Nowadays, people are increasingly interested in purchasing gold. They worry about the economy and want to be sure their money is safe in case another economic crisis like the one in 2008 occurs. The need to safeguard your wealth is a timeless concern shared by millions worldwide. A traditional method for achieving this is investing in physical gold.
However, with evolving times, investment options have expanded. Gold IRA investments have emerged as a popular choice for securing your retirement. This leads us to the question: Which is the superior method to invest in gold?
Truth be told, no one investment option is better for everyone. Based on your investment limitations and goals, either one can be a viable option. This leaves us with only one way to understand the better option; understanding both options in depth.
To help you with that, this article will explore everything related to these investment options. Dive in to uncover insights into tax implications, storage constraints, ownership flexibility, and more associated with both physical gold and gold IRA investments.
What is a Gold IRA?
A gold IRA allows you to invest in physical gold as part of your retirement plan. This means you can invest in physical gold and start liquidating once you reach the age of 59 ½. This is an excellent way to protect your assets and secure your financial future. Notably, this type of IRA investment enjoys the same tax benefits and is subject to the same IRS regulations as a traditional IRA.
Now, you might wonder how you can invest in a gold IRA. The process is quite straightforward. Opting for an IRS-approved custodian is the safest route when investing in a gold IRA. They guide you in compliance with IRS regulations, ensuring a secure investment journey.
In simple terms, the custodian will handle everything — from opening your precious metals IRA account to assisting with investments in IRS-approved precious metals. Once you have purchased assets, the same custodian will help deliver your precious metals to a secure third-party depository. This depository will store your gold until you can seek its physical possession, i.e., once you reach retirement age.
It is also important to consider that only specific precious metals are eligible for gold IRA investment. These include:
- 99.5% pure gold
- 99.9% pure silver
- 99.95% pure platinum
- 99.95% pure palladium
What is Physical Gold Investment?
Besides the popular retirement investment option, physical gold investment is the oldest way to own gold. As the term suggests, physical gold investment is possessing the gold you purchase. This can be coins, bars, or even jewelry. The best part? There are no restrictions on this type of investment.
You can invest in any physical gold product and hold it for as long as you want. However, just like a gold IRA, physical gold ownership also has some regulations. Precisely, holding gold or silver physically is subject to capital gains tax. This tax equals your marginal tax rate of 28% max.
Now, when it comes to buying physical gold, you have multiple options to work with: gold dealers, pawn shops, rare coin shops, and even online investment platforms. That, or you can acquire physical gold from individuals looking to sell their gold assets.
The Investment Strategy
Struggling to choose between physical gold and gold IRA investments? This is a good sign to employ a solid investment strategy. To help you with this, let's look at some key factors to include in your strategy that’ll ensure you make the optimal investment choice.
Diversification and Risk Tolerance
Your risk tolerance is important when deciding between a Physical Gold IRA and owning physical gold. A Physical Gold IRA is a tax-advantaged retirement account in which you invest in gold-backed financial products. While it does not provide physical possession of the precious metal, it may involve less market risk than directly holding actual gold.
Moreover, physical gold is a tangible asset that is susceptible to market swings and the risk of theft or damage since it is in your possession. Since both these investments come with risks, you must understand your risk tolerance capacity. Additionally, these investments' different advantages make them an ideal combination to diversify your portfolio and balance the risks and benefits.
Goals for the Short-Term vs Long Term
When picking between these possibilities, keep your investment time horizon in mind. A physical gold IRA is frequently recommended for long-term financial planning, particularly for retirement. It provides tax advantages and allows gold's value to rise over time. In contrast, owning real gold may be appropriate for short-term purposes or as a store of value, but it may incur greater transaction costs and necessitate a secure storage — which comes with its own costs.
Is It Important to Pick One Option?
No, it’s not! As we mentioned earlier, diversifying your portfolio with both these investments can ensure your present and future financial stability.
Historically seen as a safe-haven asset, gold can help diversify portfolios and function as a hedge against economic volatility. Hence, owning it in both physical form and an IRA account can help you limit the risks of losses and enjoy short-term and long-term gold investment benefits.
