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Gold and other precious metals comprise an alternative asset class that is widely considered to be a “safe haven” during recessions, as well as a hedge against inflation. But how should you actually invest in gold, if you choose to do so?
There are several options, including via a gold individual retirement account (IRA). Gold IRAs have some distinct advantages as well as drawbacks, so you need to make sure they will fit your personal financial situation.
This guide will help you determine if you should get a gold IRA and give you the tools to find the best gold IRA for you.
What is a gold IRA?
A gold IRA is technically a self-directed IRA, which is a type of IRA that lets you hold nontraditional retirement assets — like precious metals or real estate or cryptocurrency — in compliance with IRS regulations.
How a gold IRA works
For investors who want to take advantage of the tax-preferred status of an individual retirement account while investing in gold, a gold IRA may be a good option.
A gold IRA lets you hold physical precious metals while receiving the same tax benefits as traditional IRA investments in paper assets such as stocks, bonds and mutual funds. It has the same contribution limits and rules around required minimum distributions (RMDs) as ordinary IRAs.
Types of precious metals that can be held in a gold IRA
You can hold other precious metals such as silver, platinum and palladium in your gold IRA. For this reason, you might sometimes see the terms “silver IRA” or “precious metals IRA” used. The latter is technically the most accurate description, but “gold IRA” is the term most commonly used to describe this type of investment vehicle.
IRA-approved precious metals must meet minimum requirements for metal fineness or purity. Gold must be 99.5% pure. Silver must be 99.9% pure, and platinum and palladium must each be 99.95% pure. The IRS also sets regulations around the size, type and weight of precious metals you can put in an IRA. Common examples include American Eagle proof coins and bullion, and Canadian Maple Leaf coins.
Advantages of a gold IRA
If you want to own gold for its investment potential, you might benefit by having your precious metals held inside of an IRA. Gold IRAs are a niche investment product best suited to sophisticated investors who are already familiar with buying and selling physical precious metals. Their benefits include:
As previously mentioned, a gold IRA gives you the same tax benefits as a regular IRA, with pre-tax contributions that can lower your taxable income, and no taxes due until you take withdrawals.
Precious metals investments, including those in gold IRAs, are often used to provide diversification in a portfolio. Keep in mind, however, that many financial advisors recommend having just a small percentage of your nest egg invested in precious metals, like 5-10%.
Protection against inflation and U.S. dollar weakening
Gold can play a valuable role in a portfolio by acting as a store of value, meaning that it will retain its value over time. Since it often moves inversely to the stock market, gold can mitigate losses during recessions and provide peace of mind during periods of market volatility. It’s important to note, though, that gold prices can and do go down, so it’s best not to invest for the short term.
Potential for long-term growth in your retirement savings
Precious metals are sought after because they have intrinsic value — although their prices can fluctuate, especially in the near term. If you plan to open a gold IRA, make sure your time horizon is sufficient to ride out these fluctuations.
Disadvantages of a gold IRA
While holding physical gold in your retirement account might sound appealing, gold IRAs aren’t a good choice for every investor. There are some particular drawbacks that come with this type of account, and not being knowledgeable about these important details could result in making a potentially costly mistake with your nest egg. The disadvantages include:
Gold IRAs have considerably higher expenses than conventional 401(k)s or IRAs. The greater management required typically means you have to pay an account custodian to administer and oversee your gold IRA. Since IRA gold must, by law, be held in an IRS-approved depository facility, you also will incur storage fees to house and insure your precious metals.
In addition, gold IRA companies make their money by charging what is called a “spread” — essentially, a two-tiered pricing structure that means the gold IRA company sells you gold at a higher price than it will pay you when you sell that gold.
Not the same long-term growth potential as assets like stocks
Although gold has intrinsic value, there’s no guarantee that the price of gold will rise between when you buy it and when you need to sell it. If you’re depending on your IRA for retirement income, as most people who open gold IRAs are, you could be forced to sell at a loss.
Likewise, when you reach the age where you need to take RMDs, you’ll need to either liquidate your gold or pay to have it shipped to you, after which you’ll need a secure place to store it.
Gold doesn’t pay dividends
Although gold is considered an inflation hedge, the counterpoint is that it doesn’t earn income, unlike dividend-paying stocks or bonds that will earn a yield to maturity. The income generated by conventional investments is an important factor in growing wealth over the long term via compounding.
