You may have a well-thought-out plan for your gold IRA, including your initial and recurring investments and investment timeline. But what you might not yet have thought about is how to liquidate your IRA when the time comes. While there is plenty of information about opening and funding an IRA, what is much less discussed is the best way to liquidate your retirement savings.
Let’s go over some liquidation basics, including when to liquidate your retirement account, how you can liquidate your gold IRA and the tax implications of doing so.
Liquidation is when you sell your positions within your investment portfolio, turning them into cash. Your positions may be precious metals, stocks, bonds, etc. Unlike conventional portfolio accounts, liquidation within a qualified retirement account like a gold IRA isn’t a taxable event until you take a distribution of the cash. When you liquidate a gold IRA, the money you receive still remains within your retirement account and is not personally withdrawn to you.
Eventually, you will want to remove money from your IRA. This process of withdrawing funds out of a retirement account is called taking a distribution. While most people wait until they are of retirement age, some are forced to take distributions early due to unforeseen life circumstances and expenses. Taking early distributions, however, will be costly. You will be levied a 10% penalty on early withdrawals from your IRA and a 25% withdrawal from a SIMPLE IRA if done within the first two years of participating in the fund.
On the flip side, those who want to hold their precious metals or other investments in an IRA can’t do so forever (unless it’s a Roth IRA), as withdrawals become mandatory at a certain age, depending on the saver’s birth date.
Once you get into retirement age, most types of IRAs require you to take minimum distributions (RMDs). The federal government imposes RMDs so that individuals can’t forgo paying taxes altogether on their retirement savings. The idea is that RMDs force individuals to draw down on their retirement accounts until little to nothing is left at the time of death. RMDs are taxed at the owner’s income tax rate at the time of the withdrawal, and distributions can be taken as a lump sum or series of withdrawals.
The amount of an RMD is determined based on your age, life expectancy (as determined by the IRS), and the amount held in your IRA account. To calculate your RMD, you can refer to the IRA Required Minimum Distribution Worksheet created by the IRS. Currently, the RMD requirement begins at age 72, up from Age 70.5 before 2020. However, if you turned 70.5 before January 1, 2020, you will have to start taking RMDs based on the previous rule.
It’s important to note that if you have a Roth IRA, RMDs do not apply. That’s because all of the contributions into a Roth account are after-tax dollars, so taxes have already been paid on deposits into the retirement account. However, if the Roth is inherited, the beneficiary will be forced to take RMDs much the same as a Traditional IRA. Beneficiaries who don’t take RMDs as required face a 50% penalty.
An IRA cash distribution is precisely as it sounds. When ready, you can liquidate any part of your precious metals IRA into cash and receive the proceeds directly. For most types of IRAs, you will have to pay taxes on the cash distribution as income tax at the time of the distribution.
An in-kind distribution is more akin to moving savings around than selling your assets. With a gold IRA, an in-kind distribution allows you to take physical possession of your precious metals outside of your retirement account.
In-kind distributions allow you to maintain the investments you held within your retirement account even after retirement age. So, if you want to continue to keep your gold or precious metals after retirement, you can do so by taking an in-kind distribution. This can be advantageous for those who don’t need the cash and want to continue to hold their assets for future growth well into their retirement years.
Remember, you will still have to pay taxes on in-kind distributions just like you do with cash distributions. Taxes are paid on the current value of the in-kind distribution, and the price basis of your assets resets after the distribution is made. For instance, if you take an in-kind distribution from your gold IRA, the value at the time of the distribution will now become your cost basis. For example, if the value of your in-kind distribution is $10,000, your cost basis is $10,000 too.
When deciding to liquidate your gold IRA, consider your current financial situation. The choice of whether to take your distribution in cash or in-kind depends on your current cash needs. Since you have to pay taxes on in-kind distributions as if they were cash, there is no real tax benefit between the two. Another alternative is to simultaneously take both cash and in-kind distributions together, using the cash distribution to pay taxes on the in-kind distributions. This method allows you to keep most of the physical precious metals from your gold IRA assets and pay the applicable taxes without taking any additional money out of your pocket.
Whether you are getting to the age where RMDs are required, or you just want to understand your gold IRA liquidation options for the future, the precious metals specialists at Elite Bullion Investment Group can help with all of your liquidation questions and concerns.