The idea behind retirement accounts is usually to minimize risk as much as possible and have some kind of sturdy financial base well into the retirement years. These accounts will typically be backed by investments in areas such as stocks and bonds, alongside mutual funds.
In the past, many people have seen where their individual retirement account works out as expected while others have had a way less successful time. One of the challenges is that many people don’t realize that standard self-directed IRA options such as a traditional IRA or a Roth IRA are not the only ones out there.
As is the case with investments that are independent of your retirement funds, it’s never a bad strategy to diversify your holdings as much as possible to maximize the chances of a favorable outcome.
Can you ever guarantee that things will work out? No. However, minimizing the risk of outright failure is never a bad idea.
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Instead of going the traditional route, you can instead establish a self-directed IRA that is backed by physical gold or other precious metals. Other than the provisions that need to be made for this to work behind the scenes and the assets, you’ll find that these types of IRAs bear quite a few similarities to their standard counterparts.
What Are Gold IRAs?
A gold IRA allows you to set up a retirement account that is tethered to an investment in physical gold. Depending on which of the gold IRA companies you decide to work with, you’ll often find that they deal in other physical precious metals in some cases too.
These will tend to include gold, silver, platinum, and palladium. The IRS has a set of approved precious metals that can be used to fund a gold IRA account, and these regulations will need to be followed aptly.
However, gold IRA companies will often sell other precious metals than those approved, or at least, variations that may not be allowed for an individual retirement account. So, if you want to buy gold bullion apart from your investment, you’re allowed to.
This all works out because of the self-directed nature of gold IRAs. It means that alternative assets are all fair game, so long as the compliance element is met.
Pros and Cons of Precious Metals IRAs
If you’re considering a gold IRA, like any investment decision, you should always analyze to see how it can benefit you and what the downsides look like. As great as a precious metals IRA can be, it may not be for everyone, so completing the required research and at least understanding what you’re signing up for is a good idea.
Pros
If you research what the history of the price of physical gold has looked like, you’ll find it to be quite interesting. While you will see some movements, you’ll notice that if you had gold bars decades ago, you would notice that they didn’t just lose all their value over time.
Compare that to the dollar and note the difference. What you’ll also find is that even in times when Fiat currencies would be on the decline, physical gold didn’t go down the same path. A big part of this is the fact that gold cannot just be created at will. Gold holds its value pretty well, which makes it a pretty solid asset to opt for.
As mentioned before, a gold IRA is a chance to diversify your portfolio. By no means are you being told to upend your entire investment strategy and have your pool consist exclusively of gold coins tied up in a precious metals IRA.
However, having a traditional or Roth IRA backed by something that isn’t influenced by so many different external factors isn’t a bad plan at all.
You may have gathered this by now but the principles of a traditional gold IRA and a Roth gold IRA exist and they are quite similar to their standard retirement account counterparts.
This means you pay taxes for a gold IRA in the same way you would for one of these retirement accounts. Some people will use a traditional IRA because the lack of upfront taxation appeals to their strategy or predictions, while others go the Roth IRA route because upfront taxation works better for them.
The final benefit of precious metals is their being a hedge against inflation. There’s no lack of certainty that inflation will consistently be a problem. Your traditional IRA, for example, may suffer because of the value of the cash depreciating by the time you’re ready to use it.
Since a gold IRA is backed by gold, which has a high resistance to inflation, it makes for a great option to retain the value of your investment.
Cons
Whether you go with a traditional gold IRA or a Roth gold ira, you’re going to need to work with a company that specializes in this area. Standard institutions don’t carry precious metals IRAs, which means you don’t have much of a choice.
The problem this can create is the fees associated with your investment. There can be setup fees, annual fees, depository fees, insurance fees, and more! Sometimes even when the account itself doesn’t have exuberant fees, you’ll still find yourself paying quite a bit to cover everything.
Some people who consider a gold IRA immediately think about what they’ll do if it doesn’t work out as intended. This is a good thing to think about since you do want to game plan if things don’t work out your way. One of the common thoughts is selling the precious metals that back gold IRAs.
There’s nothing wrong with this except for the fact that selling a precious metal is not the easiest thing in the world. Sometimes, even the gold IRA firms themselves will not buy gold, silver, platinum, and palladium. In a lot of cases, you find that people have to sell for well below the real value of the precious metals.
Setting Up Your Gold IRA
Now that you know a little more about tax benefits, value, and what a gold IRA is overall, you may be interested in setting one up for yourself, which leaves you to wonder how exactly you’re meant to achieve such a feat.
