“I’ve heard a lot of talk about physical assets and diversifying savings,” we hear people saying, “and I know it’s important to diversify my retirement savings with something like a physical gold IRA. But what is a gold IRA, exactly?”
A gold IRA is a particular type of retirement account that holds physical gold assets within it such as gold bars and coins. They exist both on paper and physically. Gold coins and bars in an IRA, for example, are held in a secure storage facility designed for precious metals. A gold IRA brings with it many of the advantages of a physical asset, along with the tax advantages of an IRA.
We all want to have a comfortable retirement, and - for most people - that means saving a lot of money over a long period of time. But currency (upon which most retirement accounts are based) tends to lose its value with inflation and other national economic stresses. It may feel like it’s impossible to be sure that you keep all your hard-earned wealth long enough to retire on it.
If you’re worried about your retirement money losing value, what can do you to give yourself the best possible chance of the retirement you planned? One option many retirement savers use is to diversify their savings—and gold IRAs are one great way to hedge your savings against economic forces, because gold IRAs are a fundamentally different type of asset than those built on currency. Physical assets in your portfolio have the potential to offset losses that come with economic volatility.
Of course, that doesn’t mean the value in a gold IRA won’t fluctuate, as any asset does. And it doesn’t mean this type of IRA is the best solution for everyone. Like any other investment, gold IRAs come with their own pros and cons. In this article, we’ll go over both the advantages and disadvantages of gold IRAs, so you and your personal legal, tax and financial advisors can decide if this investment is right for you and your financial goals.
What is a Gold IRA?
Let’s start by breaking down exactly what a gold IRA is. This type of individual retirement account holds gold instead of more traditional assets such as annuities, stocks, or bonds. Specifically, a gold IRA needs to be a self-directed IRA.
Physical gold wasn’t always an investment option for retirement savers who were looking to take advantage of an IRA. But the Taxpayer Relief Act of 1997 expanded the list of assets that could be included in an IRA to include gold and some other precious metals such as silver, platinum and palladium. This is the same act that established the Roth IRA. Americans loved it because it gave them more choices – more autonomy and control over their own retirement investments.
Since the passing of that act, retirement savers have been able to enjoy the benefits of an IRA while also enjoying some of the benefits of investing in a physical asset. Gold IRAs have been a popular method of diversifying savings ever since.
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Why a Gold IRA?
There are a lot of assets out there that could be used as a store of value, and other assets can be contained in a self-directed IRA. So why is there so much attention on gold specifically?Gold has a very long history as a representation of value. Gold coins have been produced since at least the 5th century BC and have been used throughout history to demonstrate wealth through decorations and accessories. The more gold you could afford to display, the more wealth you had.It's hard to say exactly why this precious metal has captured human imagination for thousands of years, but we can make some guesses. Gold stands out—it’s very reflective and easily grabs attention. It’s relatively rare, so amassing a lot of it shows your influence. It’s malleable enough to be worked into coins, but durable enough to hold that shape sometimes for hundreds of years.
Gold is even used to demonstrate wealth in fairy tales throughout the world. You will be sure to find it in fictional pirate chests, along with twinkling jewels. It’s used to embellish home and building décor and show a certain sense of sophistication. It’s also the world’s best conductor of electricity and a must-have for all kinds of electronic devices, some of which are life-or-death tools for the medical industry and other sectors.Whatever the reason, gold has maintained its reputation as a valuable metal for thousands of years. Gold was even used as the basis of American currency for quite some time—the “gold standard”—though that isn’t the case anymore. Because of this history, many people feel more comfortable storing their savings in gold than some other physical and paper-based assets.
What Is a Gold IRA’s Strongest Benefit?
So what is a gold IRA good for? There are many different advantages to storing your hard-earned wealth in a gold IRA, from being able to own a valuable, physical asset that has an intrinsic value to getting tax advantages by owning that asset through your IRA and more. We’ll cover the strongest arguments we’ve heard for starting a gold IRA and why retirement savers might choose to diversify their savings with this kind of retirement account.Later, we’ll go over a few cautionary points you may want to consider before rushing to roll over all your savings into a gold IRA. After all, no asset is perfect, and no one can make any guarantees about what the future will bring and how it will affect the assets you hold in your retirement account. Still, many people have decided that a gold IRA is an important part of their plan to retire as they planned—and when you examine the benefits of this appealing tangible asset it’s easy to see why.
