Why should you consider investing in a gold individual retirement account (IRA)? You are diversifying your nest egg by allocating some of your retirement savings to gold. However, it’s important to determine whether including a gold IRA in your investment portfolio suits your specific circumstances.
While not all gold IRA accounts permit gold investments, this article aims to guide you in assessing whether your IRA allows the opportunity to cultivate a valuable retirement fund.
Things to Think about Before Starting a Gold IRA Account
Before you begin a gold IRA, it’s important to understand how these retirement accounts work and what they involve. Here are the basics:
Type of account
First, you must know what kind of account you want to open. A self-directed gold IRA can be either a traditional IRA or Roth IRA. The difference is how your money is taxed. With Roth IRAs, you pay taxes before you add money to your account. With traditional IRAs, you pay taxes when you withdraw the money later.
There is a limit to how much you can invest in gold in an IRA, and it depends on your age. If you’re under 50, you can contribute up to $6,000 per year to a self-directed IRA. Once you turn 50, the limit increases to $7,000.
Storing your physical gold
Physical gold and silver purchased through a precious metals IRA must be stored in an approved bank or depository. Be cautious of companies advertising “self-storage” IRAs, as this legality is uncertain. You could face penalties or fines from the IRS if you personally hold your gold purchases.
However, when you become eligible, you can choose to take your gold, silver, or other metal as a distribution. You can also take them earlier, but you will have to pay a 10% penalty.
Gold IRAs come with fees. These typically include a set-up fee, a storage fee, and often a management fee from the account custodian you select. The fees for the first year can range from $250 to $350, and after that, it’s usually $150 to $250 per year.
Fees for regular individual retirement accounts are usually much lower or sometimes nonexistent. Additionally, there are no storage fees for regular IRAs.
Steps to Start Investing in a Gold IRA
Step 1: Choose a gold IRA company to work with
The first thing you need to do is pick a company that specializes in gold IRAs. They will help you set up your account, transfer funds, buy gold and silver, and ensure your precious metals are stored safely in an approved facility.
Some companies can also act as the custodian of your account, taking care of paperwork and IRS compliance.
Many gold IRA companies are available, each with different fees, services, and customer support. Take your time to choose the right one that offers good service at a reasonable price. You’ll need to fill out paperwork and provide your driver’s license or ID and information about your existing retirement accounts if you plan to transfer money from them.
Step 2: Fund your account
After opening your account, you need to deposit money into it before you can start buying and investing in metals.
You have three options for funding your gold IRA:
- Cash contribution: You can use cash, checks, or wire transfers, just like a regular savings or investment account. Keep in mind that there may be a fee for wire transfers from your bank.
- Rollover: If you want to transfer money from your existing retirement account to your gold IRA, you can do a gold ira rollover. Contact your current account administrator for instructions, or choose to take a cash distribution and deposit it into your gold IRA within 60 days. Just be aware that if you’re under 59.5 years old, you may face a 10% penalty.
- Transfer: You can transfer funds directly from your retirement account to your gold IRA. You’ll need to fill out a form or let your gold IRA custodian contact your current account administrator on your behalf. This transfer is tax and penalty-free but may take up to five days.
Most people prefer direct transfers because they are less complicated and reduce the risk of penalties.
Step 3: Choose your metals
Once your funds are available in your account, you can purchase gold, silver, and other precious metals for your investments. Remember that the IRS has specific rules about the types and purity of metals allowed in self-directed IRAs, so be careful about what you buy.
The process for buying metals depends on the company you choose. Some gold IRA companies sell IRS-approved metals, allowing you to buy coins such as American Eagle Coins and Canadian Maple Leaf Coins, and gold bullion directly from them. Others require you to purchase from a separate precious metals dealer and then instruct your custodian to buy on your behalf using your IRA funds.
For example, Oxford Gold Group offers direct metal sales. Your assigned account director will assist you in purchasing physical gold. Once purchased, they are shipped securely to the Delaware Depository Service Company or Brink’s Global Services facility for storage.
Step 4: Monitor your metals’ performance
Your ability to track the performance of your gold IRA depends on the custodian you work with. Some companies provide online dashboards where you can monitor how your investments are doing, while others may not offer this service.