Rebalancing your portfolio — the process of buying and selling assets to ensure you maintain a breakdown that aligns with your goals, timeline and risk tolerance — is something financial advisors say you should do regularly, especially as you draw closer to retirement. But it can be more of a hassle and can cost more if you’re trading precious metals as opposed to stocks or exchange-traded funds (ETFs), which can often be traded on online brokerage platforms commission-free.
What to consider before investing in a gold IRA
Like most major financial choices, opening a gold IRA isn’t a decision you should make lightly, or before educating yourself thoroughly. Make sure to do this via unbiased, third-party sources (not gold IRA companies, which have a financial interest in selling you a gold IRA). There are a number of considerations to take into account before investing some of your nest egg in gold.
If you're trying to decide whether a gold IRA is a good fit for your retirement saving needs, consult with a financial advisor who is a fiduciary, which means they have a legal obligation to look out for your best financial interest. Despite what some of their sales and marketing literature might imply, you should not rely on gold IRA companies for investment advice.
Custodian and dealer selection
Most gold IRA companies let you choose your account custodian — the trust company that handles the administration of your IRA — and depository institution, although some require you to use ones with which they have a relationship.
Take care when choosing where to open your account. The best gold IRA companies offer transparent and competitive pricing on purchases and offer to buy back your precious metals if need be. They also don't charge ancillary fees and do offer unbiased customer education. A reputation for good customer service is also a plus. It's smart to avoid companies that use high-pressure sales tactics or try to convince you that mainstream financial institutions are unsafe.
While you could theoretically roll over the entire balance of your existing retirement account into a gold IRA, doing so would be extremely risky. A conventional retirement account holding stocks and bonds gives you the opportunity to be exposed to a variety of assets, which provides you with diversification, income-earning potential and liquidity (important for performing portfolio reallocations).
Amount you will invest
You can fund a precious metals IRA by rolling over money held in a 401(k), 403(b), 457, pension or Thrift Savings Plan account. If performed correctly, this transfer won't trigger any tax liabilities or penalties. Consider your retirement income needs, time horizon and risk tolerance to determine how much to invest in a gold IRA.
Like other types of tax-advantaged retirement accounts, gold IRAs have specific tax implications. Calculating your anticipated income in retirement will help you figure out what kind of account — traditional IRA versus Roth IRA — will perform better in terms of reducing your overall tax burden.
Traditional IRA tax implications
Gold IRAs are like traditional IRAs in their tax treatment: You fund a gold IRA with pre-tax dollars — generally by rolling over funds from a 401(k) or similar account — and that money remains tax-deferred until you begin to take withdrawals in retirement.
Roth IRA tax implications
A Roth IRA, on the other hand, is funded with after-tax dollars. Those investments grow tax-free, and the withdrawals you take in retirement are not taxed.
How to open a gold IRA
If you’ve conducted your due diligence and decided that a precious metals IRA will be a good fit for your retirement plan, then you just need to choose your provider, your funding source and your gold bars, coins or ingots.
Find a gold IRA company
Setting up a gold IRA starts with selecting a gold IRA company — essentially, a metals dealer that sells you gold or other precious metals. That company helps you open and fund your account, and connects you with an IRA custodian and a depository institution, both of which have to be IRS-approved. Money has a list of the best gold IRA companies.
Open the gold IRA account
The gold IRA company also will guide you through the process of establishing the account. Your best bet will be to have them initiate an institution-to-institution transfer of the money you plan to use to buy your gold and silver. If you conduct the rollover yourself, the IRS has very strict rules that can trigger significant penalties if you run afoul of them, even inadvertently.
Choose which precious metals to invest in
The gold IRA company will help you select what kinds of approved precious metals you can put in your account: IRA-eligible gold and silver are most common. Since one of the key features of a gold IRA is owning physical precious metals, you can choose gold bullion in the form of gold bars or rounds, as well as many varieties of gold coins and silver coins. Some gold IRA companies also offer IRA-approved platinum and palladium.
Gold IRA FAQ
Is gold a good investment?
What is IRA gold?
What are other ways to own gold?
A self-directed gold IRA can give you peace of mind if you want to hold physical assets, but if you want the diversification of precious metals without the hassle and expense of a gold IRA, you can also invest in gold ETFs, gold mutual funds and stocks of gold-mining companies. Learn everything you need to know about the different ways to own gold in this guide.
Many of these investments can be easily bought with an ordinary brokerage account, and — depending on your retirement plan administrator — might even be available within a regular 401(k) or similar type of account.