If you own a Traditional IRA, you probably understand the importance of diversifying your funds into an array of investments to make wise retirement choices. However, many Traditional IRA holders are now taking their investments to the next level and adding precious metals, such as gold and silver, to their portfolios as well. The following information can help you to better understand how a traditional IRA differs from a self directed IRA portfolio, how to invest in assets such as precious metals, and discuss methods to protect the funds in your portfolio against drastic economic changes.
Traditional IRA Explained
In 1974, traditional Individual Retirement Accounts were initiated via the Employee Retirement Income Security Act, often referred to as ERISA.
An IRA is an investment vehicle that has been created specifically to help investors save for retirement. Money which is added and accumulated within an IRA will not be taxed, and in fact, will continue to grow without taxes until the investor is ready to withdraw it.
Traditional IRAs differ from 401(k) portfolios in that employers do not sponsor traditional IRAs. Instead, individual investors must qualify for the ability to establish and put funds into their IRA. However, the qualifications are not difficult to meet. In fact, if you earn taxable income and are under the age of 70 1/2 years old, you can qualify to create your own IRA.
While most IRA holders do enjoy many benefits of having this type of portfolio, there is a drawback as well, in relation to other types of investment vehicles for retirement. Since last year in 2014, investors who are under 50 years old are only permitted to add $5,500 to their IRAs annually; those who are older than 50 are allowed to contribute at annual rate of $6,500. Just as is the case in other types of accounts, early withdrawal is subject to a 10% tax penalty; therefore, this penalty will need to be paid if the money is withdrawn before age 59 1/2, when retirement age begins to approach. However, there are a few exceptions to this rule, for example, if the investor provides proof of financial hardship. After the age of 70 1/2, investors are no longer able to contribute money to their IRAs, and are required to withdraw the funds.
Traditional IRAs tend to be popular because of the wider range of investment choices for this type of account. Employee-sponsored investment vehicles tend to be more limiting, though your IRA custodian may still have the power to limit the decisions that you make. Another important point to remember is that the IRS will not allow funds from your Traditional IRA to serve as an investment for tangible assets, such as gold bullion or real estate. Additionally, investors may not take out loans from their IRAs.
Making the Most of Your Traditional IRA Rollover
A rollover of your Traditional IRA is possible once each year, which means that the IRA funds can be transferred without tax penalties between two institutions.
Investors may also decide to use their current Traditional IRA funds toward a self directed IRA.
Be aware that if you wish to take cash from your IRA before you reach retirement age, there will be financial penalties. Investment professionals will frequently advise investors that, when the time comes to perform a rollover, the investor opt for a direct rollover as opposed to an indirect one. The reason for this is that direct rollovers can be completed once annually free of penalties, but indirect rollovers may require the investor to pay early distribution penalties, and also often involve withholding requirements as well.
Transfers between two IRAs tend to be the most widely used practice when investors establish a self directed IRA. This can be achieved by establishing a new IRA account and custodian with the Internal Revenue Service; the custodian will then request that the first IRA transfers its exiting qualified funds to the new account. The custodian will then be able to accept the funds, with your consent, and to invest the money in accordance with your specifications.
Let’s compare the self directed IRA, Traditional IRA, 401k and other retirement accounts. Here, we have an info graphic which shows the ways that a Traditional IRA is similar to other retirement savings methods, as well as ways that each savings vehicle is different.
| Plan Type | Sponsorship | 2019 Contribution Limit | Roth Option? | Allow Gold Stocks? | Allow Gold ETFs? | Allow Gold Bullion |
|---|---|---|---|---|---|---|
| 401(k) | Private Employer | $19,000 / $25,000 | Yes | Maybe | Maybe | No |
| Solo 401(k) | Self-employed | $19,000 / $25,000 | Yes | Yes | Yes | Yes |
| Keogh Plan | Self-employed or Unincorporated Employer | $56,000 | No | Maybe | Maybe | No |
| 403(b) | Government or Non-profit Employer | $19,000 / $25,000 | Yes | Maybe | Maybe | No |
| 457(b) | Government or Tax-exempt Employer | $19,000 / $25,000 | Yes | Maybe | Maybe | No |
| SIMPLE IRA | Private Employer | $13,000 / $16,000 | Yes | Yes | Yes | Maybe |
| SEP IRA | Business Owners & Self-employed | $56,000 | Yes | Yes | Yes | Maybe |
| Profit Sharing Plan | Private Employer | $56,000 | No | Maybe | No | No |
| Money Purchase Plan | Private Employer | $56,000 | No | Maybe | Maybe | No |
| Annuity | Individual | None | No | Maybe | Maybe | No |
| ESOP | Private Employer | Varies | Yes | Maybe | No | No |
| SARSEP | Private Employer | $19,000 / $25,000 | No | Yes | Yes | Maybe |
| Traditional IRA | Individual | $6,000 / $7,500 | Yes | Yes | Yes | No |
| Precious Metals IRA | Individual | $6,000 / $7,500 | Yes | Yes | Yes | Yes |
| Thrift Savings Plan (TSP) | Government or Military | $19,000 / $25,000 | Yes | No | No | No |
How Can I Begin Gold Investing with my Traditional IRA?
TBecause we’ve discussed quite a lot about the Traditional IRA before now, readers should understand that the investment options for an IRA portfolio can vary.
However, IRS rules do limit investment options for IRAs, as does the custodian of the IRA. However, there are several investment types that are common for an investor’s IRA portfolio. Some of these investment types are:
Certificates of Deposit (known as CDs)
Options
Individual stocks
Individual bonds (both government and corporate)
Mutual funds
Money market funds
Exchange Traded Fund shares (ETF)
What this essentially means is that physical gold bullion cannot be part of a Traditional IRA portfolio. Other metals in their physical form, which are approved for investment, are also not investable through a Traditional IRA. However, you can still invest in gold with your IRA. Instead of investing in physical gold or other precious metals, you can instead purchase stocks in companies that mine gold and other metals in which you’d like to invest. This investment method is known as “buying paper gold.” Additionally, IRAs can also include Exchange Traded Fund shares that involve gold mining; these are known as GLD ETFs, and may prove useful for the investor who wishes to make gold a part of a Traditional IRA.
