Gold IRAs are a specific type of self-directed IRA that allows you to invest in physical gold and other precious metals like silver, platinum and palladium. Investing in a gold IRA requires the service of a custodian, a broker for purchasing gold and an approved depository for storing gold. Like other self-directed IRAs, gold IRAs can be traditional or Roth.
- Written By Marguerita M. Cheng, CFP®, CRPC®, RICP®
Marguerita M. Cheng, CFP®, CRPC®, RICP®
Marguerita M. Cheng, CFP®, CRPC®, RICP®, is the chief executive officer at Blue Ocean Global Wealth. As a Certified Financial Planner Board of Standards Ambassador, Marguerita educates the public, policymakers and media about the benefits of competent and ethical financial planning. She is a past spokesperson for the AARP Financial Freedom campaign.Read More
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Senior Financial Editor
Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.Read More
- Financially Reviewed ByThomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
- Updated: December 5, 2022
- 8 min read time
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The goal of every investor, including those with retirement accounts, is to maximize returns and minimize risk. To achieve this two-fold goal, many retirement account holders are seeking to invest in alternative assets — assets outside of stocks, bonds, mutual funds, ETFs and CDs — that are the traditional investments allowed in retirement accounts.
These investors have been able to invest in these alternative assets through self-directed IRAs (SDIRAs). The alternative assets supported by these SDIRAS include real estate, cryptocurrency and physical assets like gold, silver, platinum and palladium. Self-directed IRAs can be traditional IRA (traditional SDIRA) or Roth IRA (Roth SDIRA) and the same rules regarding contributions, income limits, and distributions apply to them as apply to mainstream IRAs.
Gold has become popular because of its ability to provide portfolio diversification and serve as a hedge against inflation. As the US hits a new 40-year inflation high, hedging against inflation has become even more important and we can expect greater popularity of gold IRAs in the future.
What Is a Gold IRA and How Does It Work?
A gold IRA is a type of SDIRA that allows retirement investors to invest in physical gold.
It bears emphasizing that a gold IRA only becomes necessary when an investor wants to invest in physical gold — bars, coins and bullions.
Those who would prefer investing in the stocks of gold companies (like Barrick Gold), in mutual funds of such companies (like Fidelity Select Gold Portfolio) or in ETFs that track the performance of a gold index (like SPDR Gold Shares), can do so with a mainstream IRA.
Furthermore, a gold IRA can contain other precious metals, including silver, platinum and palladium. Like gold, these precious metals must also be physical.
According to IRS rules, “Your IRA can invest in one, one-half, one-quarter or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium and platinum bullion.”
How Does a Gold IRA Work?
Let’s consider how a gold IRA works by highlighting the key steps involved in starting one:
1. Find a Custodian
Many of the custodians and brokers that open mainstream IRAs that invest in traditional assets don’t have the capacity to open and operate a SDIRA, including a gold IRA.
Therefore, the first step towards operating a gold IRA is to look for a custodian or trustee that provides gold IRAs.
While these custodians and trustees are not as plentiful as those for mainstream IRAs, there are still many of them. Some of the popular gold IRA companies include Orion Metal Exchange, Birch Gold Group, Red Rock Secured, Gold Alliance, Oxford Gold Group and Goldco, among others.
With any of these companies, you can open a gold IRA account. However, there are certain factors investors must consider before deciding on gold IRA companies: fees, track record, customer support, transparency and accountability, among others.
2. Fund the Gold IRA
Investors can fund their gold IRAs by contributing to it within the annual contribution limits: $6,000 for those younger than 50 and $7,000 for those 50 or older.
Investors can also roll their 401(k) or traditional IRA over into a gold IRA. Any gold IRA rollovers will follow the same rules that apply for rolling over into a traditional IRA or a Roth IRA. For example, pre-tax funds that are rolled into a Roth IRA are taxed before they are converted into a Roth IRA while after tax funds are not taxed. On the other hand, pre-tax funds rolled into a traditional IRA are not taxed until they are withdrawn.
3. Buy Approved Gold
The IRS has strict rules regarding physical gold and other precious metals. For example, to be IRS-eligible, gold bars must have a 99.5% purity, silver 99.9% purity and platinum and palladium 99.95% purity.
- The producer must be a manufacturer, refiner, or assayer certified by NYMEX, COMEX, NYSE/Liffe, LME, LBMA, LPPM, TOCOM, ISO 9000 or national government mint.
- Proof coins must be in excellent condition. They must also include a certificate of authenticity and be in complete and original mint packaging.
- Small bullion bars (other than 100-ounce and 400-ounce gold, 1000-ounce silver, 50-ounce platinum and 100-ounce palladium bars) must be produced to exact weight specifications.
- Bullion coins must be free from any damages and be in brilliant uncirculated condition.
Furthermore, while the IRS permits gold coins like the American Gold Eagle, American Buffalo, Canadian Maple Leaf and Australian Gold Nugget, it does not allow investment in South African Krugerrand or British Sovereign gold coins. Similarly, the IRS does not permit investment in gold collectibles.
Once an investor has seen an approved gold for purchase, they can complete the transaction through a broker.
While the custodian or trustee oversees the accounting, the SEC dictates that they are not responsible for the gold seller or broker that the investor uses. Though they can make recommendations, they are not ultimately held accountable for the investor’s choice.