Tax Implications
One of the major considerations when choosing any type of gold investment is tax implications. After all, you don't want to be a defaulter while trying to secure your finances for a stable present and future. Speaking of which, both physical gold and precious metals IRA have tax implications. Before we discuss these tax implications in detail, here's a brief overview of IRS tax regulations for physical gold and gold IRA:
Investment Type | Tax Implications for Gold Investments |
|---|---|
Gold IRA | If contributions to a standard IRA account are tax-deductible, the income taxed that year goes down. However, distributions from a precious metals IRA are taxed like ordinary income. |
Physical Gold | Short-term gains through physically owned precious metals are taxed at ordinary income rates. |
As shown in the table above, whether you opt for a Roth or traditional gold IRA, your taxes will be determined by IRS regulations. Importantly, both these accounts enable you to grow your assets without immediate tax payments. Traditional IRAs are funded with pre-tax money, while Roth IRAs use post-tax funds. However, gains in both IRA types are tax-free.
In contrast, physical gold has fewer tax advantages. The IRS treats gold as a collectible, subjecting it to the capital gains rate, which doesn't exceed 28%. Additionally, when you sell precious metals, you must adhere to IRS reporting requirements. For instance, reporting gold transactions often involves filing Form 1099-B with your taxes. To gain a better understanding of IRS reporting regulations, it's advisable to consult a professional tax advisor.
It is worth noting that depending on the jurisdiction and the amount of time the gold has been stored, the sale of physical gold may be liable to capital gains tax. Again, it is better to consult a tax professional to understand the tax implications of actual gold assets as per IRS regulations.
Liquidity and Access
When considering the liquidity of physical gold and gold IRA, physical gold retains its liquidity because it is recognized and valued globally. This means that it is quickly sold or traded, providing immediate access to income in times of need. However, worldwide demand and supply dynamics control physical gold's market value, leaving it vulnerable to market changes.
On the other hand, IRAs are long-term investments that often involve assets that remain in place for years or even decades. This means you can't access or liquidate your gold in an IRA anytime before retirement age, making it less liquid than a physical gold investment. However, it also means that as the gold you hold for years increases in value over time, you can access more value for your investment.
How Does Early Withdrawal and Sale of Physical Gold and Gold IRA Work?
Just as buying gold can be a reality check for investors regarding prices, those who decide to sell may be surprised by the rates they're offered. This is because the buyback or bid price is generally lower than the asking price. The gap between the two, known as the spread, represents a loss initially incurred by the seller.
For example, if an investor spends US $2,022 for a 1-ounce Canadian Maple Leaf and decides to sell it the next day, the buying price might be as low as US$1,952.
Additionally, extra charges are frequently associated with selling physical gold, such as shipping, insurance, and liquidation fees. However, if you still need to sell your physical gold fast, you can consider gold purchasing companies, since they provide higher liquidity. It’s important to note that due to the spread and associated acquisition and selling costs, making a profit from early sales of physical gold typically requires a significant price shift.
In contrast, early withdrawals and sales of gold in your IRA are subject to a 10% penalty on the withdrawn amount/asset value. To avoid this, it is better to wait until you reach your retirement age, 59 ½, before withdrawing assets or liquidating a portion of your assets in an IRA as a distribution.
This not only ensures that the value of your physical gold is protected until you reach retirement age, but it also allows you to benefit from the rising value of gold over the decades. Speaking of which, selling physical gold is the best way to seek profits through early gold sales when its price hikes for a certain period.
Costs and Fees
Besides the tax regulations and liquidity of physical gold and gold IRA, the costs and fees associated with both investments differ. Let’s dsciuss these differences further in detail.
Gold IRA
When you start a gold IRA, your custodian may charge you various fees, including one-time account setup, yearly asset maintenance, and storage fees. These fees are disclosed by the IRA custodian you choose to invest in before you proceed with the gold IRA investment.
Physical Gold
Meanwhile, when you buy gold directly, you will not be charged any additional costs on top of the transaction price. Your primary expense for physical gold is storage. Storing it at home may seem cost-free, but we advise against relying solely on this. It's a wise investment as long as it's secure. To ensure security, you might need to invest in a secure vault or safe at home, incurring additional costs.
