Pros and Cons of a Gold IRA
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Today's financial environment makes it easier than ever to save for retirement. Investors can choose from a variety of account types, including IRAs and 401(k)s. In fact, there's more than one type of IRA to consider for investment benefits.
The gold IRA is gaining traction when compared with traditional IRAs. Learn about the pros and cons of a gold IRA so that investors can make an educated decision on their next financial step.
Before we get started:
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Table Of Contents
Getting Familiar With a Gold IRA
Investors may be familiar with a traditional IRA or Individual Retirement Account. Individuals open an IRA at a bank, fund it with cash, and watch the nest egg grow.
A gold IRA operates in the same manner. However, the funding comes from precious metals in the form of coins or bars. Investors purchase gold, silver, platinum, or palladium metals. They're carefully stored at an IRS-approved facility. Investors can buy or sell these precious metals at any time.
Gold and associated metals have a history of retaining value. Because the investment is in precious metals and not the dollar bill, investors are relatively safe from value loss. For this and many other reasons, the gold IRA is becoming more mainstream by the day.
Setting Up and Funding a Gold IRA
Opening a gold IRA is similar to starting any standard bank account. Initially, research an institution that specializes in precious metals. They should have a solid reputation in the industry. Working with a bank that doesn't have a long history with precious metals may not be able to meet an investor's goals. Physically visiting the approved institution is usually required.
With the account open and ready for funds, consider how to purchase the precious metals. Many investors use a rollover from an existing account, such as another IRA or 401(k). Ideally, choose a direct rollover for the gold IRA.
Funds transfer directly between banking institutions, which keeps investors out of the withdrawal-deposit loop. Because the funds are never actually withdrawn, there are no tax implications for the investor. Rollovers keep the money protected by the federal government.
These gold IRA funds can then be invested in precious metals. The precious metals facility assists investors with purchases and timely storage. Investors are now proud owners of precious metal coins or bars.
Understanding Gold IRA Limitations
A gold IRA is unique, but it still has the same limitations as a traditional IRA. If investors want to withdraw funds before age 59-1/2, the amount will be taxed with an additional penalty. At the heart of this gold investment is its retirement power. It's designed to be used in retirement and not before.
In contrast to early withdrawal limitations, there are distribution rules. Once investors reach age 72, there must be regular withdrawals from the account. It cannot be held for beneficiaries or other purposes, for example.
There are also deposit limits based on the tax year. As of 2022, investors can deposit up to $6,000 in the account each year. This rule is only different for investors over 50 years of age. These investors can deposit up to $7,000 each year.
Keep in mind that tax laws can change from year to year. Be aware of the current tax year's laws to deposit just the right amount.
Looking at the Pros
Comparing the pros and cons of a potential investment is crucial to success. Investors must understand the benefits involved so that any hurdles beforehand are justified. The top five pros can be attractive to even the most conservative investor.
One of the main purposes of placing funds into an IRA or 401(k) is tax savings. Whether the funds come from before- or after-tax income, there are tax advantages to both types. A gold IRA also has tax incentives.
Contrary to popular thought, it's not necessary to withdraw and close other retirement accounts to open a gold IRA. This scenario leaves investors open to possible tax bills and considerable penalties.
Investors can use the 60-day rule of an indirect rollover, for example. Withdraw an amount from a traditional IRA or 401(k). Be sure to invest all these funds in the gold IRA before 60 days have elapsed. There are no tax implications within this period.
The quickest way to invest in a gold IRA is the direct-rollover method. Simply transfer funds from one retirement account to the gold IRA. It can be a partial amount too. There's no need to move all the funds to a gold IRA.
A rule of thumb used in any investment atmosphere is to always diversify. It's never a good idea to put every dollar into one stock, bond, or mutual fund, for example. A solid strategy involves buying several different types of investments, including precious metals.
There might be the argument of bonds are better than stocks in any market downturn, but that's not always the case. Bonds can lose significant value in delicate times. Precious metals rarely see any downturn.
Gold IRAs allow investors to buy many different metals along with other investments. A traditional IRA doesn't offer this level of diversification. If investors are truly looking to move their retirement forward, diversifying with precious metals is an intelligent way to go.
The stock market doesn't always produce the returns investors desire. Some decades have seen a nearly neutral amount of growth in the stock market, such as during the 1970s. Investors saving for retirement know that steady growth is always the goal.
Gold typically has a solid value and potential for growth. For example, the 1970s were famous for a 30-percent growth rate in gold over the entire decade. That type of return is nearly impossible with either stocks or bonds alone.
Investors can add precious metals to their overall portfolio, which provides a steady stream of growth until those distribution years. While stocks may gain or lose during that same time, precious metals are typically rocks against market volatility.
A gold IRA is also known as a self-directed account. Investors choose nearly every detail of the investment. Bank, custodian, depository, and even the type of precious metals are all decided on by the investor.
Investors make the decisions for buying and selling the metals whenever desired. The only limitations come from IRS rules when it comes to tax and penalty laws.
