What are the pros and cons of a gold IRA?


by Grant HEnson

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Planning for retirement is a critical decision. No matter how well you’re doing financially today and how much you save for your tomorrow, the value of your savings won’t remain the same in the coming years. Hence, huge savings today may not be the key to a financially stable future once you reach your retirement age. 

In this situation, most people opt for retirement savings plans like IRAs. While a traditional IRA serves like a savings account, a gold IRA is a more popular choice among investors who want to add precious metals to their portfolios. This is a great way to secure the value of your savings, unlike fiat currencies that tend to lose value in struggling economies. 

But just cause something's popular doesn’t mean it's ideal for everyone. Therefore, it’s crucial to consider whether a gold IRA investment meets your investment needs and requirements. To help you with that, we will discuss the pros and cons of a gold IRA. So, without any delay, let’s explore!

What is a Gold IRA?

Starting with the basics, let’s first talk about what a gold IRA is. This account is quite similar to a typical IRA (Individual Retirement Account). Precisely, it serves as a savings account where you can hold your savings and keep contributing to them (yearly) until you reach your retirement age. 

You can access these savings in sections as your RMDs (Required Minimum Distributions) upon retiring. The IRS determines these distributions based on the value of your IRA account every year. A gold IRA is very similar to a typical IRA account. The only difference is that a typical IRA account allows you to hold savings in bonds, stocks, etc. 

In a gold IRA or precious metals IRA, you can hold precious metals like gold, silver, palladium, and platinum in coins, bars, and bullions. Since these precious metals tend to rise when the stock market and the economy fall, they are a safer long-term investment option. 

It is also worth noting that a gold IRA account should be kept separate from a typical retirement account, following the IRS regulations. This includes opening a gold IRA account through an IRS-approved custodian and holding only IRA-eligible gold and other precious metals. 

What are IRA-eligible precious metals? They’re simply the metals that meet a certain purity standard, like: 

  • Physical gold with a purity of 99.5%
  • Physical silver with a purity of 99.9%
  • Physical platinum with a purity of 99.95%
  • Physical palladium with a purity of 99.95%

Pros of a Gold IRA 

As mentioned, a gold IRA is an ideal retirement investment for many. 

Now, you might wonder: ‘What exactly makes it the ideal option?’ 

Simply put, it’s the advantages of gold investment and the tax benefits a gold IRA offers. For a clearer idea, let’s go ahead and explore these advantages. 

Diversification 

The primary advantage of a gold IRA investment is diversification. Successful investors typically spread their funds across various assets or companies, steering clear of putting everything into a single basket. This strategy is rooted in the unpredictability of individual assets or companies – they might experience a decline, leaving you with significant losses. After, you never know when that specific asset or company may fall. And if it does, you’re left with nothing. 

This is where gold investments save you from losing all your savings. How? Gold is a real asset that doesn’t immediately get impacted by stock market failures. Hence, diversifying your investment portfolio with gold will help limit your losses even if one specific investment fails to provide profits. Keeping you financially afloat at all times! 

Inflation Protection

In a world already hit by economic uncertainty causing a consistent rise in inflation, it’s only smart to invest in assets that hold the value of your money. If we compare most investment options with gold and other precious metals, these are the only assets that haven’t witnessed a huge fall. 

Whereas real estate, the stock market, paper money, and many more forms of saving and investment have struggled to maintain market value lately. This doesn’t mean you should invest all your money in gold. However, with gold carrying less danger of extreme losses, it’s a great way to secure the value of some of your savings for future years. 

Potential Growth

Undeniably, gold has grown consistently over the past few decades. If we go back in history, there have been endless moments where gold was seen to witness a significant rise. One example is gold’s rise from $35 per ounce to over $850 per ounce between 1971 and 1980. This marked an incredible gain of 2,000% for gold investors and holders. 

But that’s not the only time gold shocked us with a significant rise. In fact, during the global COVID-19 pandemic in August 2020, gold’s value reached around $2,037. At the same time, gold’s value was around $1,500 at the start of that year. 

This showed how struggling economic times can push gold’s demand among investors, resulting in a drastic price increase. Speaking of which, gold is an ideal long-term investment option with great growth potential. 

Tax Advantages

Lastly, a huge benefit of a gold IRA investment, like any other retirement account, is its tax advantages. So, how does taxation in this account work? Well, you simply invest pre-taxed money in gold that will be held in an IRA account. Once you reach your retirement age, you get distributions on that money (gold). The advantage here is that you only get taxed once in this investment. 

In an ordinary situation, you must pay income tax when you earn money. After that, you must also pay capital gains tax when you withdraw the money from the investment. But with a gold IRA investment, you can save more by paying a one-time tax. This tax is charged at a specific time, either when you fund your IRA account (in a Roth gold IRA) or seek withdrawals from it (in a traditional gold IRA). 

