The Pros and Cons of Gold IRAs

The Backstory

In traditional self-directed individual retirement accounts (IRAs), people hold paper assets like stocks, bonds, certificates of deposit (CDs), exchange-traded funds (EFTs), and the like. For many years, the IRS allowed people to only hold these kinds of securities in IRAs.

In 1997, however, the IRS broadened the permissible types of IRA investments to include certain gold and silver coins, followed by silver, platinum, and palladium coins and bullion in 1998.

This type of self-directed individual retirement account became known as a gold IRA or a precious metals IRA. The former designation is most common because more investors hold gold coins or gold bullion than other metals.

Setup Basics

The gold IRA can be set up either with pre-tax or post-tax capital. If post-tax funds are used, the account is called a Roth IRA, and distributions are tax-free. If pre-tax money is used, taxes must be paid upon distribution, but the account is still considered tax-advantaged. It must be set up by a custodian or administrator (with fees), which could be a traditional bank or financial institution.

A gold or precious metal IRA is a common investment vehicle now, but to the new financial investor, its benefits and disadvantages may not be clear. It's worth taking a look at the pros and cons so you know if investing in gold, silver, platinum, or palladium and holding these metals in this type of retirement account is a good idea.

Gold IRA Pros (Is a Gold IRA a Good Idea?)

Gold and precious metals self-directed IRAs appeal to many investors who are looking to build a diversified long-term retirement portfolio. They have their place among financial vehicles as secure investment homes for approved coins, bullion, and gold--that durable yellow metal that traditionally remains stable during periods of market volatility, political turbulence, and inflation.

Let's dive into the four benefits of having this kind of investment account rather than a traditional IRA.

Pro #1: Gold IRAs Provide Control of Your Future

Historically, gold has kept pace with inflation so usually serves as a stable asset that can be counted on to retain its value.

The example has been given of the $20 gold piece weighing 0.97 ounces that, in 1921, could buy a man a great suit. One hundred years later, that same piece, with gold prices now at $1,783 per ounce, can still buy a man a fine suit, maybe with enough left for a nice dinner.

Gold and precious metals held in a gold self-directed IRA are considered insurance against inflation, and this gives investors a feeling of security and control over the future. When you know that your gold deposited today will keep up with rising costs and be worth just as much or more in ten years because it's a physical asset whose value keeps pace with the economy, you can rest easier at night.

For those who went through the Great Recession, this is especially comforting.

And there's a plus.

In the last two decades, more and more financial institutions have emerged providing all the necessary account set-up services from custodian tasks to coin buying to transporting of investors' metals to IRS-approved storage facilities.

The streamlining of the somewhat complex setup process (plus 401k rollover services with reasonable fees) makes these financial vehicles more accessible to the busy investor.

Pro #2: Powerfully Hedge Your Retirement Portfolio with a Gold IRA

Gold is an "uncorrelated alternative asset" that usually does not respond to stocks and bonds declining or increasing. In other words, when stocks, bonds, or mutual funds go up, the price of gold doesn't go down. When stocks, bonds, or mutual funds go down, gold prices don't necessarily go up. Physical gold has intrinsic value and is relatively impervious to market fluctuations.

Whereas paper assets can crash and lose huge amounts of their value (think the Great Recession a decade ago), gold will never do that because it is a physical asset. Gold, silver, platinum, and palladium typically hold their own, so investing in these metals is considered fairly safe.

Because of its uncorrelated nature, gold acts as a powerful hedge against the main asset classes of stocks and bonds. While the worth of those assets may plummet in a volatile market, gold won't. It will generally remain steady and dependable.

Pro #3: Consider your Gold IRA as Disaster Insurance for your Portfolio

When you think about portfolio vulnerabilities, what comes to mind? A volatile stock market? Political turbulence? Government turnovers? Global pandemic impacts?

In the face of any of these events, a retirement plan that includes a gold IRA can generally ride out the storm without taking on excess water. Few other single investments retain as much stability in a storm as this kind of vehicle.

As mentioned earlier, an asset class such as a mutual fund or stocks, bonds, and the like, can bottom out and decimate your portfolio. Invest your money at least partially in gold and it can offset poorly performing accounts by simply retaining its worth.

Pro #4: You Can Hold Precious Metals in Them

A final benefit to this type of individual retirement account is simply the ability to hold gold in an IRA (plus certain other precious metals) whereas before, you couldn't.

A gold IRA grants you quite a bit more freedom and flexibility than a standard individual retirement account does. Although the list of IRS-approved coinage and bullion is exclusive and precise, there are many options on the roster. Invest in gold American Eagles, Canadian maple leaves, Mexican Libertad Silver pieces, or Isle of Man platinum, to name just a few. You can also hold bars and bullion of specific purities in IRAs.

Are There Any Cons to Gold IRAs?

So what are the downfalls of this type of retirement savings account? There are a few, although they may not matter to you and thus won't occur as anything negative. Still, we'll look at them below.

Con #1: They Take a Bit of Doing to Get Set Up

Many investors set up a gold IRA by rolling over a retirement vehicle such as a traditional IRA, a 401 k, 403b, or Thrift Savings Plan. Others prefer to execute transfers instead of rollovers.

Regardless of how it's funded, a gold or precious metal IRA must be opened by an administrator or custodian. That institution will purchase your coins or bullion on your behalf, arrange for an IRS-approved depository, and have the metals or gold in your IRA physically transported to the designated vault. And yes, most depositories charge storage fees.

The process from start to finish takes some doing to get gold IRAs set up. Josh McCleary, Co-Founder and COO or OWNx, says, "While many financial professionals see the benefit of establishing a position in gold as a cornerstone of any portfolio, it can be a daunting task for many people."

Con #1: Most Admins Forbid You Physically Holding Your Gold

As much as you might want to keep your IRA investment gold in a chest in your basement, you can't. The IRS won't let you. And neither can you stash your precious metals in a safety deposit box at the bank.

All precious metals, including gold, that you purchase for your gold IRA must be held in an IRS-approved depository.

The custodian or administrator that sets up your precious metals or gold IRA will handle getting your physical gold and metals to the depository. Be sure to select a reputable financial institution to manage your gold and silver IRA accounts.

Con #2: Want Quick Profit? Forget Gold IRAs. They’re a Long Game

Investing in a gold IRA is for people who are in it for the long haul. If you want fast results and you're ok with risk, you might be better off buying one of the major gold exchange-traded funds. Holding a gold IRA should be for the long term.

Con #3: Don’t Look to Gold IRAs for Interest, Dividends, or Yields

Stocks pay dividends and bonds pay out interest. If you invest in a gold IRA, you will get neither. The most you can hope for in this type of IRA account is to gain value through capital appreciation of your holdings through increases in gold prices. With patience, such a strategy will likely pay off over time.

Con #4: Is a Gold IRA Appropriate for a Roth IRA?

Some investment fund managers suggest that Roth IRAs, with their tax-free structure, are not the most appropriate investment vehicles for gold, given that they do not bear yields.

Wrapping It Up

Investing in gold IRAs has its pros and cons. Compared to setting up traditional IRA accounts, establishing this kind of account is more complicated because it involves custodians, depositories, and fees. Additionally, these accounts bear no yields other than straightforward appreciation of the actual gold over time.

If you're looking for a relatively safe way to invest in gold, however, and you like the idea of holding physical gold or precious metals, this kind of account may be perfect for you. Many competent custodians can navigate the investment landscape and make your account setup pain-free. (With reasonable fees that won't give you a heart attack.)


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