Alternatively, storing physical gold in a bank's safe deposit box may also involve storage fees. Unlike gold IRA investments that include insurance, you'll need to consider insurance for your physical assets, especially when stored at home. Precious metals insurance plans can be costly, increasing your expenses when holding physical gold at home.
Cost Comparison
If you're still confused about which investment option fits your budget, refer to the comparison below.
Different Costs | Gold IRA | Physical Gold |
|---|---|---|
Buying/Account Setup | Apart from the purchasing cost of precious metals, you must pay a one-time account setup fee. This fee can range between $50-$150. | You must only pay the market price of gold or other assets you plan to purchase. |
Storage, Insurance, & Maintenance | You pay yearly costs to your storage depository for safely storing, insuring, and maintaining your assets, which can range between $200-$500. This can be less or more based on your chosen gold IRA depository. | Physical gold storage expenses vary by the storage option, i.e., home storage, a secure vault, or a bank safe. While a home storage safe cost is one-time, gold vault and bank safe storage costs vary by company/bank. Additionally, iInsurance prices for physical gold vary by insurance plan and gold size/type. For instance, a $10,000 ring can cost $100–200 in insurance yearly. Some insurance policies cost more. But since insurance is crucial if you opt for home storage of your physical assets, it is better to consider all insurance policies available and pick one that meets your requirements. |
Note: Some additional charges may apply based on the gold IRA custodian or physical gold provider you choose.
Security and Storage
Another notable difference between physical gold and a gold IRA is its security and storage. Let’s take a look at the security and storage considerations of both below in detail:
Gold IRA
As mentioned, you cannot take physical custody of the precious metals in your account if you invest in a gold IRA. Instead, you must select a depository to hold your gold investments. Storage and security are inextricably linked. When you keep your gold and precious metals in a recognized depository, you can be confident that they will be protected from theft and natural calamities – and that you will receive their insured value if they are not.
Now comes the question, "What makes these depositories so reliable?" Simply put, gold depositories are specialist storage facilities that offer a variety of security mechanisms to keep your precious metals safe. This includes armed security, high-quality and active cameras, and temperature-controlled storage facilities.
By storing your gold IRA in such safe and IRS-approved depositories, you can expect it to be in the best possible condition. This also means that gold IRAs are a safer investment than physical gold in terms of storage.
Physical Gold
When you buy gold, you have complete control over its storage. This means you can store the gold in a depository, a safe in your basement, a bank safe deposit box, or bury it in your lawn. With enormous power, however, comes great responsibility.
So, when you buy genuine gold, you are accountable for it and will bear the loss if it is destroyed, lost, or stolen. Hence, we suggest using safe and security cameras to store your physical gold at home.
Another safe option to limit the risks of theft and loss of your physical gold is storing it in a vault or bank safe. When considering these options, opt for only the safest company/bank with a track record of securing their client’s assets. This way, you can rest assured that your physical gold is safe.
Flexibility and Control
Lastly, it is important to consider the flexibility and control that your investment offers you. Having said that, let’s explore how flexible and controllable are physical gold and gold IRA investments.
Physical Gold
As mentioned, physical gold investments give you complete ownership of your assets. This makes such investments more reliable, especially if you prefer being in control and close to your assets.
Gold IRA
Unlike physical gold, Gold IRAs offer the least control and flexibility to investors. This refers to the lack of access you have to your assets. This doesn’t mean you can’t physically check your gold or other precious metals in an IRA. Instead, your accessibility to these assets is based on how close the depository is to your home and the visiting timings of the depository.
Yet, the most secure depositories offer real-time digital accessibility to your assets so you can keep a check on them and stay updated about their security.
Conclusion
Where physical gold is easier to access and more liquid, it also comes with fewer tax benefits and more security risks. Likewise, even with the various tax benefits of a precious metals IRA investment, it has drawbacks like lack of control and limited liquidity.
This proves these gold investment options have their fair share of benefits and risks. So, understanding your investment goals is the best way to make an informed decision. For instance, a gold IRA is a better option if you are looking for a long-term investment with added security. If you want to set up a gold IRA, click here to read about the best companies.
In contrast, investing in physical gold is ideal if you want short-term returns on your investments and seek physical possession of your assets. We hope this detailed guide will help you better navigate your investment goals and the ideal option that caters to these goals.