Traditional Vs Self Directed IRAs
If you own a traditional IRA, then the odds are good that you know how important it is to have retirement savings as well as diverse investment choices. The question is, have you thought about taking it to the next level and adding some physical assets such as gold and silver bullion in your portfolio?
Here I’ll discuss many of the differences between a traditional IRA and a self-directed IRA account, how investing in precious metals works, and how precious metals can safeguard your savings against a fluctuating stock market or currency collapses.
What is a Traditional IRA?
- Traditional IRAs, or Individual Retirement Accounts, became possible in 1974. This was established under the ERISA (Employee Retirement Income Security Act). An IRA is a tax-advantageous investment vehicle specifically designed to be used for retirement savings. The money you contribute to an IRA will not be taxed and it can grow tax-free until you make a withdrawal.
- Contrary to how 401ks work, a traditional IRA isn’t employer sponsored. Instead, individuals must qualify before they can open up and contribute to an IRA of their own. These qualifications can be as simple as being under age 70½ and earning a taxable income.
- That’s all there is to it. However, you might have, or might not have, deductible contributions. It will depend on the level of your income and your access to any other retirement accounts.
- One negative aspect of an IRA when compared to other types of retirement accounts, is how they carry pretty low contribution limits.
- As of 2023 any individual under age 50 may only contribute a sum of $6,500 annually, and individuals age 50 or above may contribute $7,500 (the additional $1,000 is known as a ‘catch up’ contribution).
- Like other qualified plans they carry a tax penalty of 10% if any withdrawals are made prior to age 50½ (retirement age). There are exceptions for cases of hardship.
- A withdrawal can become mandatory when you reach age 70½, at which age you will no longer be eligible to make contributions.
- The choices for investment into traditional IRAs are generally larger for employer-sponsored accounts. However, your IRA custodian may still limit your choices. Furthermore, the IRS will not allow any traditional IRA money to be used for investing in physical assets such as precious metals bullion or real estate.
- You are NOT allowed to take out a loan from your IRA.
Rules & Limitations Governing Traditional IRA Rollovers
- You can rollover IRA money or transfer it between financial institutions without any threat of tax penalties. However, you are limited to one rollover per year. You may also use your existing traditional IRA money to help fund your own self-directed IRA.
- You do incur penalties for taking distributions out in cash before you reach retirement age. Furthermore, if you’re attempting a rollover, I recommend that you choose to do a direct rollover as opposed to an indirect rollover. An indirect rollover carries withholding requirements and is at risk for incurring penalties for early distribution.
- Transfers from IRA to IRA are the most popular ways of establishing a self-directed IRA that carries exiting qualified funds. New accounts are established with your IRA custodian, who must be IRS approved, and who will with your consent request a transfer of IRA assets to come out of your Traditional IRA.
How Can Gold Protect Your Retirement?
What Kinds of Gold Can be Invested via Traditional IRAs?
As I mentioned previously, a traditional IRA has plenty of options for investing. However, they can be a bit limited by both IRS rules and your IRA custodian. Here are some investment types that standard IRA owners should be able to partake in:
- Money Market Fund Shares
- CDs (Certificate of Deposit)
- Individual Bonds (Government & Corporate)
- Mutual Fund Shares
What this means is that you can’t invest in any physical gold bullion (as well as any other types of approved metal investments) via a traditional IRA.
The easiest way of investing in gold via your traditional IRA would be to buy stocks in certain gold mining companies or purchase yourself a mutual fund that also includes mining company stock.
This a strategy commonly called ‘buying paper gold’. Gold ETFs, (GLDs) along with mining ETFs provide you with ‘indirect’ access to investing in gold.
Physical Gold Investing Compared to Paper Gold Investing
These ‘paper gold’ stocks are merely shares from companies that either produce, explore, or mine gold ore. You can find hundreds of gold stocks to invest in. The larger companies that you may see listed on the major gold indices are companies like BUGS Index (HUI) or Gold Miners Index (GDX).
Gold stocks can be a bit more risky than actually owning physical gold. That’s because gold stocks tend to appreciate more quickly when the gold spot prices go up, but fall off a lot more dramatically whenever gold prices decline.
With gold stocks also comes a few additional types of risk. These are:
- Management Risk – Companies that are overly leveraged or mismanaged can and quite possibly will declare bankruptcy or even close up shop altogether.
- Regulatory Risk – Companies involved with mining and exploration are also subject to increases in taxes and regulations.
- Cost of Productions Risk – Things like the depreciation of mining equipment, increases in labor costs, and rising land values, all have a negative impact on the value of mining companies.
- Fiat Currency Risk – Whenever securities like gold stock or gold mutual fund shares are sold, you will receive your compensation via paper currency. That means, if there is a currency collapse, you could be holding an asset that is worthless.
Physical gold’s value has never hit the ‘zero’ mark, and it has retained its value for thousands of years.
When it comes to staying power, physical gold is more secure than paper gold. This is part of the reason why more and more people are choosing a Gold IRA. By dedicating a percentage of your current retirement portfolio to savvy precious metals investments, you are exercising a simple and safe way of diversifying and balancing your retirement portfolio.
Gold and investment metals like silver, palladium and platinum can help to protect assets against the volatility of the stock market as well as inflation.
Gold is more than just a convenient hedge, it also offers good potential for growth. It is actually this growth potential that draws many investors to invest in gold since most analysts, with historic performance to draw upon, predict that gold will continuously see gains over time.
Gold is widely recognized as a long term investment, which makes it a good fit for inclusion in retirement investment portfolios. This slants the Traditional Vs Self Directed IRAs debate in favor of the self directed option.
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About the Author: Doug Young Doug is a highly experienced professional and widely trusted authority in financial investing, commodity trading, and precious metals. With over 20 years of expertise, he helps others make informed decisions by sharing a combination of personal experience, extensive knowledge and meticulously researched information on gold IRAs, precious metals investing and retirement planning. He regularly writes news items on these topics. He has considerable experience of evaluating Gold IRA and Precious Metals Companies, gained over a period spanning more than a decade.
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