Investors are highly encouraged to seek out an advisor's assistance when it comes to dabbling in the precious metals market. These advisors work separately from the banking institution so that there's no bias. The advisor is there for the investor's financial success.
Because gold IRAs allow the investor to be as free as possible with their financial goals, this account type is incredibly attractive. They can buy or sell based on their research and instincts alone. Any advisor is simply there as a helpful resource.
The economy goes through ups and downs that involve either deflation or inflation. As a result, the dollar goes through a lot of valuation changes. Stocks, bonds, and other monetary investments reflect gains and losses because of the economy's health. Precious metals don't go through the same channels.
Metals are physical items stored away in a depository for investors. Their value remains steady during the worst economic times. They can even have growth during those periods too. They aren't tied to the stock market, which makes them desirable as alternative retirement resources.
Investors remain somewhat protected from inflation when it comes to precious metals. They'll have some income during retirement even if other investments lose a lot of value. Diversifying with metals, bonds, stocks, and other accounts is the best way to protect a household's future.
Exploring the Cons
Focusing on the advantages of a gold IRA can make investors lose sight of possible issues. Be aware of these top five cons to gold IRA investments. With these facts in mind, investors may not encounter any surprises along the way.
The distribution requirements on gold IRAs can be a sticking point with investors. They may not want to take required minimum distributions or RMDs at age 72. The minimum amount can vary based on tax laws, states, and other details. However, there is a loophole that might appease investors.
Rather than taking a distribution in the form of selling the precious metals at their current value, investors can take a distribution in the form of physical coins or bars. Investors who want to keep the gold for other purposes are certainly allowed to do so.
They might pass it down to their heirs at some point, for instance. Most people want to use precious metals' profits for income during retirement. It's often rare for investors to withdraw the actual metals. However, there is that option if desired.
Some investors may not realize that a gold IRA requires the storage of precious metals. They cannot opt to hold gold, silver, or other metals at home. The IRS mandates this rule so that the investments are valid and secure. Storing the metals at a depository is the only way to hold a valid gold IRA and reap the tax benefits from it.
Investors can choose their depository, however. The custodian plans out purchases and stores the coins or bars accordingly. The storage facility verifies all investments are approved metals too. Collectibles, such as gold jewelry, cannot be used in a gold IRA.
Because of these professionals' attention to detail, investors can rely on their precious metals to be safe and ready for sale whenever necessary. These facilities will incur a fee for their use, which needs to be taken into account when considering a gold IRA.
Investors should note that there are plenty of fees associated with gold IRAs. Unlike traditional IRAs, gold IRAs have a lot more details to their maintenance than just virtually transferring cash.
Gold IRAs have fees for setup, maintenance, purchases, transfers, shipping, and storage. Every institution will have a different fee structure. Although the number of fees may seem excessive, they're justified.
Custodians and depositories must process precious metal purchases, ship the items, and store them in their secure location. Before setting up a gold IRA, investors should compare their particular fees to potential gains.
The fees may put investors in the red temporarily, but they can ultimately create a huge gain in the future. Ideally, investing several thousand dollars in a gold IRA will offer the best return regardless of the fees involved.
Although investors can buy or sell at virtually any time, there are limitations to these funds being released. If an investor needs liquid cash right now, for instance, a gold IRA cannot provide that resource. It cannot act like an ATM.
An investor's custodian must buy and sell the precious metals because IRS rules dictate this regulation. The rules are simply there to protect the investment institution. If an investor directs the custodian to sell some precious metals right away, they might turn up as a loss.
The metals might have a slight downturn in value when they're needed the most.
Gold and associated metals are designed to be long-term investments. Years and even decades should go by before they're sold at a profit. Investors who may need extra cash put away should look for an alternative outlet instead of a gold IRA for these situations.
Investors should also note that gold IRAs don't create dividends like traditional IRAs. For example, a traditional IRA posts either a gain or loss every month or quarter. Any gain is often reinvested into the IRA's funds for even more growth.
In contrast, gold IRAs are investments in physical metals. They remain stored in a depository until they're sold. There isn't any way to create interest or dividends from them. Their value comes when they're sold for a profit later on.
As long as investors are aware of this fact, gold IRAs are satisfying investments. They're both similar and starkly different from a traditional IRA. A profitable sale is possible, which may produce more funds than dividends or interest anyway.
Open and fund a gold IRA with a small investment at first. Pay careful attention to how the investment improves or declines over time. Investors can add more funds to the account whenever desired.
Weighing the pros and cons of a gold IRA can make this investment even more lucrative with knowledge as a practical guide.
Remember to read our list of the Best Gold Investment Companies to work with, before investing your hard-earned savings!
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Hi, I'm Charles Turner, founder of Turner Investments. I created Turner Investments to provide education and guidance to individuals interested in personal finance.
My goal is to make Turner Investments a valuable resource for anyone looking to learn more about personal finance and make smarter investment decisions.