What is a Gold IRA and How Does it Work?
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By Tim Schmidt Sr.
Accredited Investor and Gold IRA Specialist
Since the dawn of civilization, gold has been used as an investment, a currency, and a valuable commodity. These days, it’s no different. Investors turn to gold during times of high inflation, market volatility, and when they want to protect their wealth. If you are looking to invest in gold and other physical precious metals, one of the best ways to do it is with a gold IRA.
A gold IRA is a type of self-directed retirement account that allows investors to put their money into alternative investments like gold, silver, platinum, and palladium.
Gold IRAs are often seen as an option for retirement accounts, but they also can come with high fees and might not grow your wealth in the same way as traditional and Roth IRAs, which hold stocks and bonds.
Are you thinking about a precious metals IRA? Before you, you should understand what they are and how they work.
What is a Gold IRA Account?
A gold IRA is a special time type of individual retirement account, or IRA, that allows an investor to hold physical gold and other IRS approved precious metals. Typically, gold and other metals aren’t allowed in a traditional IRA because they are considered to be collectables. A self-directed IRS is seen differently, however, and as long as they are funded with IRS-approved precious metals, they can serve as a legitimate retirement account.
Why Invest in and Open a Gold IRA?
Gold IRAs offer a number of potential benefits to investors, including diversification and tax benefits. Here are some others:
Alternative Investments
As an alternative investment, gold can act as a hedge against inflation and economic volatility.
IRS Approve Metals are Good for Diversification
The price of physical gold is not dependent on the stock market. In fact, it often acts in the opposite way — when the stock market falls, the value of gold, rises.
Keep More of Your Money
When you hold gold bullion and other types of precious metals, there are no capital gains taxes on profits.
Tax-Advantaged Accounts
Gold IRAs are also tax-advantaged. Withdrawals may be tax-deferred, or in the case of a gold Roth IRA, tax-free.
Solid History of Wins
Gold spot prices have outperformed the S&P 500 and Dow Jones Industrial Average for decades at a time.
Liquidity
Gold and other metals can be quickly converted into cash when necessary.
How Gold IRAs Work
Gold IRAs work in a similar way to traditional IRAs. However, there is a big difference. With a gold IRA, the investor gets to choose which types of IRS approved gold and other approved precious metals are put into the account.
You can fill it with gold coins and bars, you can mix different metals, or you can add specific coins like American Gold Eagles or other assets, as long as they are approved for a gold IRA. In addition to that, you can choose from traditional IRAs, gold Roth IRAs, or even gold SEP IRAs.
Gold IRAs also let you purchase and store physical gold and other precious metals, which means you need to have an IRS-approved depository. This doesn’t happen with a traditional IRA, but since the IRS requires extremely secure storage, you don’t have a choice. You cannot store metals in an IRA at home. This adds storage costs to the mix, which is something to keep in mind as you are considering a gold IRA.
Types of Gold IRAs
There are three main types of gold IRAs:
Traditional Gold IRAs
A traditional IRA is one that is funded with pre-tax dollars. The money can grow tax deferred until you start to make withdrawals at retirement. Then, the money is taxed like income.
Roth Gold IRAs
Another option is a Roth gold IRA. In this case, the account is funded with after-tax dollars, so there isn’t a tax benefit at that point. However, when you retire, you take the money tax-free since you already used after-tax funds.
SEP Gold IRAs
A SEP gold IRA is also possible. Traditional SEP IRAs are often used by small business owners or self-employed people since they don’t have an employer retirement account.
Contributions to a traditional gold IRA may be tax-deductible, while contributions to a Roth gold IRA are made with after-tax dollars, allowing for tax-free withdrawals in retirement. The contribution limits for a gold IRA are the same as those for traditional and Roth IRAs, which are $6,500 for 2023 and $7,000 for 2024, with an additional $1,000 allowed for individuals aged 50 and older.
The Pros and Cons of a Gold IRA – Top Reasons to Consider Investing in Physical Gold and IRS-Approved Precious Metals
Here are some of the pros and cons to further help in understanding gold IRAs:
Pros
- Great tax advantages – Gold IRAs come with great tax advantages, just like traditional IRAs do. Your money will grow tax deferred until you retire. Roth IRA withdrawals are tax-free, but they are funded with after-tax dollars.
- Diversification benefits – Gold IRAs typically don’t have a lot in common with other types of retirement savings accounts, so it helps to diversify your retirement portfolio. Gold has historically maintained purchasing power and is viewed as a ‘flight-to-safety’ asset during economic turmoil.