This is the section that will cover that. Note, however, that companies that deal in gold IRAs tend to be very client-friendly, which means that they will spend the time to ensure that you ensure the parameters of a precious metals IRA, especially if you choose one of the reputable names out there.
Choosing Your Custodian
Though a gold IRA bears so many similarities to its self-directed standard IRA counterparts, it’s also quite different in a lot of respects. This is the basis of standard financial institutions that deal in regular IRAs not doing the precious metals variations. The requirements can be quite intense.
With all that said, your first course of action will be actually finding one of the companies that deals in gold IRAs. Goldco is one of the big names that come up here, as does Orion Metal Exchange. In fact, Goldco has a buyback guarantee for physical gold and even goes as far as to say that it has the best buyback rates in the industry.
Don’t just choose a gold IRA firm because of the big name though. Ensure that you take the time to do a little investigation to ensure that you are fully comfortable before you continue. For example, you may want to call the company and see how they treat you even before you’re a customer, and then decide how comfortable you feel.
Funding
No one has to tell you that gold IRAs need to be funded. You do need to buy the gold or other approved precious metals after all. There are a couple of ways to go about this.
There is the contribution method, but it requires that you be cognisant of the contribution limits annually. People 50 years old and over have a $7,000 limit while younger folks have a $6,000 limit.
What a lot of people do, though, is leverage funds from their existing IRA accounts. Whenever the discovery of gold IRAs is made, there’s usually a willingness to move at least some of the funds to the precious metals IRA.
The process can be a bit daunting, but you can get a lot of assistance from the gold IRA firm. In fact, you will often be able to choose an option where everything is handled behind the scenes on your behalf, which makes it pretty easy.
Gold Coins and Other Precious Metals
You’ll notice when talking about a gold IRA and what is being bought, the word “approved” will tend to be used, and this isn’t just a throwaway word. As indicated before, the IRS has established rules that dictate exactly which coins, like the American Buffalo Coin, for example, can be used for your Roth or traditional gold IRAs.
Thankfully, your gold IRA firm of choice is acutely aware of these regulations and will ensure that you do not fall into the trap of purchasing gold, silver, platinum, and palladium that does not meet the requirements.
The purity of the precious metals will usually have a lot to do with it. Just in case you aren’t sure what that means, purity refers to the extent to which the actual metal makes up the coin, bar, or whatever other physical piece is being referenced.
In many cases, the gold you see is not 100% pure. There will be other metals such as nickel, copper, etc in your gold coins and jewelry. This may be to change the appearance, but it may also be to make it easier to work with and form.
In gold’s case, the IRA requires that it has a purity of no less than 99.5%. You can always ask your service provider for a run-through of the approved list of coins.
Storage
Another rule that the IRS has is that you can’t keep your gold yourself even as the holder of the self-directed IRA it backs. If you try to, it will be counted as a withdrawal, and taxation, as well as any other penalties, will apply.
Therefore, there will be a depository that is a part of the equation. As you probably guessed, you can’t just use any depository you want to and go about your business. There are approved depositories such as the Delaware Depository Service Company that you must use.
Gold IRA companies will typically have a set of depositories that they work with, so it will usually come down to your choosing which of them you feel most comfortable with.
Of course, there will be a charge for the storage, so you’ll want to have that in the back of your mind.
Different Types of Gold IRAs to Bear in Mind
The final area to cover is the gold IRA types out there. Not everyone will have the same investment strategy after all, so it stands to reason that there will be variations that will cater to different needs.
First, you have the standard gold IRA. As you’d expect, it works a lot like a traditional IRA in that you can deduct contribution amounts from income at taxation time.
The Roth gold IRA is next, and it sees you paying your taxes at the time you contribute. While some people may not be a fan of this, it does mean that your funds will be able to grow tax-free.
You also have what is known as a SEP gold IRA. This one is designed to fit self-employed persons and small businesses and it provides owners with the option of contributing for them and their staff members.
Also, be sure to check out my gold IRA vs. physical gold article.
Conclusion
You started with the question “what is a gold IRA,” and that should now have been sufficiently answered. Apart from knowing all about how it works, you even got some insight into how you would set one up if so desired. Just remember not to have a portfolio that consists entirely of a gold IRA.
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started this website to share his expertise in using his Self-Directed IRA. Most recently he's been advising individuals to diversify into precious metals ahead of a certain recession. He invested with Goldco.