If staying updated on your IRA’s performance is important to you, make sure to ask about monitoring options when speaking to a representative. Your custodian should be able to provide access to such monitoring tools.
Pros and Cons of Gold IRAs
Investing in a gold IRA offers several advantages similar to investing in gold itself. Gold is commonly used as a protection against inflation, allowing investors to hedge against uncertainty in the broader market. Unlike specific stocks or bonds that can potentially become worthless, the price of gold can never fall to zero.
A gold IRA also provides similar tax benefits to a regular IRA, allowing interest to grow tax-free until the account owner retires. However, early distributions before reaching the age of 59½ can result in penalties.
Gold IRAs have higher maintenance fees compared to other types of IRAs due to the additional costs associated with investing in gold. In addition to brokerage and account setup fees, investors must pay for storage and insurance of the precious metal. There may also be markups on sales costs and additional fees for closing the account.
Gold is considered a highly illiquid asset, making it challenging to find buyers for large-scale sales without accepting lower prices. Furthermore, gold prices are relatively volatile, with rapid fluctuations in value. Since IRA owners are required to take distributions by age 73, they may be forced to sell gold at lower prices than desired.
Owning gold in a gold IRA entails specific expenses, including:
- Seller’s Fee (Markup): The price of gold can have markups depending on the type of gold being purchased, such as bullion, coins, or proofs. Each form of gold also has different selling requirements, affecting the price when an investor decides to sell.
- Retirement Account Setup: Establishing a new gold IRA account incurs a one-time fee, which may be higher than the typical setup fee, as not all financial institutions handle gold IRAs.
- Custodian Fees: Annual costs associated with maintaining the IRA, including asset or transaction fees, may be higher for gold IRAs, especially if a different financial institution holds the account than other accounts.
- Storage Fees: Storage fees are charged since the gold must be stored in a qualified facility.
- Cash-Out Costs: When closing a gold IRA and selling the gold to a third-party dealer, the dealer may offer a price lower than the market rate. Unless the price of gold has significantly increased since the purchase, the account owner may experience a loss of capital.
While some IRA companies may offer to buy back the gold at current wholesale rates, closing the account can still result in financial losses, which is not typically true with regular IRAs.
Frequently Asked Questions
Q: Should You Invest in a Gold IRA?
Many people choose to invest in gold to make their diversified retirement portfolio more diverse. They can do this by either investing in a gold IRA or buying gold directly. However, it’s important to consider the risks of buying gold compared to other assets.
When saving for retirement, choosing assets that will grow in value over time is important. Gold doesn’t pay dividends or yield to the owner, unlike stocks and bonds. The only way to make a profit with gold is if its price goes up. However, on average, the stock market tends to rise by about 7% each year, so it’s rare for a gold IRA to perform better than other retirement investments.
Q: How Can You Buy Gold in an IRA?
There are two ways to invest in gold through an IRA. One way is to set up a self-directed gold IRA, which allows you to use your retirement funds to buy physical gold and silver.
Another option is investing in mutual funds or gold ETFs, focusing on physical precious metals. However, this is different from owning physical gold bars or coins.
Q: What Kind of Gold Can You Use in a Gold IRA?
Only certain types of gold investments are allowed in a gold IRA. You can use bullion coins, but they must be legal tender and have a purity level of 99.5% or higher. Bullion bars and rounds are also allowed as long as they have a purity level greater than 99.9%.
Q: Who Holds My Gold in a Gold IRA?
If you have a gold IRA, the precious metal must be stored with a custodian approved by the IRS. You cannot personally possess the gold because that would be considered a distribution, and you would be taxed accordingly.
Gold IRAs are considered alternative investments that require specialized knowledge to assess their value. While gold can potentially provide high returns, it’s important not to be solely captivated by its allure. Gold prices can unexpectedly drop, and when gold is on the rise, you must carefully consider if you’re buying near the market peak.
If you’re thinking about a gold IRA, it’s advisable to consult a financial advisor who can help you determine how gold fits into your overall portfolio goals. It’s generally unwise to put all your investments into a single asset. If you believe gold is a good choice for you, experts suggest allocating no more than one-third of your retirement funds to a gold IRA. Additionally, they recommend keeping no more than 10% to 15% of your total portfolio invested in gold, whether in the form of paper investments (which are not allowed in a gold IRA) or physical holdings.