Learn the Rules to Defer Taxes While You Save For Retirement
With the 2019 standard tax filing deadline automatically pushed back to July 15, 2020, you still have time to figure out your taxes for 2019 while also starting to think about 2020. And since tax strategies are part of financial planning, it makes sense to consider your retirement savings in parallel.
Depending on your financial situation, you might be reallocating your savings or even considering early withdrawals from your IRAs. Thinking ahead for your future, you may be prioritizing building a nest egg more than ever before. If you’re in a position to contribute to retirement savings, you’ll want to leverage maximum tax benefits as well.
Many people’s financial situations are rapidly evolving. It’s important you know which deadlines and other tax considerations could affect you, especially if you already own or have been thinking about opening a retirement savings account. This can help you allocate your funds wisely, choose the right type of retirement account to align with your goals, and make the best long-term decisions for your retirement.
The long-term goal of trying to keep your retirement savings “safe” from the volatility of fiat currency may have led you to a Precious Metals IRA, where you can buy gold, silver, palladium, or platinum while enjoying the same tax benefits as other IRAs. Precious Metals IRAs are, in fact, self-directed IRAs (SDIRAs), which are retirement savings accounts where you can hold any assets not excluded by the IRS. Since these are still IRAs, they follow the same deadlines this tax season as their conventional IRA counterparts.
There are four types of IRAs: Traditional, Roth, SEP, and SIMPLE. Each comes with its own unique set of rules and limits when it comes to tax filing, usually reflecting the very same characteristics that make it unique.
Before we proceed: this piece is intended for general education, not as tax advice. For the latter, consult with a certified tax professional who can review your particular situation and give you the best personalized advice.
2020 Tax Considerations for the Four Main IRA Types
The four key types of IRAs share many similarities come tax time, but they also diverge slightly in some important ways. For each type, we review the critical deadlines and contribution limits that you need to keep in mind.
One important, overarching note to keep in mind is the tax filing deadline for each year.
- For 2019 filing, the tax deadline has been extended to July 15, 2020.
- For 2020 filing, the tax deadline is April 15, 2021.
If haven’t finalized your 2019 contributions to this type of IRA, you’re not out of luck; the IRS allows Traditional IRA contributions for the prior year up to the filing deadline. For 2019 returns, that deadline has been extended to July 15, 2020. Through that date, you can still make tax-deferred contributions to these accounts that will be considered part of the 2019 tax year. You must be careful to clearly note if you want your contribution to count toward 2019 or 2020.
The contribution limit for Traditional IRAs for both the 2019 and 2020 tax years is $6,000.
If you are over the age of 50, you can contribute an additional $1,000 each filing year. So, if you haven’t used this catch-up contribution yet for 2019, you can still do so if you file by July 15.
If you haven’t even opened a Traditional IRA yet, you can still do so and contribute to it for the 2019 tax season as long as your IRA application is postmarked by midnight of the tax filing deadline.
The deadlines for Roth IRAs are the same as for Traditional IRAs. Contribution limits are identical as well, as long as your 2019 adjusted gross income was less than $122,000 as a single filer or $193,000 as a married joint-filer. The IRS has published further information on the AGI limits for Roth contributions.
Tax consequences, however, are much different for Roth IRAs. The way they work is almost the direct opposite of other types of retirement accounts. Roth contributions are taxed upfront, right when you make them, while Traditional IRA contributions are tax-deferred. As a result, distributions during retirement from a Roth IRA are tax-free.
This makes Roth IRAs ideal for a range of situations, including if you expect to be in a higher tax bracket when you start taking distributions than when you make your contributions.
While Traditional IRAs and Roth IRAs share a fair number of deadline similarities, SEP IRAs are where we start to run into some differences. These differences likely stem from how SEP IRAs are employer-sponsored and can be opened by business owners with at least one employee, as well as freelancers. Traditional IRAs and Roth IRAs, on the other hand, are opened by individuals (not employers), who are also the ones making contributions.
For contributions, the SEP IRA deadlines are the same as for Traditional and Roth IRAs: tax filing day for that filing year. But when establishing a new SEP IRA, that deadline depends on your employer’s tax filing date: it might be the standard tax filing date, or they may receive a filing extension—generally to October 15—which also applies to SEP contributions.
