September 29, 2024

Gold IRA Pros and Cons

By Stella Magay
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Before you decide to invest in a Gold IRA, review its benefits and drawbacks to see if it's right for you.

Gold has historically been a good store of value. Many investors like to allocate a small portion of gold in their portfolio as a conservative strategy.

Luckily, you can now invest in this precious metal through a self-directed IRA to enjoy tax advantages.

However, it may not make sense for everyone. Let's take a closer look.

What Is a Gold IRA?

A Gold IRA is a type of retirement account that lets you invest in physical gold and other precious metals such as silver and palladium.

You might have already heard of IRAs for securities like stocks. However, a Gold IRA is a special self-directed IRA for precious metals, since you can't buy gold in the same account where you hold stocks.

Gold IRAs also must follow strict IRS rules. This includes how you can fund it, what kind of coins are allowed, and where they can be stored.

Not all types of gold are accepted in a Gold IRA. You can only invest in bullion gold with a fineness of 99.5%.[1] Collectible coins that derive their value from rarity aren't allowed in a Gold IRA.[2]

Just like any asset, the timing of your investment matters. If you invested while gold is at an all-time high, you may potentially experience losses if it retraces.

Gold reached an all-time high last September 2011 and it took almost 9 years before it returned to that level again. During those 9 years, the price of gold dropped as low as 45.5%.[3]

Gold IRA Pros

Here's why you might consider investing in a Gold IRA:

  • Store of value
    Gold has a positive real return rate in the long run. [4] This means that even with inflation, gold maintains its value well for a long period of time.

    Gold is also a tangible asset with intrinsic value. The supply of gold is finite, mining it is getting harder, and institutions and emerging markets are buying more gold for their reserves, which may contribute to its demand.

  • Provides diversification
    Financial institutions recommend gold as a way to diversify a traditional portfolio. Even central banks hold gold to diversify their reserves.

    This is because gold maintains its purchasing power well and typically has a low correlation to other assets.

  • Tax advantages
    Investing in a Gold IRA means you can enjoy all the tax benefits you get with regular IRAs.

    Your contributions to Traditional Gold IRAs are tax-deductible and your investments grow tax-deferred. With a Roth Gold IRA, your investments grow tax-free.

  • Secure storage
    Gold IRA providers store your gold in IRS-approved depositories such as Delaware Depository and Brink's.

    These depositories are fortified and highly secure. With state-of-the-art security systems and access-controlled facilities, you can be confident that your gold is guarded well.

    Some depositories also have insurance. For example, the Delaware Depository has $1 billion in all-risk insurance through London underwriters.

  • Easy rollover from your 401k
    Many people nearing retirement invest in a Gold IRA by rolling over funds from their 401k. This lets you convert part of your 401k to a Gold IRA without triggering a tax event.

    The Gold IRA company will help with the rollover paperwork to make it as hassle-free as possible.

What is your primary reason for rolling over your 401k into a gold IRA?

Gold IRA Cons

Now, here's why a Gold IRA might not be for you:

  • High fees
    Unlike regular IRAs, Gold IRAs charge more fees. Gold IRA providers charge you a one-time setup fee, an annual admin fee, and an annual storage fee. It can add up to $200 to $300 a year.

  • High minimum investment
    The minimum amount to invest in a Gold IRA can range from $10,000 to $50,000. This is very high compared to other gold vehicles like gold ETFs, where you can get started for as less than $100.[5]

  • You can't store it on your own
    Investing through a Gold IRA means that your assets must be held in an IRS-approved depository such as Brink's. If you store your IRA gold on your own, you may get penalized, like that couple from Rhode Island.[6]

  • Early withdrawal penalty
    IRAs are meant to be held for the long run. Therefore, the IRS has specific rules that discourage you from withdrawing early. Unless your withdrawal falls under the valid exceptions, there's a 10% penalty if you withdraw before age 59½.

  • Low liquidity
    Unlike stocks, you can't sell gold with a press of a button and get cash right away. So if you suddenly need to sell, you won't be able to liquidate super fast. Especially if you get your distribution as actual physical gold coins.

  • Limited types of gold allowed
    The IRS only accepts certain gold that meets purity standards and are minted by a national government. Basically, you can only buy gold with a fineness of 99.5%. Collectible gold coins are not allowed.

  • Not income generating
    Unlike stocks which can provide dividends, gold does not generate any income at all. Therefore, you only earn a profit if the spot price of gold appreciates over time.

  • Prone to scams
    Because of the complexity of the Gold IRA process, many who are unfamiliar with this product can get easily scammed through aggressive sales tactics.

Warren Buffett argues that gold is not a great asset as it does not produce any income over time. At the same time, financial writers such as Robert Kiyosaki always promote holding gold in terms of economic uncertainty.

Who Is a Gold IRA Best For?

A Gold IRA could be best for:

  • Physical gold investors who want tax advantages
  • Those near retirement looking to preserve wealth
  • Investors looking to diversify their portfolio with non-stock assets

How much money do you want to invest in gold for retirement?

On the other hand, gold does not generate income. So it's not ideal for those looking for cash yields or dividends in their investments.

