What do you get by investing in a gold individual retirement account (IRA)? You are literally turning part of your retirement nest egg into gold. That said, is putting a gold IRA in your portfolio the right move for you? Not all IRA accounts allow gold investments, but this article should help you understand what to look for in your IRA to see if it allows you to build a golden retirement egg.
- A gold IRA is a self-directed individual retirement account that invests in physical gold as well as in other precious metals.
- A gold IRA often comes with higher fees than a traditional or Roth IRA that invests solely in stocks, bonds, and mutual funds.
- A gold IRA can serve as a good hedge against inflation but is also concentrated in a single asset class.
- Physical gold held in an IRA must be stored in an IRS-approved depository.
- Required minimum distribution rules apply to gold IRAs.
The Shifting Price of Gold
Gold prices have ranged from $255 per ounce in September 1999 to an all-time high of $2,075 per ounce in August 2020. As of March 2023, gold was going for roughly $1,843 per ounce. So there has been significant growth, yet also some retrenching.
A gold IRA is a type of IRA that allows investors to own physical gold, silver, platinum, and palladium. This is in contrast to the more-usual assets to which regular IRAs are limited, such as cash, stocks, and bonds.
The possibility of using gold and other materials as securities in an IRA was created by Congress in 1997, says Edmund C. Moy, chief strategist for Fortress Gold, who, as a former United States Mint director, oversaw the largest production of gold and silver coins in the world.
Gold IRAs: A Growing Trend
Gold IRAs appeal to investors who want a diversified retirement portfolio. “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.”
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,” Moy explains.
But gold IRAs have become significantly more popular since the 2007-2008 financial crisis and the resulting Great Recession. Record gold sales combined with the appearance of many more companies to handle and simplify the transactions have made investing in a gold IRA a one-stop shop. The 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.
The price of gold, per ounce, on March 1, 2023.
“Gold IRAs can be either traditional or Roth options,” says Daniel Sentell, former director of communications at Broad Financial, a Monsey, New York–based financial services company that offers these accounts. Whichever version, a gold IRA can only be invested in actual gold, be it coins or bullion.
According to Brett Gottlieb, a financial advisor and founder of Comprehensive Advisor in Carlsbad, California, the first thing to consider is whether you want to have a physical investment in your portfolio rather than a gold-company stock or mutual fund or an exchange-traded fund (ETF) that tracks a gold index.
If you opt for the actual metal, certain criteria apply for it to be held in an IRA. “The precious metal coins or bars must meet IRS fineness standards and must be held by the IRA trustee instead of the IRA owner,” says Moy. “The gold must be stored in an IRS-approved depository.”
In other words, no stashing the bullion or specie in safe deposit boxes, home safes, or closets. “All other rules about IRA contributions, disbursements, and taxes apply,” Moy adds.
Since the gold in a gold IRA must be stored in an IRS-approved depository, you can’t keep it in a safety deposit box, home safe, or under your mattress.
Finding a Broker or Custodian
To put IRA funds into gold, you have to establish a self-directed IRA. This is a type of IRA that the investor manages directly and is permitted to own a wider range of investment products than other IRAs. 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 bullion, 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. They do not select metals dealers for their IRA clients. This is the investor’s responsibility. However, established custodians have relationships with several hundred dealers throughout the country and may be willing to share that list.
It can also 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.”
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: Knowing all your costs upfront can avoid any nasty surprises, such as hidden fees after you invest.
- Track record: Look for a company with an outstanding reputation 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 complaints filed. He looked for firms that were “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 you, 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.
Advantages and Disadvantages of Gold IRAs
A gold IRA has many of the same advantages as investing in gold itself. Gold is frequently used as a hedge against inflation, allowing investors to bet against uncertainty in the wider market. Moreover, while it is possible for the price of a specific stock or bond to fall to zero, the price of gold can never fall to zero.
A gold IRA also has similar tax advantages to an ordinary IRA, allowing interest to accumulate tax-free until the owner is ready to retire. However, there are penalties if the account holder takes a distribution before age 59½.
Gold IRAs have higher maintenance fees than other types of IRAs, due to the additional costs associated with investing in gold. In addition to brokerage fees and account setup fees, the investor must pay additional costs for storing and insuring the precious metal. They may also be a markup on sales costs, and an additional account closure fee.
Gold is a highly illiquid asset, meaning that it can be difficult to find a buyer for large sales without discounting the price. Moreover, it is also relatively volatile, meaning that the price can rise or fall quickly. Since IRA owners are required to take distributions when they reach age 73, they may find themselves forced to sell gold for a lower price than they would wish.
Pros and Cons of Gold IRAs
Acts as an inflation hedge
Easier to store than physical gold
Tax advantages for those saving for retirement
Higher fees than other IRAs
Illiquidity means lower selling prices, especially for required distributions
Owning gold in a gold IRA does come with some special expenses. The charges that an investor will face include:
- Seller’s Fee (Markup): “Although gold has a going rate, there are markups depending upon whether you want gold bullion, coins, proofs, etc.,” says Sentell. The markup, which can also vary depending on the vendor, is a one-time fee. “Similarly, each form of gold presents its own set of requirements when an investor has to sell," he adds.
- Retirement Account Setup: This one-time fee is charged to establish your new IRA account. This also varies by institution, but it might be more than the usual setup fee, as not all financial services firms deal with gold IRAs.
- Custodian Fees: Again, while you’d encounter these annual costs (as well as any associated asset or transaction fees) with all IRAs, they may be higher for this sort of account, especially if you're having to go to a different financial institution than the one holding your other accounts.
