Should You Open a Gold IRA? Here’s What You Need To Know
A gold IRA is a type of retirement account that allows you to invest in precious metals. You should consider opening a gold IRA if you believe in gold as an investment and you want to benefit from the special tax advantages offered by this type of account. But before you do, you’ll want to make sure you fully understand both the benefits and the drawbacks of investing in a gold IRA.
Read: 3 Things You Must Do When Your Savings Reach $50,000
What Is a Gold IRA and How Does It Work?
A gold IRA functions in a similar manner as any traditional individual retirement account, except that it allows investment in select precious metals and it must be self-directed. The name “gold IRA” doesn’t mean that only gold is allowed in the account. Other precious metals, such as platinum and silver, may also be permitted, along with all of the investments that can go into a regular, traditional IRA.
What Types of Precious Metals Can You Put Into a Gold IRA?
Although a gold IRA allows investors to buy precious metals, there are specific limitations. For example, you can’t buy gold jewelry and put it into a gold IRA. Rather, any precious metals you buy in a gold IRA must meet the following specifications:
Gold must be 99.5% pure
Silver must be 99.9% pure
Platinum and palladium must be 99.95% pure
Essentially, this means that you can only buy raw bullion for your gold IRA, in the form of either bars or qualifying coins.
The IRS has additional requirements for precious metals placed into a gold IRA. Specifically, “collectibles” are not allowable in any type of IRA. This means you can’t put gold coins that have investment value — even those issued by the U.S. — into an IRA. However, you can put qualifying bullion coins in a gold IRA, such as Canadian Maple Leaf coins and American Eagle coins.
What Are the Advantages of a Gold IRA?
The main advantages of a gold IRA are similar to a traditional IRA, with one added feature — taxes. How are gold IRAs taxed? The money you contribute to a gold IRA may be tax-deductible, and it will grow tax-deferred until you withdraw it. However, a gold IRA also allows you the ability to invest in precious metals, something that is not allowable in traditional IRAs.
What Is the Downside of a Gold IRA?
The main disadvantage of a gold IRA is that it will cost you more in fees. How much it will cost to start a gold IRA can vary but you can expect to pay initial setup and annual fees set by your IRA. In addition, you’ll also have to pay a special custodian fee to handle your precious metals. As precious metals in an IRA must physically reside in an IRS-approved depository facility, you’ll also have to pay storage fees. All of these can add up to a significant amount.
You should also be aware that the spread on gold — the difference between what you have to pay when you buy gold vs. what you receive when you sell gold — can be much higher than with a more liquid investment like a stock.
What Are the Pros and Cons of Investing in Gold?
Gold is a real, tangible asset, and that is something that will always interest investors. Many investors buy gold when financial assets like stocks and bonds are falling in value. These investors would prefer to own a “real” asset rather than one that exists only on paper.
Gold and other precious metals are also fairly scarce and inherently beautiful, factors that give them long-term appeal. Gold has also been touted as a hedge against inflation, although the correlation between the two is not clear-cut.
On the downside, gold has a number of drawbacks. First, it’s not the most liquid investment available, meaning you may have to wait to sell your gold — at least, if you want to get it at a certain price. Stocks, on the other hand, generally trade thousands of shares every second, meaning it’s easy to get in and out of them rapidly. That can also make it hard to rebalance a portfolio with gold in it.
Gold also doesn’t pay any dividends, so the only profit you can potentially make is if you sell it at a higher price than you bought it. Gold also doesn’t have any earnings or revenues behind it to give it value. Its value is solely what people will pay for it based on macroeconomic factors and plain old supply and demand. While gold can rise dramatically in price, there’s no guarantee that it will have a profitable long-term future.
What Is the Best IRA for Gold?
There is no single best IRA for gold. First, you’ll have to find a company that offers self-directed IRAs that are allowed to invest in gold and other precious metals. Then, you’ll want to look for a company with the lowest fees possible while still providing a high level of customer support. You may also want to investigate where your gold investments will be physically held.
Good IRA custodians will offer to buy your gold from you at any time and will avoid the high-pressure sales tactics that tend to afflict the industry. For example, you’re likely best served avoiding the gold companies that advertise on late-night television. A good gold IRA custodian will service your needs, not try to coerce you into making trades, investing in products you don’t want or putting all of your money into precious metals.
The Bottom Line
So, are gold IRAs a good idea? Gold can be a good investment, and you can enjoy tax benefits by investing in it via a gold IRA. However, most professionals recommend that gold only occupy a small percentage of a diversified portfolio, typically something in the 5% to 10% range. As gold doesn’t pay dividends, can be illiquid and doesn’t have any financial earnings or revenue to help determine its fair value, it can be an investment that can go in and out of favor quickly.
This article originally appeared on GOBankingRates.com: Should You Open a Gold IRA? Here’s What You Need To Know
