How is GLD Taxed in IRA?
Emma is contemplating investing in gold through her IRA, and is considering whether to opt for physical coins, gold mutual funds or futures ETFs as possible options.
Traditionally, the IRS has prohibited individual retirement account investments in collectibles and certain types of bullion. But recent changes have opened the door for direct investments into physical gold IRAs.
Capital Gains
Before-tax returns on gold investments can vary significantly, depending on whether you invest in physical coins, mutual funds or ETFs. Direct gold investments tend to yield higher pretax returns; however, they do not qualify for lower capital gains tax rates that apply to IRA investors.
When selling equity or bond ETFs, any gains are subject to tax depending on how long they were owned and your income level. Long-term gains are taxed at 23.8% (which includes 3.8% Net Investment Income Tax (NIIT), while short-term gains are taxed at 40%.
Direct physical ownership of precious metals by IRAs is generally forbidden, though the IRS allows an exception for coins and bullion that meet certain purity standards. Furthermore, they issued a letter ruling in 2007 clarifying that precious metal ETFs do not qualify as collectibles and can therefore be held by an IRA. Furthermore, all accounts must begin taking annual required minimum distributions (RMDs) after age 72.
Dividends
When holding dividend-paying stocks in an IRA, the IRS applies various tax rates depending on whether the shares qualify as qualified or non-qualified dividends. Qualified dividends are subject to long-term capital gains rates of between 0%-20% while non-qualified dividends may be subject to ordinary income tax rates.
As long as they stay inside your IRA, dividends won’t be subject to taxes for years and years – perhaps decades. But once they come out at some point in your life, the IRS will treat them as ordinary income and tax them accordingly.
IRA withdrawals generally don’t attract taxes until either you reach age 59 1/2 or your account meets the five-year rule, though any funds withdrawn prior will be subject to your marginal rate and an excise tax of 10% is applied by the IRS on withdrawals made before age 59 1/2; there may be exceptions such as collectible coins and bullion which do not incur this additional fee.
Withdrawals
As with other IRA investments, gold withdrawals from an IRA are taxed at their individual marginal rate; this may encourage higher-income taxpayers to choose precious metal ETFs rather than physical coins or bullion for investment purposes.
Physical gold does not generate dividends or interest payments like stocks, mutual funds and ETFs do; as a result, owning it in an IRA probably won’t save you from the 3.8% net investment income tax that applies to those with MAGIs above $150,000.
IRS rules dictate that an IRA’s acquisition of collectible items such as AE coins constitutes a taxable distribution and to reduce this risk it is important that only bullion investments be included within an IRA and any assets not directly related to bullion are managed separately in order to protect itself from being considered as distributions. Furthermore, its trustee must physically possess it for this to work correctly.
Taxes
Usually, traditional or Roth IRA amounts aren’t subject to tax until you withdraw a distribution from the account. However, if an IRA generates unqualified basis trading income (UBTI), gains could be subject to taxes both when they arise as well as when taken as distributions.
Your distributions from traditional and Roth IRAs that you receive after turning 59.5 will generally be subject to income tax, unless an exception applies. Furthermore, an early withdrawal penalty tax of 10% could apply if you withdraw it before age 59.5.
Annual required minimum distributions are essential in avoiding having too much taxed income in retirement. You can check whether or not RMDs are required by using the IRS IRA Required Minimum Distribution Calculator. It is also wise to carefully track your IRA’s cost basis as this information will be necessary when withdrawing funds – your Thrivent financial advisor can assist with creating a retirement plan which maximizes IRA tax efficiency.
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