4. Use an Approved Depository
Gold, silver, platinum and palladium cannot be stored just anywhere. The IRS must approve the depository for that explicit purpose. More importantly, the investor cannot take the gold home. The IRS considers storing gold at home a withdrawal and will subject the investor to taxes (if it’s a traditional gold IRA) and/or penalties (if the withdrawal takes place before age 591/2).
Examples of IRS-approved depositories include Delaware Depository Service Company, HSBC, JPMorgan Chase and CNT Depository, among others.
5. Make Withdrawals
The rules guiding withdrawals (selling off the gold for cash) depend on whether the gold IRA is traditional or Roth
- Required minimum distributions (RMDs) set in at age 72
- Every withdrawal, required or voluntary, is taxed
- Withdrawals before age 591/2 attract a 10% penalty
- No RMDs
- No taxation on withdrawals
- Withdrawals before age 591/2 and before the Roth IRA is five years old attract a 10% penalty
6. Keep Accounts
The custodian or trustee keeps accounts of new purchases and withdrawals.
Pros and Cons of Gold IRAs
Why do some investors find gold to be a great alternative investment for their retirement planning? There are many benefits of doing so.
- Hedge Against Inflation
- As inflation continued to rock the global economy, Reuters once again emphasized the usefulness of gold as a hedge against inflation: “Our analysis shows gold can be a valuable component of an inflation-hedging basket.”
Though the debate about gold’s performance in inflationary periods remains, investors have continued to use it as an inflation-hedge and that is not stopping soon.
- Store of Value
- While 2008 showed that a company can so fail that its stock price goes to zero, the price of gold can never be zero. Also, while the central bank can unilaterally increase the supply of currencies to reduce their value, creating new gold (increasing its supply) is more difficult: mining new gold is harder than printing some pieces of paper.
For these reasons, gold can be a better store of value than currencies and stocks.
- Gold has near-zero correlation with stocks and bonds. For example, between 2012 and 2020, there was a 0.02 and 0.28 correlation between gold and stocks and bonds, respectively. Therefore, when added to stocks and bonds, it can reduce the risk of the overall portfolio.
Nevertheless, gold IRAs also have their disadvantages.
- High Fees
- The fees of opening and operating SDIRAs are high when compared to mainstream IRAs. But gold is even more expensive compared to cryptocurrency or real estate SDIRAs.
The fees involved includes one-time account setup fee (paid to the custodian), yearly account maintenance fees, seller’s fee (the markup on the spot market price of gold that an investor in an IRA pays), brokerage fees, storage fees (paid to the approved depository), insurance fees (insuring against the loss of the gold at the depository), cash-out costs (a fee for closing the account when you decide to do so). When these are added together, they can become significant.
- For traditional gold IRAs, RMDs set in at age 72. However, selling off physical gold or silver or platinum or palladium can be very difficult.
The process of looking for buyers can be tedious and when in haste, investors may be forced to sell for a price lesser than the market price. And failure to make RMDs will be penalized.
- Stocks can also be as volatile as stocks and currencies. Due to this high volatility, there can be significant losses during certain periods.
- Risk of Loss
- There is always a possibility that a physical asset can be stolen or lost to some unforeseen circumstances. Insuring against such losses is an extra cost to the investor.
Ensure you speak with your financial advisor before deciding if investing in gold is appropriate for you based on your unique personal and financial circumstances.
Frequently Asked Questions About Gold IRAs
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9 Cited Research Articles
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- CNBC. (2021, June 8). Gold as an inflation hedge? History suggests otherwise. Retrieved from https://www.cnbc.com/2021/06/08/gold-as-an-inflation-hedge-history-suggests-otherwise.html
- ETF Trends. (2021, February 13). Bitcoin’s Correlation to Markets Hits a Record in 2020. Retrieved from https://www.etftrends.com/tactical-allocation-channel/bitcoins-correlation-to-markets-hits-a-record-in-2020/
- The Guardian. (2022, June 10). US inflation hits 40-year high of 8.6% as food, gas and shelter costs rise. Retrieved from https://www.theguardian.com/business/2022/jun/10/us-inflation-rate-may-2022-four-decade-high
- Money Control. (2022, March 23). Why investors use gold as shield against inflation. Retrieved from https://www.moneycontrol.com/news/trends/features/why-investors-use-gold-as-shield-against-inflation-8262631.html
- Reuters. (2022, February 2). Beyond CPI: Gold as a strategic inflation hedge. Retrieved from https://www.reuters.com/article/sponsored/beyond-cpi-gold-as-a-strategic-inflation-hedge
- Strata Trust. (n.d). IRA ALLOWABLE PRECIOUS METALS. Retrieved from https://www.stratatrust.com/self-directed-iras/investment-options/gold-precious-metals/ira-allowable-precious-metals/
- U.S. Internal Revenue Service. (2022, February 22). Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/publications/p590a
- U.S. Internal Revenue Service. (2021, November 21). Retirement Topics - IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
- U.S. Securities and Exchange Commission. (2018, August 8). Investor Alert: Self-Directed IRAs and the Risk of Fraud. Retrieved from https://www.sec.gov/investor/alerts/sdira.html