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The Benefits of a Physical Asset Such as Gold
Some people enjoy the peace of mind they get from owning a valuable physical asset such as gold. There’s certainly nothing wrong with paper assets such as annuities, stocks and bonds—those types of assets have performed well for many people in the past. But it can be nice to know that your money is invested in something more tangible. A real object you could pick up and hold. An asset that has built-in value just by existing in the form we find it in the earth.It is difficult for a physical asset to ever become truly worthless. Regardless of what’s happening with the economy, physical assets are likely to always have some real-world application, even if it’s simply as a building material or decoration.Fortunately, gold in particular has several real-world, practical uses.
The Benefits of Gold as an Asset in Demand
Physical gold in many forms has significant value beyond just being seen as rare and expensive. Gold is malleable and sturdy and conducts electricity well while being resistant to corrosion. Because of these features and others, gold has uses in many different fields, from manufacturing to medicine, which creates a regular demand for the metal.Gold is a necessary component of many of the electronic devices you use in your home. It’s used for its conductive properties in computers, which means it’s needed for the production of things like TVs, smartphones, cars, and more.You may not even realize how many devices have computerized components these days. Modern household appliances such as vacuum cleaners and washing machines frequently use computerized components to handle their more advanced features—and thus, require gold to manufacture them. Gold is also often used in the dental industry. Gold plating is used for tooth restorations, crowns, dentures and more. Not only is the metal workable enough to be fit exactly to a patient’s mouth, it’s very biocompatible, meaning the body doesn’t reject gold. In addition, gold is highly resistant to corrosion, which means it’s ideal for durable fixtures.These and other practical uses mean that gold is in high demand and seems likely to stay that way—at least as long as these manufacturing processes continue. And that demand could mean good things for gold’s value over time, which is good for those who are looking to diversify into gold to hedge against economic downturns for the sake of their retirement savings.
Benefits of an IRA
Of course, if all you wanted was to own gold, you could simply buy it without the need for an IRA. What is a gold IRA good for, then? It was illegal to own gold at all in the U.S. for a little over forty years, but that hasn’t been true since the 1970s. Maybe partly for that reason, Americans have gotten into the habit of neglecting gold as a viable investment option both inside of and outside of official retirement accounts.
Now that gold can be owned by individuals, it’s tempting to just buy it outright, store and insure it yourself, and not worry about any retirement benefits. However, by simply buying gold outright, you could be missing out on some key features of a gold IRA.The real advantage of a gold IRA is combining the benefits listed above of precious metals themselves with the additional benefits an IRA can bring. It’s important to take advantage of all the benefits possible when it comes to retirement savings. We don’t know what future years will bring, and IRA benefits can help offset some of the risks to your retirement, not the least of which are economic stresses that happen naturally and with the changing of political parties.A gold IRA has many of the same advantages as a standard IRA like the one you might have through your employer – or may have had over the years. You can choose between many of the same types of IRA, such as a traditional IRA, a SIMPLE IRA or a Roth IRA. Depending on the kind you choose, you’ll get different tax benefits. With a gold IRA, you can also roll over or transfer retirement money from other retirement accounts, such as a 401(k). That makes it easy to add physical precious metals to your retirement savings mix.With a traditional gold IRA, you can move your income directly into your self-directed account before you pay any taxes on it. That way, you aren’t paying taxes on money you won’t see again until later in life. This has the additional benefit of lowering your total income by the amount you contribute, which can have other advantages. However, with a traditional IRA, your money will be taxed when you withdraw it from your account later in life. Many people believe they’ll be in a lower tax bracket then, and so will ultimately pay fewer taxes on their money overall. On the other hand, tax laws are susceptible to change, and it’s possible you could be taxed at a higher rate in the end.If that concerns you and you’d rather have a more predictable income when you retire, you also have the option of using a Roth IRA. A Roth IRA works the other way around—your money is taxed when you put it into the account at your current tax level, but later, when you withdraw it, you can claim your money tax-free. For some Americans, this is better, because they don’t want to see their retirement distributions eaten away by taxes at a time in life when every penny may count.
Hedge Against Inflation
You may already have some money tucked away in a savings account that is based on currency (the number of dollars you deposit), but many professionals advise against storing your wealth in pure currency, such as in a checking or savings account, for one big reason: inflation.
We’ve all seen the effects of inflation over the course of our lives. A candy bar that once cost 25 cents now costs $1.50. The same kind of sticker shock applies to the money you have saved. If you simply held all of your savings in currency within a savings account in that span of time, you’d only be able to buy 1/6th as many candy bars as you could have purchased when you started saving. But what if you instead decided to save the candy bars themselves, worth the same amount as the total of your savings?Well, they’d probably have rotted by the time you are ready to retire. That’s why candy bars don’t make a good store of value. But what if you saved physical gold coins and bars instead? Now, the appeal becomes obvious. Storing your hard-earned money in some kind of physical asset makes it more likely that you’ll retain at least part of the value of that money, even as inflation does its dirty work.
