IRA and Gold IRA Regulations
When you invest in an IRA, you have many investment options. One of those options is to invest in gold. A gold-based investment in an IRA has slightly different rules than normal IRA rules when making distributions from the IRA. You must understand these different rules, since they will affect how much in taxes you ultimately pay.
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IRA
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An IRA normally accepts tax deductible contributions (for traditional IRAs) and non-deductible contributions (for Roth IRAs). The money in the IRA is not taxed. But, when you withdraw funds from the IRA, you must liquidate your IRA holdings. What you withdraw from the IRA is cash. You then pay income tax on all withdrawals from the IRA, unless it's a qualified distribution from a Roth IRA, where the money was taxed going into the fund and the withdrawal is tax free.
Gold IRA
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With a gold IRA, you own physical metal. The gold is "in an IRA" for tax purposes. This means that you have two choices: you may liquidate the gold and withdraw it from your IRA or you may take physical possession of the gold and liquidate it later. If you liquidate the gold before withdrawing it, the normal IRA tax rules apply -- you pay income tax on your withdrawal. However, if you take physical possession of the gold, you must pay the income tax on the value of the metal at the time you withdraw it. Then, you must pay 28 percent capital gains tax on the gold when you liquidate it in the future.
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Benefit
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The benefit of a gold IRA is that you get a choice as to how you want to pay tax on the gold. If you think income tax rates will remain low in the future, then you are better off liquidating the gold and paying income tax. If, however, you think that future increases in the value of the gold would overcome the income tax you pay by taking physical possession of the gold now, it may be wise to take possession of the gold and hold the metal for future appreciation.
Disadvantage
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The disadvantage to holding a gold IRA is that you'll pay tax on your investment twice. You'll pay income tax when you withdraw the money, then, you receive a new tax basis -- the value of the gold at withdrawal. This tax basis is treated as your "investment capital" and is used to calculate future tax when you liquidate the gold.
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