Ever since the introduction of gold IRA investments in 1997, this investment option has been a safe haven for individuals planning to secure their retirement funds. Since investing in a gold IRA allows you to purchase IRS-eligible physical gold that can be liquidated once you reach your retirement age, it is undoubtedly a secure way to store your funds.
However, the only way to make the most of these benefits is by understanding how a gold IRA works. To help you with that, I will thoroughly take you through all that I have explored about gold IRA investments over the years. So keep reading to learn more!
What is a Gold IRA?
A gold IRA, or more broadly a precious metal IRA, allows you to store physical gold as part of your retirement portfolio. An Individual Retirement Account (IRA) allows investors to store gold in various forms, including bars and coins.
Gold IRAs can also include gold mutual funds that invest in bullion or stocks (or both), gold equities (shares of gold mining/production businesses), and gold exchange-traded funds (ETFs) that track gold indexes.
While understanding a gold IRA investment is no rocket science, one of the most crucial aspects is the type of gold eligible for an IRA investment. Yes, it’s different from a normal gold investment.
I didn’t know this until I invested in a gold IRA myself. To be specific, only gold that meets a purity standard can be stored in a gold IRA. This includes legal bullion coins with a purity of 99.5% or above. Bullion bars and rounds with a fineness greater than 99.9% are also permitted as gold IRA investments.
How Safe Are Gold IRAs?
According to a survey conducted by the renowned publication, ‘Gold IRA Guide’ in 2020, 10.8% of Americans own gold.
Why is that? Unlike other investments such as stocks and bonds, gold prices remain stable even in a struggling economy. My personal experience with gold IRAs has taught me how this investment option safeguards money regardless of the economic instability. It has provided me with confidence and peace of mind regarding my financial future.
But it’s not just myself vouching for the safety and investment security gold IRAs offer. Instead, experts like Edmund C. Moy — chief strategist for Fortress Gold and a former director of the United States Mint — also believe investing in a gold IRA is a smart investment decision.Moy says "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. This balanced approach smooths out risk, especially over time, making it an excellent choice for retirement investments like IRAs."
Differences Between a Traditional Gold IRA and a Roth IRA
While an IRA is a commonly opted investment option, especially for securing retirement funds, it’s important to understand the different categories of this investment. When I began investing in gold IRAs, I found two different gold IRA investment options: Roth IRAs and traditional gold IRAs.
While these IRA investment options may appear similar at first, they have differences in contributions, taxation, eligibility, and minimum distributions. The table below provides a detailed breakdown of these distinctions.
Gold Roth IRAs
Traditional Gold IRAs
These IRAs are self-directed, and the IRS taxes your investment at the time you contribute to them.
These IRAs offer you less power to make an investment decision. Instead, you have to invest according to the limited options provided by your investment company. Moreover, the IRS does not charge any tax on your invested funds in a traditional gold IRA.
As mentioned earlier, investments in this gold IRA account are not tax-free. However, your withdrawals from a gold Roth IRA are tax-free since you already pay tax on the contributions when you invest in the account.
Contributions to this type of IRA are tax-free. However, you must pay tax for withdrawing from your traditional IRA account.
You can only invest in a gold Roth IRA if your income is a minimum of $153,000 as an individual and $228,000 as a married couple (if you file for the IRA account jointly with your partner). Your income also determines the amount of Roth IRA contributions you can deduct from your annual taxes as a gold IRA holder.
These types of IRAs have no income requirement.
Gold Roth IRAs don’t require any minimum distribution.
With a traditional IRA, you must take out a certain amount each year starting at age 72 as a minimum distribution.
Key Considerations Before Investing in a Gold IRA
From my experience, the following factors and considerations are what make investing in a gold IRA worthwhile. Let’s take a closer look at each one.
Accreditation of Custodians
When investing in a gold IRA, selecting a trustworthy custodian who complies with IRS regulations is paramount. Based on my experience, it's crucial to confirm that the gold investment company you choose collaborates with IRS-approved custodians.
In my experience, I've found that some investment companies partner with a single trusted custodian, while others provide a choice of qualified custodians.
Either way, I highly recommend taking a close look at the custodians a company works with and confirming their IRS-approved status. You can easily check a custodian's eligibility by referring to the list of approved custodians on the IRS website. This step can provide you with added peace of mind when investing in a gold IRA.
Quality of Gold
The quality of the gold you invest in depends on the company you invest with and the custodian options they offer. The best way you can ensure this is by choosing a company that is transparent about the custodian they work with and the quality of gold they offer. You can read about the best gold IRA companies here, to find the best option for you.
Remember, when assessing your chosen company and its custodian, consider not only the authenticity but also the purity of the gold. Ensure they meet the IRS eligibility requirements mentioned earlier to guarantee your investment meets the necessary standards.
One thing I was quite careful about during my investment experience was the tax implications. This was mainly to ensure I didn’t face any legal issues when liquidating my gold IRA investment. After all, no one wants to face tax-related issues, especially on their retirement investments.
Since I was unfamiliar with the tax implications myself, I not only did thorough research but also consulted with a tax specialist. It was then that I discovered that when investors withdraw money or precious metals from their regular IRA before becoming eligible for the required minimum distribution (RMD), they must pay taxes.
This RMD is the amount you can start withdrawing from your IRA account at 59½ years of age, without having any additional tax applied to the money you withdraw. If you withdraw before you are eligible for an RMD, the withdrawal amount is applied to your annual gross income and is subject to regular income tax.