Contributions limits are also vastly different for SEP IRAs. The IRS allows SEP contributions of the lesser of either 25% of your compensation or $56,000 for 2019 ($57,000 for the 2020 filing year). Again, it is very important that you take careful note of which year you are contributing towards.
Like SEP IRAs, SIMPLE IRAs are employee-sponsored; individuals cannot go and sign up for one like they could a Traditional or Roth IRA. Employees can opt for salary reduction contributions, while employers have a couple of options for how they make their contributions.
For SIMPLE IRAs, both contribution and establishment deadlines have already passed for the 2019 filing year. For reference, contributions to SIMPLE IRAs can be made up until December 31 of that tax year. Furthermore, these accounts must be established by October 1 of that same tax year.
So, if you open a new SIMPLE IRA or if you want to contribute to one you already have, it would be for the 2020 tax year.
The contribution limit for SIMPLE IRAs is $13,500 for the 2020 tax year. They also allow an additional $3,000 in catch-up contributions if you are over 50 years of age.
Precious Metals Tax Considerations For 2020
In addition to the differences between each type of IRA, there are also some major differences between buying precious metals inside of an IRA as opposed to purchasing them outside of one.
Rules Around Buying and Holding Precious Metals in an IRA
There is a limited set of precious metals products that may be purchased within an IRA, and enjoy the tax benefits that this type of retirement account brings. Only certain types of bullion and semi-numismatic coins and rounds, as well as bullion bars, are IRA-eligible based on the IRS’ guidelines.
Additionally, the IRA custodian handling the paperwork for your transactions and the depository securely transporting and storing your precious metals both help maintain the tax benefits of your account. Because they do not enter your physical possession, the IRS allows qualified precious metals to be bought and sold within your IRA while enjoying the tax benefits—and subject to the rules of—that particular type of IRA.
Buying Precious Metals Within An IRA Offers Tax Benefits
The most obvious benefit is the tax-deferred status of IRA contributions—and Precious Metals IRAs are no different from conventional IRAs with this. In most cases, you contribute a portion of your annual compensation as cash into purchasing precious metals within an IRA just as you would any other retirement account. That contribution is tax-deferred (with the exception of a Roth IRA as outlined above).
While those contributions are made in cash, they are then used to buy physical metals. Therefore, your gold purchases are the same (in the eyes of the IRS) as contributing to a mutual fund inside of an IRA. There is no tax difference between a Precious Metals IRA and any other IRA.
Buying Precious Metals Outside An IRA Can Be Tax-Heavy
Now, taxes on precious metals held outside of an IRA—like buying physical gold or silver—are a completely different story. They are taxed as collectibles, which means that the IRS sees them as being the same type of thing as stamps, baseball cards, paintings, and similar items.
If you’ve held gold outside of an IRA for more than a year, any gains for the sale of that metal is taxed as a long-term capital gain. This isn’t the exact same as long-term capital gains in your brokerage account. Collectibles held for less than a year are taxed at the same rate as income taxes. Once they have been held for more than a year, collectibles are taxed as ordinary income but capped at 28%.
As the Journal of Accountancy notes, this tax rate is significantly higher than long-term capital gains taxes, which are generally 15%, although higher-income individuals incur higher tax rates capped at 20%.
Losses from the sale of precious metals outside of an IRA can be used to offset other capital gains on your taxes, although given the rally experienced in 2019, gains are more likely this tax season. For anyone reporting any losses on these metals, there is a limit of $3,000 of ordinary income after other capital gains that may be offset with these losses.
There is one other key tax consideration that differs between buying precious metals inside and out of an IRA. The collectibles’ capital gains tax rate (capped at 28%) only applies to those precious metals held outside of an IRA. Gold, silver, platinum, and palladium inside of an IRA are converted to cash upon withdrawal or for distributions, and are therefore taxed as ordinary income. Again, because Roth IRAs require taxes be paid upfront instead of deferring them, distributions from a Roth Precious Metals IRA are still not taxed at all.
Whether you are preparing to file your 2019 taxes or you are thinking ahead to your 2020 taxes, you have options when it comes to the type of Precious Metals IRA you choose. Given the types of IRAs available, you can leverage tax benefits alongside the advantages that diversification with gold, silver, platinum, and palladium can bring.