Gold IRA vs. Physical Gold | Which Is the Better Option for 2023

Before you can safely choose between buying gold bars and investing in a traditional gold IRA, there are a few important considerations you need to make.

One thing that has to be clear from the onset is that both these options are valid investment opportunities that will benefit your retirement accounts in many ways.

All that is left to do is look closely at the various features of each investment option to decide which one is better suited to your current needs as an investor.

To do this, you need an in-depth understanding of how each type of investment works, the pros and cons of gold IRAs and buying physical gold, as well as how IRS requirements come into play.

We will start by looking at gold IRAs and the six important factors you need to know about this kind of self-directed IRA.

Gold IRAs

A gold IRA is a retirement portfolio whose value is linked to that of the gold, silver, and other precious metals held in its safety deposit box.

It is one of the easiest and most direct ways in which any investor with some retirement funds can invest in precious metals. It is a fairly simple (read how to buy gold for IRA here) concept to understand as long as you have a firm grasp of the following key aspects:

Contribution limits

If you have ever come across the limitations imposed by the IRS on various types of self-directed IRAs, such as a Roth IRA or traditional IRA, you already have an idea of what we mean by contribution limits.

Since the money being used to fund your gold IRA is coming from another retirement account, you cannot just take as much as you want and use it to buy gold.

Doing this would be considered a distribution and would incur a heavy penalty. The only way is to take only as much as the IRS will allow you over a 12-month limit. You cannot at any point exceed these contributions.

The contribution limits for investors opening a gold IRA in 2022 were $6,000 per year and $7,000 for those older than 50 years.

Fees

One of the major considerations you have to make when opening a gold IRA is the fees that are associated with the opening and managing of the account.

If you are not careful, these fees have the potential to take a huge portion of the gains you are supposed to make from your gold IRAs.

The fees you are expected to pay may include, start-up fees, custodial fees, annual and miscellaneous fees, and brokerage fees. The only way to avoid making losses through high fees is by looking carefully at the custodian or trustee you choose to work with, asking about their specific rules and fee structure, and watching out for hidden costs.

IRS-approved custodian or trustee

Even though the money in your retirement account is technically yours, the URS still retains a certain amount of control over it, such as making sure that you use a custodian that they have approved.

The job of the custodian is very important because they will take charge of the account, the gold or silver coins within, and manage the storage arrangements.

You can use any approved custodian you want but in most cases, gold IRAs are managed by banks, credit unions, brokerage firms, and other large financial institutions. You cannot keep your gold or leave it in the hands of private gold dealers.

Tax benefits

The most important reason why an investor would choose to open a gold IRA despite all the IRS rules and regulations is so that they can enjoy the tax benefits that come with the account.

Gold IRAs allow you to take certain tax deductions on your investments, just as you would do with a traditional or Roth individual retirement account.

There are two ways of doing this depending on whether you have a Traditional gold IRA or a Roth gold IRA. With a traditional gold IRA, your contributions will be tax-deferred, meaning you will only pay taxes when you make withdrawals.

In a Roth gold IRA, investors will have to pay taxes upfront, meaning your deductions and tax benefits will be applied when you fund the account. Both options have their advantages and your choice will depend on your circumstances

Alternative investments

Besides gold, which is the most common type of investment, a gold IRA can hold other precious metals, such as silver, platinum, and palladium.

The complexities involved in owning such a diversified portfolio mean that not all gold IRA companies can offer this kind of service.

However, it is not wise to focus on gold investments alone because you will be placing a lot of risk on one asset class. You should look for a reputable dealer or custodian that offers a wide range of precious metals for your gold IRA.

Self-directed IRA

When we say the account is self-directed, we mean you have a higher degree of control over it compared to, say, a 401(k) account.

While there are obvious advantages to self-directed gold IRAs, it also places a lot of responsibility on your shoulders. You will be responsible for choosing the custodian, arranging and paying for storage, and, at times, even transporting your precious metals.

Your chosen custodians are usually not allowed to give you financial advice as this would be deemed as self-serving on their part. This means you will also have to look elsewhere for a suitable financial advisor.

Physical Gold

If you choose to invest in physical gold rather than open a gold IRA, you will be faced with many options from the moment you go out and try to buy gold.

The first thing you will notice is that physical gold comes in many forms, such as gold bullion, coins, nuggets, jewelry, and even gold leaf.

Choosing any type of physical gold is a worthy investment. However, some options, such as jewelry, do come with added value that stems from their design and functionality. This would mean a gold necklace could hold more value than a gold nugget even if both contain the same amount of gold.

You are also allowed to hold and keep your physical gold, which is something gold IRA investors cannot do. That means if you wish, you can purchase gold and silver simply to keep it or wear it, without worrying about breaching IRS rules.

When buying gold purely for investment purposes, though, gold bullion is certainly the best option. It is by far the easiest form of gold to grade, quantify, and sell because its value is simply based on the amount of gold it contains.

A few important things

Keep the following facts in mind when it comes to buying physical gold:

• Research how and where to buy and sell gold safely and legally

• Only work with a reputable dealer, like Goldco.

• Be prepared to pay for shipping and handling costs out of your pocket

• Keep up to date with the spot market price of gold so that you may know the best times to buy and sell

• You are allowed to hold your physical gold, therefore the storage is also up to you

Besides these facts, you must educate yourself on taxes and IRS reporting as follows:

IRS reporting requirements

Whenever you sell or buy gold coins or bars, you need to report to the IRS or risk serious consequences.

This is because, unlike paper assets, such as mutual funds, which are easy to trace, the origins of gold bars and bullion coins are not always so clear. A close eye is always kept on gold trades for this reason.

Depending on the type of gold you have purchased, and the nature of the transaction, you are required to either report it immediately to the IRS or the next time you pay your taxes.

If any tax liabilities arise from purchasing gold, you will have to settle these along with your regular taxes.

Taxes

Purchasing gold and other precious metals will incur some taxes from the IRS, which considers these assets as collectibles, which means capital gains tax will be applicable.

Typical income rates are applied to short-term gains (gold purchased and sold within a year), and capital gains tax equal to an investor’s marginal tax rate will be applied to long-term gains (gold kept for more than a year)