Cons of a Gold IRA 

Now that we've discussed the advantages of investing in a gold IRA, let’s discuss some notable downsides of this popular retirement investment option. 

Volatility

Firstly, although gold is seen to witness huge price growth in the long term, we can’t avoid the fact that gold is a volatile investment. Hence, it has equal falls or lows in value and highs. So, while the price of gold may increase in the next ten years, it will also witness multiple falls and jumps in the next 8-9 months. This isn’t an issue initially because you’re holding gold for the long run in an IRA investment. 

But once you reach your retirement age and plan to liquidate the assets you receive as an RMD, you will have to wait for price increases or sell the assets at lower rates at times. This means all your gold assets in a precious metals IRA won’t bring you good returns upon liquidating unless you wait for the next price surge. 

Costs of Storage and Insurance

Wait! Did you think the only investment you make in a gold IRA is in the gold itself? Sure, it might seem that way! But it’s not true! Instead, a gold IRA investment comes with various additional costs. It includes: 

  • One-time account opening fee (charged by the custodian or your investment partner)
  • Yearly account maintenance fee (charged by the custodian or your investment partner)
  • Yearly storage fees (charged by the depository company)
  • And any other charges required by the company you choose to invest with. 

With so many charges involved, it’s clear that a gold IRA investment is a better option for those with a decent sum of money and a good yearly income to easily bear these charges. Here, it is also worth considering that some companies have specific investment limits for a gold IRA. So you can’t even divide your savings as per your convenience to invest in a gold IRA while handling all these charges. 

Liquidity Problems

Since a gold IRA investment means you don’t get physical possession of all your assets in an IRA before or even after your retirement age, it can be hard to liquidate these assets. Notably, your RMDs calculated by the IRS determine how much distribution you will receive yearly. Hence, you can only sell/liquidate the distribution you receive. But that’s not even an easy task in times of need. 

Why? Because the delivery process also takes some time. 

So once your RMD is finalized for a year, the delivery will get processed. And only once you receive the asset can you start finding buyers for it. Hence, no matter how much you need it, liquidating the gold you receive in your RMDs is a slow process. 

Lack of Dividends

Unlike other investments like stocks, gold doesn’t bring any share of frequent profits — also known as dividends — in the short term. And even if we consider long-term profits, it isn’t always promised to be huge. Hence, we can never be sure that gold’s value will increase significantly within those years. 

Evaluating Your Investment Goals

Once you understand the pros and cons of a gold IRA, it’s time to further determine if this investment will help financially secure your retirement age or not. How do you do that? Simply evaluate your investment goals and connect gold IRA investments with these goals. For creating your specific investment goals, it’s important to consider: 

  • What is my investment timeline, i.e., when do I need the return/money back? 
  • What is my level of risk tolerance? How much and how frequently can I accept high or low returns on my investments? 
  • What percentage of my portfolio can I easily devote to holding precious metals like gold? 
  • What specific lifestyle do you expect to live upon retiring? And what investments can ensure that lifestyle for you? 
  • What will be your estimated retirement expenses? Will liquidating your gold assets help you bear these expenses easily in the future?

Once you ask yourself these questions and get their answers, you can determine your specific investment goals for retirement. If, according to these goals, a gold IRA investment seems like a good fit, you should proceed with the investment. But if you’re still confused, we suggest you consult a financial advisor. This way, you can seek professional help to create a stronger and clearer investment plan per your goals. 

How to Start a Gold IRA?

If you’re still with us, there’s a great chance you believe a gold IRA is the right investment for you. But how do you proceed with it? Well, it’s quite simple! Here’s a step-by-step guide to understanding how a gold IRA investment works.

Step #1

First, you select a gold IRA company. Choose one with a strong track record, fee transparency, enough investment products for you to choose from, and a professional team willing to go above and beyond to assist you with the investment. Don’t forget to ensure your investment partner is IRS-approved! For some great options, read this article on the best gold IRA companies in 2024. Our top suggestions are Goldco and Augusta Precious Metals.

Step #2

Now, it’s time to fund your account. Your funding options will be based on the company you invest with. Gold IRA investment service providers typically allow you to fund your account through a rollover from an existing IRA or 401(k) account. Once you choose any option, your investment partner will help fund your account by directly coordinating with the team handling your other retirement account. 

Step #3

After funding your account, you can invest. Here, you can choose precious metals investment options based on the company’s offerings. Once you choose, your preferred assets will be added to your account and moved to a safe third-party depository. 

Conclusion

A gold IRA is undeniably a great investment option for retirees to enjoy a financially stable future. Not only does it offer the benefits that come with gold ownership, but it also introduces you to significant tax benefits. 

However, if you want to make the most of this investment, don’t forget to comply with IRS regulations for a gold IRA investment. This will help you avoid any tax penalties, allowing you to make the most of the benefits of your investment in the future. To get started, read through this article of the best gold IRA companies, and this guide on gold IRA investing.

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