Investing is an inherently risky practice, considering the wide array of financial standings and how easily they can change. However, that doesn’t mean that risk isn’t worth it, especially considering the benefits on the table. One such benefit is that you can ensure that you are set up to comfortably retire through creating a great investment portfolio. An important tool in investing for retirement is the individual retirement account, or an IRA. If you’re looking to expand your retirement portfolio specifically, your IRA is a great place to start, but what kind of IRA should you have?

The recent rise in popularity of gold IRAs has coincided with increasing economic uncertainty as investors and retirees look to diversify their holdings and ensure a more stable future, and here you’ll learn what you need to know to determine if this move is for you.

Understanding Why Gold

Gold and precious metals are your classic alternative investment. Investors typically add these to their portfolio to broaden their holding structure and mitigate against the risk involved with more classic equities if the market as a whole was to drop. See, when the market as a whole drops or experiences some economic turmoil, anything involving the currency behind it, say USD, generally goes south with it.

This means that not only does the value of the dollar decrease relative to its purchasing power, but the assets being bought with it on the market will see a decline as well. All the exchange-traded funds (ETFs), options contracts, bond interests, mutual funds, classic stock shares, and other basket assets available for public trading usually experience a drop in value.

Gold is the opposite of this, generally being perceived to have an inverse relationship with the underlying currency that purchases it, because gold itself was a currency and used to back the US dollar before the world came off the gold standard. Because of this, when the dollar declines in value, gold is expected to rise. Investors see gold as a way to hedge against the potential pitfalls of inflation when this happens, and add it to their portfolio to mitigate risk. This is where gold derives its value.

Things To Know About A Gold IRA

First and foremost, yes, gold IRAs can be both Roth and traditional in terms of their taxation format. A Roth IRA is a version of the IRA that deducts taxes upon the time of investing as opposed to time of withdrawal, thus saving the investor tax dollars if they rise in income bracket by the time they begin withdrawals. This is appealing to both large and small-scale investors, with preference for either type sometimes depending on the initial principle invested.
Also important to note is the fact that you’ll need to find both a broker and a custodian for the account. You’ll have to establish a “self-directed IRA,” which is a different version of the IRA investment account that allows investors to add alternative assets to the account which are generally prohibited by a typical IRA. It must be administered by a custodian, but is truly controlled by the asset owner, hence the name self-directed. Once done through the firm of your choice, a broker will purchase the gold on your behalf and pass it on to the custodial account managers.
It’s also important to be aware of the excess costs associated with a gold IRA account. Not all financial institutions or investment firms offer this form of account, and finding one may not be as convenient as just going to your local brokerage. Because of it’s a specialty service, there will be extra fees tacked on. These may include a storage fee, because the gold must be held by a qualified facility, the seller’s fee based upon which form of gold bullion you’re buying, inflated service fees by the institution, and the potential loss you may take upon selling prematurely.
If you wish to liquidate your assets, the buyer will likely be a third-party type dealer who purchases your holdings, and they will not be paying fair market value for your gold. You could potentially lose a relatively large amount on the investment, depending on the statistics. This pitfall, accompanied with higher brokerage and custodial fees raise the annual and lifetime expenses of this particular investment, but they of course don’t make it a bad investment.

Apply This Knowledge

The individual investor will need to take and apply this information to their unique situation and portfolio analysis. Someone with a relatively large nest egg may not care at all about the expenses and risk of loss, as they perhaps have no plans at all to sell anytime in the near future. Smaller retirement accounts on the other hand may be more concerned, and this option may not be for them. Ultimately, it depends on all the factors unique to you.

 


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