- Storage Fees: The gold has to be held by a qualified storage facility for which storage fees are charged.
- Cash-out Costs: If you want to close out a gold IRA by selling your gold to a third-party dealer, said dealer will want to pay less than what it goes for on the open market. So unless prices have risen significantly since you bought it, you could lose a chunk of capital.
Some IRA companies will guarantee to buy the gold back from you at current wholesale rates, but you could still lose money by closing the account, something that usually doesn't happen with opening and closing regular IRAs.
Required Minimum Distribution (RMD) Problems
The schedule to begin taking required minimum distributions (RMDs) from a traditional gold IRA depends on your age or the year you were born. Your RMDs kick in on April 1 the year after you turn:
- 73 if you turned that age after Jan. 1, 2023
- 72 if you turned that age between Jan. 1, 2020, and Dec. 31, 2022
- 70½ if you turned that age before Dec. 31, 2019
Metals, of course, are not particularly liquid, so finding the cash for those distributions could be a problem, causing you to have to sell some of your gold when it may not be advantageous to do so. This problem, however, can be ameliorated by taking the total amount of your RMDs from other traditional IRAs.
Withdrawing From a Gold IRA
The rules for withdrawing from a gold IRA are similar to those of other individual retirement accounts. Like other IRAs, a gold IRA is available as either a traditional or Roth IRA.
For Traditional Gold IRAs
- Contributions are made with pretax dollars.
- All distributions are taxed as ordinary income.
- Distributions before age 59½ face a 10% penalty.
- You must take RMDs after you reach age 73.
For a Gold Roth IRA
- Contributions are made with after-tax dollars.
- There are no taxes due on withdrawals.
- Distributions before age 59½ face a 10% penalty.
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," a self-directed IRA that does not require custodial management. Setting up a checkbook IRA is complicated because you must be a limited liability company (LLC) and have a business checking account to name two of the requirements.
However, as Sentell points out, it does allow investors to purchase gold American Eagles, a U.S. Treasury–minted coin, for their retirement accounts and hold them personally, sidestepping custodian and storage fees. No other coin enjoys this tax-code exception, described in Internal Revenue Code (IRC) 408(m). The IRS is said to be currently scrutinizing this type of IRA, so proceed cautiously with this option.
If you already have an IRA or 401(k), either regular or Roth, you have the option of rolling over some or all of its funds into a gold IRA. The rollover process is the same as for any other retirement fund. You typically fill out an account application (whether online or on paper), and the account is usually established within 24 to 48 hours of completion and receipt of the application.
“Once the signed transfer request is received by all parties, the two custodians will communicate with each other to transfer the funds to the new custodian and fund a new gold IRA,” says Gottlieb. When funds are available in the new IRA account, an account representative will review the current precious-metal options a consumer can purchase. “You advise them as to the exact type you want to purchase and prices are locked up at that time,” adds Gottlieb.
Gold’s Special Risks
All investments come with risks and rewards, gold 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 the yellow stuff. “Gold has a 5,000-year history of being a store of value,” says Moy. “Stocks can go to zero [causing havoc to companies], as we’ve seen with Lehman Brothers, bonds can default as they did in Argentina or get big haircuts as in Greece. The value of the dollar has steadily gone down [at certain periods]. But gold will never be worth zero.”
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 investments, a loss on the gold side will be balanced by the gain experienced by other assets. “Many of these risks exist for traditional IRAs too. And traditional IRAs have risks that gold IRAs do not have,” he adds.
However, 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. 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 on accounts,
“There are also untrustworthy custodians who might steal from their customers’ accounts or commit fraud by selling your 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.”
Should You Invest in a Gold IRA?
Many investors choose gold as a way to diversify their portfolio, either by investing in a gold IRA or by directly purchasing the metal. While gold can certainly have a place in a well-diversified portfolio, it is important to balance the risks of buying gold compared to other assets.
When saving for retirement, it is important to choose assets that will provide a return over time. Unlike stocks and bonds, gold does not pay any dividend or yield to the owner. The only opportunity for profit comes from the appreciation of the gold price itself. Given that the stock market typically rises by about 7% in an average year, it would be rare for a gold IRA to outperform other retirement investments.
How Do You Buy Gold in an IRA?
There are two ways to invest in gold through an IRA. One way is to set up a self-directed gold IRA, which allows you to buy physical gold and silver with retirement funds. It is also possible to invest in a mutual fund or ETF that invests in precious metals, although this is not the same as owning physical bullion.
What Is IRA Eligible Gold?
Only certain gold investments are allowed in a gold IRA. Bullion coins are allowed in an IRA, provided that they are legal tender and have a fineness of 99.5% or better. Bullion bars and rounds are also permitted, provided that they have a fineness greater than 99.9%.
Who Holds My Gold in a Gold IRA?
If you hold a gold IRA, the precious metal must be deposited with an IRS-approved custodian. If you attempt to take physical possession of the gold, that will count as a distribution and will be taxed accordingly.
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 prices can plummet unexpectedly. 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.
If you’re considering a gold IRA, consult a financial advisor to determine how the metal would fit with the overall goals of your portfolio. In general, it’s never a good idea to put all of your eggs in one asset basket. If gold seems like a solid choice for you, Sentell suggests putting no more than one-third of your retirement funds into a gold IRA. Gottlieb recommends you have no more than “10% to 15% of a personal total portfolio invested in gold, whether in the paper form [which is not permitted in a gold IRA] or the physical holdings.”