Imagine turning your retirement nest egg to gold. By adding a gold IRA to their investment portfolio, that’s what many people are doing, literally. The rise of gold past $1,300 per ounce on May 2, 2016, the highest since January 2015, had many people taking a new look at the metal. But is this the right move for you?
A gold IRA is a type of IRA that allows the investor to own physical gold, silver, platinum and palladium instead of paper-based assets such as cash, stocks and bonds. It was created by Congress in 1997, says Edmund C. Moy, chief strategist for Fortress Gold and former United States Mint director, who oversaw the largest production of gold and silver coins in the world.
To qualify as gold that can be held in an IRA, certain criteria are required. “The precious metal coins or bars must meet IRS fineness standards and must be held by the IRA trustee instead of the IRA owner. The gold must be stored in an IRS-approved depository,” says Moy. Investors don’t actually stash gold bars or bullion in their home safes or closets.
“All other rules about IRA contributions, disbursements and taxes apply,” Moy adds.
Gold IRAs appeal to investors who want a diversified retirement portfolio.
Traditional and Roth IRAs invested in stocks or mutual funds are vulnerable to inflation. “Because gold prices generally move in the opposite direction of paper assets, adding a gold IRA to a retirement portfolio provides an insurance policy against inflation,” says Moy. "This balanced approach smooths out risk, especially over the long term, which makes it a smart choice for retirement investments like IRAs.”
A Growing Trend
During his tenure as director of the Mint, Moy says there was little demand for gold IRAs because they involve a very complicated transaction that only the most persistent investor was willing to pursue. “You must find a trustee or custodian for the IRA along with an approved depository. Then, you need to buy the approved gold or other precious metal and have it transferred to the depository in a way the custodian can account for it,” he explains.
Since the financial crisis of 2008 and the resulting Great Recession, gold IRAs have become significantly more popular. Record gold sales combined with the appearance of many more companies that simplify the transaction have made investing in a gold IRA a one-stop shop. Result: robust gold IRA growth.
Then, of course, there's the impact of economic and world news. “Strong interest in gold IRAs has continued because of the potential inflationary impact of the Federal Reserve’s stimulus programs and a sharp increase in geopolitical risk,” says Moy.
Finding a Reliable Broker/Custodian
To put IRA funds into gold, you have to establish a self-directed IRA, a kind of IRA that the investor manages and can be invested in a wider range of products than other types. For a gold IRA you need a broker (to buy the gold) and a custodian to create and administer the account. This company will store or hold your actual gold, says John Johnson, president of Goldstar Trust, headquartered in Canyon Texas.
Custodians are usually banks, trust companies, credit unions, brokerage firms or savings and loan associations that have been approved by Federal and/or state agencies to provide asset-custody services to individual investors and financial advisors.
Custodians do not select dealers for their IRA clients. This is the investor’s responsibility. But established custodians have relationships with several hundred metals dealers throughout the country and may be willing share that list.
Or it can work the other way. “Some metal dealers may recommend an IRA custodian,” says Johnson. “However, consumers are always free to search for custodians on their own.
Investors have many gold IRA choices. Choosing which company to use is complicated, as it is a specialized task that major brokerage firms generally don't offer, according to Moy. “When I did my homework, there were a few criteria that were important to me,” he says. These include:
- Transparency. Moy suggests knowing all your costs up front to avoid any nasty surprises, such as hidden fees after you invest.
- Track record. Look for a company with an outstanding track record from objective third parties, such as the Better Business Bureau or the Business Consumer Alliance. Moy says it may also be helpful to dig into what customers say about the company, especially the number of customer complaints filed against the company. He looked for a company that was "educational and not pushing a hard sell."
- Flexibility. Each investor’s needs and goals are different, so Moy suggests choosing a company that will cater to your needs rather than having a one-size-fits-all approach.
- Qualifications. You should only deal with a company that has all the appropriate and required licenses, registrations, insurance and bonds to protect your investment. Ask for verification of those licenses and other information
There is one possible way to avoid having a custodian and the costs associated with one. You can open what's known as a “checkbook IRA." The IRS is currently said to be scrutinizing this type of IRA, which does not require custodial management. Setting up a checkbook IRA is complicated: You must be an LLC and have a business checking account, to name two of the requirements. However, these accounts do allow a person to purchase and personally hold Gold Eagles, a U.S. Treasury-minted coin. If you are thinking about opening one, consult a financial advisor and be very careful.
Gold's Special Risks
All investments come with risks and rewards, gold IRAs included. “In many ways, gold IRAs have the same risks that any investment has,” says Moy. “The price of gold can go up or down and have volatility. No one can accurately predict its future.”
But despite the risk, Moy says there is a reason to invest some of your retirement funds in gold. “Gold has a 5,000-year history of being a store of value. Stocks can go to zero as we’ve seen with Lehman Brothers, bonds can default like in Argentina or get big haircuts like in Greece. The value of the dollar has steadily gone down. But gold will never be worth zero,” says Moy.
If the price of gold does dip, Moy says that likely means your paper assets will be doing well. So if your portfolio is balanced with both gold and paper-based funds, a loss on the gold side will be balanced by the gain experienced by other IRAs and investments. “Many of these risks exist for traditional IRAs, too. And traditional IRAs have risks that gold IRAs do not have,” he adds.
But there are also some risks specific to investing in physical gold.
Any physical commodity is subject to theft. Someone could break into the depository where your gold is being stored and steal it. However, to qualify for gold IRAs, depositories are required to be insured, which would protect your investment as long as your account doesn’t exceed the custodian’s stated value.
“There are also untrustworthy custodians who might steal from their customer’s accounts or commit fraud by selling you precious metals that they do not actually have nor are planning to buy,” says Moy. “These risks can be mitigated by choosing a custodian that insures the financial transaction.”
The Bottom Line
Gold IRAs are normally defined as “alternative investments,” which means they are not traded on a public exchange and require special expertise to value. While gold has the potential of a high return, it’s easy to be blinded by its glitter. Gold can be volatile. See When And Why Do Gold Prices Plummet? and A Beginner's Guide To Precious Metals. When gold is rising, you also have to decide whether you'd be buying at – or close to – the top of the market if you invest at that point. Waiting could make more sense.
Especially if you're considering a gold IRA, consult a financial advisor to determine how gold would fit with the overall goals of your portfolio. And read Gold IRA Rollover for more information.