Common Gold IRA Fees to Watch Out For

There are several fees commonly associated with a precious metals IRA. It's worth keeping in mind that Gold IRAs tend to have more fees than regular IRAs.

  • Account setup fee:
    This is a one-time fee charged by some gold IRA companies when you open your account. It typically ranges between $50 and $225.

  • Annual custodial/administrative fee:
    Charged by your IRA custodian for managing your account. This also typically ends up somewhere between $50 and $250 per year.

  • Storage fee:
    A fee charged to cover the cost of storing your precious metal coins in an IRS-approved depository. It's usually between $100 and $300 per year.

  • Gold markup or spread:
    The amount that the Gold IRA company charges on top of spot gold prices. You'll pay this spread for each transaction, whether you're buying or selling.

    Companies usually don't disclose their markup on their websites, so you'll have to call to find out.

Remember: Pay close attention to the spread or markup, as they may be your biggest expense. This fee typically fluctuates with the market and differs by company.

Excessive spreads are a common issue with Gold IRAs, and the CFTC says that some companies charge as much as 30% to over 300% in markups.[7]

How Gold IRA are Taxed

With Gold IRAs, the biggest benefit is the tax advantages. In a Traditional Gold IRA, your contributions are tax-deductible in the year they are made, but you will pay income taxes when you withdraw the funds.

In a Roth Gold IRA, your contributions are made with post-tax dollars, but all qualified distributions and earnings are tax-free.

Here are other rules you should know:

  • There is no maximum if you roll over funds from a 401k.
  • Additional contributions will need to follow the IRS annual limits of $7,000 per year (or $8,000 for 50 or older).[8]
  • Withdrawing early before age 59-1/2 has a 10% penalty.
  • You must start taking required minimum distributions (RMDs) at age 72 (73 if you reach age 72 after Dec. 31, 2022).[9]

Where to Invest in a Gold IRA

Ready to invest? Here are some reputable Gold IRA providers that can help you get started:

Alternatives to Gold IRA

Gold IRA may not fit your needs, but if you're still interested in investing in gold, here are the other ways you can invest.

Physical Gold

Technically, investing in a Gold IRA means buying physical gold too. However, you can also purchase gold outside an IRA.

Buying physical gold can be as easy as online shopping. Just pick what you want from dealers like JM Bullion and SD Bullion, and have it delivered to your address.

There's no minimum investment required. You just need to pay the retail price of the gold coin or bar you're buying. Some dealers even offer free shipping for orders exceeding $199.

Unlike a Gold IRA, investing in physical gold lets you store your gold wherever you want. This can allow for quicker liquidity.

Drawbacks: You won't have any tax advantages. You also have to securely store your gold as there is a higher risk of theft.

What factor is most important to you when choosing between a Gold IRA and physical gold?

Gold Exchange-Traded Funds (ETF)

Gold ETFs are funds that track the market price of gold. They're listed on the stock market, so you just need to buy shares through a stock trading app. This makes it easier for an investor to diversify their portfolio with gold.

Gold ETFs are also more transparent about pricing and fees. You can easily check the real-time spread on the chart. Many brokers even offer zero commission.

The main cost is the expense ratio of the fund. Still, this fee can be cheaper than Gold IRA fees.

To give you an idea, SPDR Gold MiniShares (GLDM) currently has an expense ratio of 0.10%. So a $100,000 investment means a $100 annual fee. This is much lower compared to Gold IRA annual fees, which can be $200 to $300.

You can also invest in a Gold ETF through your IRA and enjoy tax advantages.

Drawbacks: You don't own gold physically. You're also exposed to counterparty risk since you're buying from a third party.

Bottom Line

Just like any investment, gold has its upsides and downsides. The pros of a Gold IRA include protection against inflation, diversification, tax benefits, and secure storage.

On the other hand, the cons of a Gold IRA include high fees, low liquidity, no self-storage, early withdrawal penalties, and no income generation.

Whether it's right for you depends on your goals. If you're looking to preserve wealth and diversify your portfolio, a Gold IRA could be worth considering. Start with a free info kit to learn more about it with no obligation.

References

  1. ^ CME. What is the Precious Metals Delivery Process?, Retrieved 06/20/2024
  2. ^ IRS. Issue snapshot - investments in collectibles in individually-directed qualified plan accounts, Retrieved 06/20/2024
  3. ^ TradingView. Gold Spot, Retrieved 06/14/2024
  4. ^ National Bureau of Economic Research. Gold Returns, Retrieved 6/05/2024
  5. ^ Bloomberg. SPDR Gold Shares, Retrieved 06/14/2024
  6. ^ The Wall Street Journal. A Couple Stored IRA Gold at Home. They Owe the IRS More Than $300,000, Retrieved 06/14/2024
  7. ^ CFTC. Lies Versus Facts: The Truth Behind Gold and Silver IRA Scams, Retrieved 08/10/2024
  8. ^ IRS. Retirement topics - IRA contribution limits, Retrieved 8/24/2024
  9. ^ IRS. Retirement topics - Required Minimum Distributions (RMDs), Retrieved 09/06/2024

Write to Stella Magay at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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How much money do you want to invest in gold for retirement?
26% Less $10,000
48% $10,000 to $25,000
16% $25,000 to $50,000
10% Over $50,000
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