- Inflation hedge – Your existing retirement account is probably filled with stock and bonds, which are affected by inflation. With a gold IRA, you hold precious metals in the account, which are typically not affected by inflation.
Cons
- Fees – Fees are one of the biggest cons of a gold IRA. Though you might not owe taxes like you would when doing other investments, you will have fees to pay including storage fees, account administration fees, and custodian fees.
- Gold does’t have cash flow – Another con is that gold doesn’t produce a cash flow for its owners like a stock might. If you buy 10 ounces of gold today, you will still have 10 ounces in the future, unless you buy more. The value of that 10 ounces, however, will change. However, historically, gold has underperformed compared to the stock market over long periods, particularly from 1980 to 2006.
- Can only hold IRS-approved metals – Gold IRAs require that you only hold specific types of metals. Adding physical gold that is not approved by the IRS goes against tax rules, and you could pay heavy fees and taxes if you try. An IRS-approved custodian can ensure you are always choosing the right metals.
Getting Started with a Gold IRA
One thin that you really need to keep in mind about a gold IRA is that you can’t just set it up with any bank. Instead, you need to work with a Gold IRA company, a custodian, and a storage partner. Here’s the basic way you get started:
Choose Your Gold IRA Company
The first step is to choose your gold IRA company. This is the company that you will buy your metals from, which will fund your self-directed IRA. Some of the most highly regarded include:
Typically, these companies work with custodians and storage companies, but you can also usually choose your own.
Open and Fund Your Gold IRA Account
You will need to choose a custodian next, as they are the ones who will facilitate your rollover or transfer into the new IRA account. Some highly-trusted custodians are Equity Trust and STRATA Trust Company.
Buy Your Investments
The next step is to purchase your metals. Typically, the custodian and the gold IRA company will help you with this based on your investment goals.
Store Your Metals
Before you can start saving for retirement, the final step is to choose a storage facility. These are called depositories, and they hold physical gold, silver, platinum, and palladium that are held in IRAs. Some of the most well-respected include Brink’s, Delaware Depository, and Texas Bullion Depository.
FAQs
What is the Downside of a Gold IRA?
There are many positives of having a gold IRA, but there are also some downsides. For instance, gold IRAs often have higher fees, and they don’t generate income like dividends. They are also less liquid and gold prices can be volatile if not looking for a long-term investment.
In addition, unlike traditional assets, there are very strict IRS rules in place for gold IRAs that make them less flexible that other investments.
What is the average return on a gold IRA?
The average return on a gold IRA depends on the price performance of gold over time. Historically, gold has returned around 6% to 8% annually over the long term, though this can vary significantly based on market conditions.
Unlike stocks, gold does not produce income, so returns rely entirely on price appreciation. Gold often performs well during periods of inflation or economic uncertainty but may lag behind equities during strong market growth. Because of this, gold IRAs are typically used as a diversification tool rather than a primary growth investment within a retirement portfolio.
Is it better to buy physical gold or a gold IRA?
Whether it is better to buy physical gold or a gold IRA depends on your goals. Physical gold offers direct ownership and immediate access, but it requires secure storage and may lack tax advantages.
A gold IRA, on the other hand, allows you to hold gold within a tax-advantaged retirement account, which can help with long-term planning. However, it comes with fees and stricter regulations. Investors seeking diversification and retirement benefits may prefer a gold IRA, while those wanting direct control and liquidity may choose physical gold.
Each option serves a different purpose in a balanced investment strategy.
Can you withdraw from a gold IRA?
Yes, you can withdraw from a gold IRA, but the process follows standard IRA rules. Withdrawals can begin penalty-free at age 59½. If you take money out earlier, you may face taxes and a 10% early withdrawal penalty. When withdrawing, you can either liquidate the gold for cash or take a physical distribution of the metals.
Required minimum distributions (RMDs) also apply starting at age 73. It is important to plan withdrawals carefully, as taxes will depend on whether the account is a traditional or Roth gold IRA and your overall financial situation.
Hold Physical Gold with a Gold IRA
A gold IRA allows investors to hold gold and other precious metals in a self-directed gold IRA that has the same tax advantages and a conventional IRA.
Some things to consider with this safe haven asset is that there are fees that you will have to pay, and they are higher fees than those that come with other IRAs.
Gold can be a great way to diversify, and it can be a hedge against inflation, but it also has not been as high performing as many people have thought it could be.
Though many investors have great success with gold IRAs, and they do come recommended, it’s very important that you understand them before you begin the investment process.