A Gold IRA is a type of individual retirement account that allows investors to hold physical gold or other precious metals, unlike standard IRAs.
To hold gold in an IRA, you need to create a self-directed account, administered by a specialist custodian who handles and stores the metal.
While convenient, keeping gold in an IRA carries high fees and doesn’t take full advantage of IRA tax benefits.
Ah, the glittering appeal of gold: a tangible, durable asset that traditionally keeps or increases its value during inflation, political upheavals, and cratering stock markets. Even if they don’t think such calamities are on the horizon, many investors who want to diversify their individual retirement accounts (IRAs) beyond the usual suspects — stocks, bonds, and mutual funds — might want a stake in the physical yellow stuff.
In fact, gold is one of the few commodities that the IRS allows IRAs to invest in. But before you go on a bullion buying spree, you should understand the ins and outs of a Gold IRA.
What is a Gold IRA?
If you want to hold physical gold in an IRA, it can’t be your regular account. It has to be a separate, special one, called a Gold IRA.
Also known as a precious metal IRA, a Gold IRA works pretty much like a standard individual retirement account: the same contribution limits and distribution rules. However, instead of holding paper assets like stocks and bonds, the Gold IRA is earmarked for holding physical bullion — that is, coins or bars of gold and other approved precious metals, including silver, platinum, and palladium.
Gold IRAs can also contain gold stocks (shares of gold mining/production companies), gold mutual funds that invest in bullion or stocks (or both), and gold ETFs that track gold indexes.
How to invest in a Gold IRA
If you want to hold physical gold in an IRA, the first step is to open a self-directed IRA (SDIRA) — one that you manage directly — with a custodian. The custodian is an IRS-approved financial institution (bank, trust company, brokerage), but many financial services and mutual fund companies who handle regular IRAs don’t do the self-directed version.
You also need to select a precious metals dealer that will make the actual gold purchases for your IRA (your custodian may be able to recommend one).
Keep in mind that not every self-directed IRA custodian offers the same investment choices, so make sure physical gold is one of their offerings before you open an account. You can set up the SDIRA as either a traditional IRA (tax-deductible contributions) or a Roth IRA (tax-free distributions).
The next step is to fund the account with a contribution (subject to contribution limits, of course), a transfer, or a rollover from a qualified plan, such as 401(k), 403(b), or 457 plan.
After that, you can select investments for the account, and your custodian and metals dealer will complete the transactions on your behalf.
You can’t just buy any bar or ingot, either. Physical metals must meet IRS “fineness” standards as their purity and weight, and be stored in an insured IRS-approved depository. When it comes to coins, you are limited to bullion coins issued by certain government mints.
The benefits of Gold IRAs
As with any investments, there are pros and cons to Gold IRAs. Some of the advantages include:
Tax benefits. Gold IRAs offer some of the same special tax treatment as standard IRAs: Contributions made to traditional self-directed IRAs are tax-deductible. And qualified withdrawals from Roth accounts are tax-free.
Long-term hold. Physical gold isn’t very liquid, but then neither are IRA holdings. Given that it’s a long-term, buy-and-hold sort of investment, gold is well-suited to an IRA, whose assets you often don’t touch for decades – usually until you retire.
Greater control. Gold IRAs are always self-directed, which means you directly manage your holdings and make all the investment decisions.
The risks of Gold IRAs
If you’re interested in a gold IRA, be sure to consider these drawbacks.
No tax-advantaged income. Gold bullion doesn’t pay interest, dividends, or other returns. So it doesn’t really take advantage of the tax-free growth aspect of IRA investing. You’d only get a break on any capital gain resulting from selling your gold at a profit.
Higher fees. You can’t keep your gold at home or in a bank’s safe deposit box. Instead, you must pay a custodian to store and insure, as well as buy, ship, and transport, the precious metals you hold in the IRA. Gold IRA custodial fees tend to be higher than regular IRA management fees, too.
Funding restrictions. You’re not allowed to move any precious metals you already own into your Gold IRA. Nor are you personally allowed to buy precious metals and send them to your IRA. A custodian must take care of all the transactions on your behalf.
Alternatives to investing in a Gold IRA
If you want to invest in gold — but not via a Gold IRA — other options exist. The main ones consider include:
Investing in gold stocks or funds, which can be held in a regular IRA or brokerage account
Trading gold options in the commodities market (again, through a broker or trading platform)
Just buying bullion or coins and storing them on your own (though you should pay to insure them)
The financial takeaway
Investing in gold has risks that you should consider before making any decisions. Still, a Gold IRA can be a good option for investors who want to diversify their retirement accounts, and also take advantage of the hedging benefits that the yellow metal offers against other financial assets, like paper currency and stocks.
Many financial experts recommend keeping 5% to 10% of a portfolio in gold.
“It’s simply advantageous to weigh and think about acquiring gold — and silver and other precious metals — to serve one well within a diversified, well-rounded investment portfolio,” says Collin Plume, president and CEO of Noble Gold Investments, a precious metals dealer and depository. “The operative word being diversified.”
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