enough to cover what you contribute to your IRA.
For example, suppose you make $4,000 in earned income in a year. In that case, you are only legally allowed to contribute a maximum of $4,000 for that year to your IRA.
SEP IRAs follow a different set of rules with varying income limits, which we will cover below.
Earned income includes salaries, wages, commissions, tips, bonuses, and self-employed income. Rental property income, child support, investment interests, investment dividends, inmate income, retirement income, unemployment benefits, and social security do not count as earned income.
This type of IRA means that your contributions will not be taxed; it is a tax deferral. You will not pay taxes on your gold until you begin to use the funds in the IRA. It is best to use this type of IRA if you believe you will earn less money during retirement (putting you in a lower tax bracket) than during your working years.
Contributions to Traditional IRAs can be partially or fully deductible, too, meaning that you can reduce your income taxes.
Roth IRAs are taxed differently from Traditional IRAs. You pay taxes on the contributions but do not pay taxes as you use the funds (also known as distributions) in your retirement. You also cannot deduct contributions to this IRA from your income taxes.
If you believe that you will earn more money during retirement than during your working years, a Roth IRA is a better choice than a Traditional IRA.
For those with higher incomes, the limit is reduced or eliminated.
You may contribute to your Roth IRA until you are 70 and a half years old, and you can leave amounts in your IRA for as long as you live. For the complete list of details and how to calculate how much you may contribute to your Roth IRA, check out this helpful table from IRS.gov.
A Simplified Employee Pension Plan or SEP-IRA lets employers contribute a significant sum of the retirement income for themselves and their employees. This type of IRA has low administrative costs and is available to all businesses, regardless of size. Only the employer can contribute to it.
The employer must contribute an equal amount for all of their eligible employees. What's so appealing to this type of IRA is that the annual contributions are flexible, so it's helpful for businesses with variable cash flow.
Small business owners and self-employed professionals tend to use SEP IRAs the most.
In-service withdrawals are available but are to be included in income. If the person is 59 and a half years or younger, they are subject to an additional 10% tax.
Like the Roth IRA, SEP IRA contributions are not taxed. You only pay taxes on your gold investment once you withdraw funds in retirement. Another benefit of this type of IRA is that contributions are tax-deductible, so your income taxes can be reduced while investing.
Employers (or self-employed business owners) can contribute up to 25% of their total annual income, or $58,000 annually, whichever is lower.
Optimize Your Gold IRA For Taxes
A bequest allows a person to gift money or IRA to others in the event of their passing, usually through a trust or will.
After death, most IRA accounts, excluding Traditional IRAs, are fully taxed within ten years. Inherited Roth IRAs work a bit differently. The money can continue to grow in the account for an additional ten years, and then the funds may be withdrawn tax-free to heirs. Some states do tax inherited IRAs, too, so look into that and consider your options carefully.
If you choose a beneficiary that is a tax-exempt charity, the money donated to them will not be taxed no matter what.
This bequest avoids taxes of up to $100,000. Accounts that exceed this amount are susceptible to some taxation. This tax rate depends on your heir's income tax bracket.
Is A Gold IRA Tax Deductible?
In short, yes, Gold IRAs are tax-deductible, but only if you have a Traditional or SEP IRA. If you have a Traditional Gold IRA or a SEP Gold IRA, you do not pay taxes until withdrawal. These accounts are tax-deferred. Gold Roth IRAs are not tax-deductible, your money will be taxed upon contribution, but withdrawals are tax-free.
How Do You Avoid Capital Gains Tax On Gold?
There aren't any special rules for gold for capital gains, so you'll need to minimize your tax bill through your overall tax planning.
Use a Self Directed IRA (SDIRA)
Traditional, Roth, and SEP IRA accounts, all mentioned above, are classified as SDIRAs. This method allows you to sell with zero capital gains tax because IRA accounts protect assets from taxation, even during growth.
There isn't a legal penalty for using your account to sell the gold for these accounts. There are a few rules you need to follow, though, so use caution and follow these closely:
The best gold IRA custodian is Augusta Precious Metals and you can see my full Augusta Precious Metals review here.
Using a self-directed IRA is arguably one of the best ways to avoid capital gains tax on gold. However, a few other options to reduce or defer your tax payments are shared below.
Earlier, I mentioned that gold is classified as a collectible by the IRS. Collectibles have a 28% capital gains tax, 8% to 13% higher than most other capital gains taxes. If you want to fall into that sweeter 15% to 20% tax rate, you'll have to invest in gold more innovatively.
One option is to invest in an Exchange Traded Fund (ETF) that holds physical gold in its portfolio. Since you would be owning the gold by proxy and not as a collectible, the most you can pay on investments in taxes is 20%. This is at least an 8% drop in the capital gains taxes you'll have to pay.
Another benefit of ETFs is that they can be bought or sold anytime easily. ETFs can purchase, store, and insure the gold much cheaper than most IRA custodians can. Here is a full list of gold ETFs you can invest in.
Hold Your Gold For at Least a Year
Another option is to hold your gold for at least one year before selling it. This allows you to be taxed at a lower rate. Short-term gains (if you sell within one year) can be up to 37%. Long-term capital gains are capped at 0%, 15%, and 20%.
If you make less than $41,675 or less as a single filer or $83,350 as a married couple filing jointly, you qualify for the 0% capital gains tax.
Suppose you make between $41,676 and $459,750 as a single filer or $83,351 to $517,200 as a married couple filing jointly. In that case, you qualify for the 15% capital gains tax.
For those who make more than $459,750 as a single filer, or more than $517,200 as a married couple filing jointly, you will pay a 20% capital gains tax.
Use a 1031 Exchange
Finally, you can defer your tax bill by reinvesting the profits of your gold into another asset.
Within 45 days of selling your gold, reinvest the profits into something else, perhaps another precious metal, to roll your old investment into a new one. This doesn't work for people who want to liquidate their gold investment, but it does help if you're looking to invest elsewhere.
How Much Gold Can You Sell Before Paying Tax?
You must file returns when you sell twenty-five or more ounces of gold. Any amount under that does not need a return to be filed.
You will need to declare your capital gains and losses on Schedule D of the IRS. The amount of tax you pay depends on your tax bracket and if your gold is considered a collectible.
How Much Gold Can You Buy Without Reporting To The IRS?
The IRS does not have specific requirements for reporting your gold purchases. The only applicable requirement is that you purchase an asset in cash as a part of a business transaction, AND if the purchase price exceeds $10,000, you must report that transaction on Form 8300.
Gold dealers are not required to report sales unless both conditions are met, so gold sales are seldom reported to the IRS.
How Much Gold Can You Sell Without Reporting To The IRS?
You can sell up to $1,000 worth of gold without reporting to the IRS. If you sell more than $1,000 of any precious or rare metals, you must file a 1099-B form within 30 days of the sale.
You do not have to report any American Gold Eagles, regardless of how many you sold. You also don't have to report on fractional-ounce gold coins or certain types of gold jewelry. If you sell fewer than twenty-five pieces or one-ounce Gold Maple Leafs, one ounce Mexican Onzas, or one ounce Krugerrands in a single transaction, you do not have to report the sale to the IRS.
There you have it. Gold IRA tax rules are not as complicated as they may seem, and there are simple ways to lower, defer or even exempt capital gains tax on gold. A self-directed IRA is the best vehicle to achieve this, but there are other ways such as using a custodian. They take all of the hassle and stress of handling your own IRA and take care of everything from purchasing of gold to storing your precious metals for a small fee. You can get a free investors kit from my #1 ranked gold custodian below.
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