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Investing

What Is a Gold IRA?

As an investor, what’s your goal? Likely it’s to minimize risk as much as possible while aiming for the greatest potential returns. Sometimes, the strategy follows the plan well, and in other cases, not so much.

Retirement accounts are often a part of the strategy, but what many people may not know is that traditional IRA options are not the only ones out there.

You’d be surprised to know the extent to which you can diversify your holdings with physical gold and other precious metals in the mix.

This is the base idea that fuels an individual retirement account rooted in gold bullion, silver, platinum, and palladium.

In any case, there’s no need to jump the gun. Why are you here today and what can you hope to learn?

Well, you can expect to discover all the essential nuances of a gold IRA account. Of course, there’s way too much information to cover every little thing here, but by the time you’re done, you’ll have all the fundamentals in check including how it works, its types, as well as the ups and downs you want to bear in mind.

What Is a Gold IRA?

What Is a Gold IRA?

Put simply, a gold IRA provides a way for investors to have holdings rooted in physical gold. Typically, this kind of self-directed IRA account is used when people want to diversify their savings. Additionally, precious metals such as physical gold are a great way to provide a hedge against inflation.

Look no further than the history of gold. Regardless of the era, the price fluctuations have been way less unfavorable than some of the other investment vehicles available.

Now you may be wondering how these IRAs work with physical precious metals and if the IRS has anything to say about it. You may have noticed the use of the verbiage “self directed IRA” earlier. That’s really where the secret lies.

Thanks to that attribute, alternative assets are allowed so long as any rules that the IRS establishes are followed.

Types of Gold IRAs

While many people may opt for a traditional gold IRA, it’s certainly not the only option available. In fact, investment advisors would tell you that your best bet is to weigh your options and choose the most appropriate one based on the benefits it will yield.

With that said, what are the different gold IRA types to bear in mind?

The first is the traditional gold IRA. As you can imagine, this is the most common type among them. In a traditional IRA, you can deduct contribution amounts from your income when the time comes to file taxes, which translates to a reduction in the applicable tax year. Bear in mind though that withdrawals will be incurred on the full amount for withdrawals.

Next, there is the Roth gold IRA. If you know how a traditional IRA works then you know that a Roth IRA is essentially the reverse. Here, you’ll be paying taxes at contribution time, which means that the money grows tax-free. Therefore, when withdrawal time comes around, there’s no need to be concerned with the amount of taxes you will need to pay.

This is also a good time to mention that unlike, the other gold IRA options, a Roth IRA doesn’t impose restrictions on contribution withdrawals.

Finally, there is the SEP gold IRA. Small businesses and the self-employed are who this type is for. Functionally, it’s not very different from traditional gold IRAs. However, business owners get the ability to optionally contribute to themselves and their employees.

Choosing to go the self-directed IRA route will require some careful consideration. For example, take traditional and Roth gold IRA options. It becomes a balancing act that considers where the impact of taxation will be greater. Surely, if it is that taxation metrics are more costly in the future, then the Roth IRA would be a better pick since taxes are paid upfront.

How a Gold IRA Works

How Gold IRA Works

How does a gold IRA work? Reputable gold IRA companies will usually walk you through the proceedings, but this overview of the steps in a logical manner will also be very helpful to help you understand how it all comes together.

Finding a Custodian

Gold IRAs have different requirements than many of their alternatives meaning that standard custodians that may deal in mutual funds, stocks, and other assets won’t be able to help you.

With that in mind, the first step to take is to find a custodian who deals in gold IRAs. Admittedly, they are few and far between when compared to their more mainstream counterparts, but you can still find a good variety.

Our top pick, Goldco, along with other companies like Birch Gold Group, among others, are some of the big names that someone opening a gold IRA account may want to consider.

In choosing from the pool of gold IRA companies, think about customer support, transparency, fee structures, and other elements that may be essential.

Funding the IRA

Before you can begin to buy your gold coins or other precious metals, it’s time to fund the account. This can be done via contribution, but must be done within the established annual contribution limits. Those younger than 50 years old have a limit of $6,000, while everyone else has a limit of $7,000.

Alternatively, you can fund your gold IRA account via a rollover from an existing traditional IRA, Roth IRA, or 401(k). The rules for rollover to a precious metals IRA are not much different from those that would govern a rollover into a standard IRA.

For example, imagine that you wanted to roll over to a Roth IRA. Your pre-tax funds would be taxed before conversion. This would apply for rollover to Roth gold IRAs too.

Buy Precious Metals Approved by the IRS

With the funding part out of the way, now it’s time to buy your gold coins or other precious metals. Note, however, that the use of the word “approved” is no mistake. The IRS has established a pool of strict rules that you must abide by in these kinds of purchasing scenarios.