Last but not least, it is critical to evaluate your time horizon while investing in a gold IRA. What is a time horizon? It is simply how long you intend to hold an investment before you need your money back. In a traditional gold IRA, as mentioned earlier, you have to pay a 10% tax for taking out money or gold before you are eligible for an RMD.
To prevent this, you must wait until you turn 59½ years old before withdrawing from your IRA account. Moreover, when you reach the age of 72, you must begin taking the required minimum distributions from your conventional IRA. This RDA amount is calculated yearly based on your past year’s account balance and current age. You can calculate the amount directly at the U.S. Securities and Exchange Commission website.
When I was considering a gold IRA investment, this restriction on accessing funds during emergencies concerned me. However, after exploring other options within the same investment category, I discovered that a Roth gold IRA investment doesn’t have required minimum distribution limitations. This means you have both a long-term investment that can’t be liquidated quickly and a short-term option that offers more flexibility. So, choose your investment wisely based on your financial goals and needs.
Historical Performance of Gold
According to Edmund C. Moy, chief strategist for Fortress Gold and a former United States Mint director, Congress authorized gold and other precious metals as securities in an IRA in 1997.
Since then, gold IRA investments have become quite common. This is likely due to the rapid increase in value of gold over the years. Notably, gold prices have risen from $255 per ounce in September 1999 to $2,075 per ounce in August 2020.
Fast forward to this year, gold was selling for around $1,843 per ounce in March 2023. This shows how much gold’s price has increased and continues to do so over time, making it an asset that has been – and will continue to be – a smart investment option.
Pros of Investing in Gold IRAs
Now that I have thoroughly discussed how a gold IRA investment works, let’s take a look at the pros of opting for this investment option:
- Tangible Asset: Considering my own experience, one of the key advantages of a Gold IRA is the asset's tangible character. For example, when I bought physical gold through an IRA account, I owned a physical product in the form of gold bars and coins. This physical ownership has instilled a strong sense of security in me, which I never experienced after investing in digital assets like cryptocurrencies.
- Inflation Hedge: Gold is an excellent inflation hedge because its price rises when the dollar's value falls. Over time, gold prices tend to weather the storm of interest rate swings and offer excellent returns. In fact, I have sought this benefit by selling the physical gold I owned myself, seeking returns and more opportunities to reinvest a larger sum afterwards.
- Diversification: A successful investing portfolio includes high-risk, high-reward assets and more conservative assets that may not yield high returns but will not suffer severe losses. Thankfully, investing in physical gold through IRA investment introduces you to such a portfolio. Simply put, even when gold doesn’t provide spectacular returns, it still helps balance out the risk of more volatile investments through its stable market value.
- Liquidity: As obvious as it may seem, gold is extremely liquid, which means it can be purchased and sold quickly. This liquidity allows you to transform your gold holdings into cash or other assets whenever needed. Unlike investments in real estate, gold investment allows you to access your funds quickly. If you choose the right type of gold IRA account based on your needs – traditional vs Roth gold IRA (as mentioned earlier) – you can be sure to liquidate your assets based on your preferences.
Cons of Investing in Gold IRAs
Despite having various advantages, gold IRA investment also has a fair share of drawbacks. As someone who has explored these drawbacks through real-life experience, I urge you to keep these in mind before proceeding with your investment:
- No Dividend Yields: Unlike certain investments like stocks, which regularly distribute a portion of a company’s earnings to shareholders as dividends, gold investments, particularly in a gold IRA, do not provide this source of passive income. While there are alternative investment options, like trading, that allow you to generate passive income, gold IRA investments don’t offer this benefit. While the other advantages of gold IRAs mentioned earlier may offset this limitation, it’s an aspect worth taking into account.
- Storage Fees: Investing in a gold IRA also comes with the hassle of paying a yearly storage fee to the depository that will store your IRA-based physical gold. If you’re not separating funds from your savings to pay these fees, you must bear them with your salary. Initially, when I was new to gold IRA investments, this fee was an unexpected surprise. However, after budgeting for my expenses, I realized that it is crucial for the maintenance and security of my assets. The good thing is that the storage fee is dependent on the depository that stores your gold, and you can select one with lower annual fees.
- Market Risk: Gold prices are notoriously volatile. While gold has always been seen as a safe-haven asset, its value fluctuates significantly. This means that various factors, such as economic conditions, geopolitical developments, and market emotion, can all impact price movements. As a result, if you invest a considerable amount of your retirement funds in a Gold IRA, you may lose a lot of value if gold prices fall. It’s important to remember that gold, like any other investment, can experience periods of both growth and collapse.
- Regulatory Risks: One important factor to consider is government regulations regarding retirement accounts, including Gold IRAs, can change frequently. I've witnessed several changes in policies and tax rules since I first invested in a gold IRA. These legislative shifts have led to alterations in the benefits and tax implications associated with Gold IRAs over the years. It's crucial to stay well-informed about any shifts in legislation affecting retirement accounts. This proactive approach has helped me mitigate potential losses by making informed decisions about my gold IRAs in response to regulatory changes.
Undeniably, gold IRA investments are a smart and secure way to invest your retirement funds. Speaking from my personal experience, I can confidently say that gold IRAs are one of the best retirement investment options today.
However, the only way you can maximize the benefits of this investment is by understanding and adhering to the requirements of an IRA investment.
For that, I hope this detailed article helps you better understand these requirements, allowing you to make a more informed investment decision.