Take the following precious metals regulations, for example:

  • Platinum and palladium must have a purity of 99.95%

  • Silver must have a purity of 99.9%

  • Gold must have a purity of 99.5%

Note that purity here refers to the composition of the precious metals. Gold, silver, platinum, and palladium coins and bars may be infused with other compounds such as copper, nickel, etc., for different reasons. The purity metric indicates how much of the base precious metals are present.

Other regulations exist that your selected gold IRA company will walk you through. One of the more nuanced examples is the fact that the producer of the precious metals must be a refiner, assayer, or manufacturer certified by the national government mint, ISO 9000, TOCOM, NYMEX, LME, or other approved certification bodies.

The Depository

The precious metals that form a part of these self-directed gold IRAs cannot be stored anywhere you wish. Just as the IRA approves gold bars and coins, for example, it has an approval standard for depositories, and more specifically, those that will be used for precious metals storage.

You cannot legally take the gold home, so this is mandatory. Should you decide to do so, it will be considered a withdrawal, and any applicable rules will follow. For example, a traditional gold IRA will require you to pay taxes.

Penalties may also be applicable for retirement accounts that may have restrictions preventing withdrawals before a certain age.

The Delaware Depository Service Company, JPMorgan Chase, and HSBC are all examples of depositories that the IRS allows to store gold and other approved precious metals.

Pros of Gold IRAs

So, by now, you have a working idea of how this kind of self-directed individual retirement account works, its use of gold bars, silver coins, and other precious metals, as well as a couple of the stranger, but still important details.

Now it’s time to look at a few of the top reasons why you would want a gold IRA.

Physical Gold as a Hedge Against Inflation

This was briefly mentioned before, and as far as security goes, this is one of the biggest reasons for the confidence in gold IRA accounts.

Inflation is a certainty, and depending on the timeline you look at, it has often rocked the economy to its core. Without any action on your part, it can make a huge difference in the amount of retirement savings you have available.

Considering that the value of gold doesn’t have a synonymous relationship to that of a FIAT currency, a precious metals IRA could theoretically see the value of your retirement portfolio increase as monetary values decrease.

Store of Value

History will tell you that a company’s stock prices can fall as low as zero if it manages to fail to that extent. However, gold’s value will never experience such a downward trajectory. Bear in mind that this is only reinforced by the fact that gold can’t just be created as standard currencies can.

This is another reason to go the route of gold IRAs since it makes them an excellent store of value in your retirement account.

Diversification

This upside of a gold IRA speaks for itself. There is almost no correlation between stocks or bonds and gold. This makes a precious metals IRA a great addition to your portfolio since you always want the performance of the different assets to be independent.

Remember that investments always come with a risk, and you need to give yourself as much insurance as possible. Having a gold IRA can be one element of the said insurance if other assets tethered to company performance, monetary value, etc., begin to go downhill.

Tax Benefits

You pay taxes with gold IRAs the same way you pay taxes on their corresponding standard counterparts. This means you can select a traditional or Roth gold IRA account for the tax benefits that come with upfront payment if it is most appealing to you.

Cons of Gold IRAs

Even if your retirement account is backed by gold or silver coins, it doesn’t mean that you have nothing to worry about. If that were the case, then your gold IRA could be your whole portfolio, which would be a very ill-advised move.

With that said, here are a couple of the negative implications to consider if you choose to make a gold IRA a part of your retirement savings plan.

Illiquidity of Gold and Other Precious Metal Options

Selling physical gold, silver, platinum, and palladium is not necessarily the easiest task in the world. Looking for buyers is a task and a half, and a lack of impatience or an inability to find a fair trade may lead to holders of a gold IRA selling the underlying precious metal for way less than a fair value.

Note, however, that there may be a saving grace in very specific cases. For example, Goldco offers its account holders a buyback system for gold. The company claims to have the best buyback rates on the market.

Assuming that the purchase value is fair, then this may be a good option for those who have a gold IRA to consider.

Fee Levels

Your traditional or Roth IRA will come with certain fees as is the case with a self-directed gold IRA. However, the latter’s fees tend to be on the much higher side of the spectrum.

It’s often the case that these fees aren’t necessary for the account itself, but instead for the moving pieces that are synonymous with having it. For example, there may be a setup fee (one time), account maintenance fees, depository storage fees, brokerage fees, insurance fees, etc.

Wrapping Up

Deciding how to handle retirement funds can be quite a task with the different investment and saving options available. Going the route of gold IRAs is an option that investors may opt for, especially when they are looking to protect themselves against inflation while having an asset that isn’t as susceptible to market moves as alternatives.

Even so, gold IRAs are not risk-proof, as indicated above, and there are several moving parts to consider. Use the information above to help you decide if it’s the right move for you!