Diversify Your Savings
No matter how people eventually decide to store their wealth, many of them choose to distribute their wealth between several different assets. That’s called “diversifying.” The reason for this is simple: if something happens and one asset falls in value dramatically, the other assets might not be susceptible to that same drop.There’s no guarantee that any particular asset will perform better than any other. However, speaking historically, some assets have performed well when the markets overall have been down, providing a kind of financial ballast in hard times for those who have money in those assets.Notably, gold has a history of keeping its value or even rising in price during times of economic turmoil. Everyone remembers the housing crisis of 2008 and the resulting economic fallout—many people lost a great deal of money when all the dust cleared, and the entire country was in a recession for well over a year. But many people don’t know that during that period the value of gold actually rose—and by a fair margin. The spot price of gold after the financial crisis went up 27% from October 9th, 2007, to March 6th, 2009. The S&P 500 fell by 54% in that same period.Of course, the price of gold does sometimes fall, too. That’s why many professionals recommend diversifying your savings and storing your money in a variety of assets. That way, when the price of one asset falls, your other assets might be spared. It’s up to you and your financial, tax, and legal professionals to come up with a plan that works for you, with physical gold (and maybe even silver) providing the ballast that could help you hang on to more of your money by the time you retire.
What Is a Gold IRA’s Biggest Risk?
There are both pros and cons to anything and, despite the numerous advantages of gold IRAs, they are no exception. There are some things you’ll want to be aware of before you decide to roll over your life savings into a gold IRA. Many of these factors are also present in similar accounts, so no matter what you decide to do with your retirement savings, make sure you’ve done your research.
No Early Withdrawals
Just like any other IRA, you won’t be able to make early withdrawals from your gold IRA without paying a penalty to the IRS. If you decide you need to access your money before you turn 59½ years old, you’ll have to give up 10% of the amount when you withdraw your gold and liquidate it.Fortunately, early withdrawal IS an option if you have some kind of financial emergency in your life. But it’s best to avoid an early withdrawal if at all possible, because that 10% penalty can add up to quite a lot depending on how much you have saved. The closer you are to retirement and the larger your accounts are, the more you’ll be penalized.
Potentially Higher Fees
Because gold is a physical asset, there are certain special considerations you have to take into account. Your gold must be physically stored at a gold depository—by IRS rules, you aren’t allowed to keep the gold used for your IRA in your personal possession (although you can still arrange for a visit to the depository to see and handle it).Of course, the depositories don’t work for free, and you’ll have to pay storage and management fees on your gold IRA. This can lead to higher fees than you might have with other kinds of retirement accounts. Some gold IRA providers (“gold IRA companies”) offer promotions that help cover some or all of the fees, but you should always ask what the fees are and under what circumstances you’ll have to pay them yourself.
It's important to keep in mind that the IRS only allows you to contribute a certain amount of your income to your IRA each year. For most people with a traditional or Roth IRA, this is going to be a limit of $6,000 or $7,000 if you’re 50 years of age or older. You also cannot contribute more than your taxable income for any given year, which may be applicable if you are semi-retired and making less than $6,000 a year but want to contribute from your savings. This probably won’t apply to most Americans, but it’s good to know, just in case.Fortunately, there are no limits on how much you can roll over from another IRA into your precious metals IRA. If you already have money saved up in a standard IRA from your employer, you can easily roll it over into a precious metals IRA with the help of a precious metals IRA provider.
You May Need Help Navigating Gold IRA Paperwork and Ordering Gold Products
It’s not too complicated, but there are a few important hoops to jump through when it comes to setting up a gold IRA account. A gold IRA specialty provider (often called a “gold IRA company”) knows all the ins and outs of getting started and maintaining this type of account. Gold IRA companies work with specialized custodians and precious metals storage facilities, and they usually have already vetted the options and have identified preferred companies and facilities they recommend.
A gold IRA company usually has an order desk that helps you select gold (or other precious metals) to fit your investment strategy – or at the very least can shed some light on the gold products that are most commonly ordered by retirement savers.
A good gold IRA company helps you through the paperwork and stays on board to act as your personal resource even after you complete your purchase (which is called a “trade”). They offer transparent prices and may even have educational materials that help you understand how physical precious metals have behaved through history in different economic conditions – and other information that could be difficult to find in other places. Gold IRAs are very common these days, but traditional financial advisors still don’t usually provide information about them to their clients.
Unfortunately, because the gold IRA industry is not regulated, some gold IRA companies have been known to pressure potential customers using questionable tactics. In one scenario, the company promises excessive amounts of “free” silver upon the opening of an account. As with any purchase, a promotional benefit (especially one as large as some excessive “free silver” offers out there) has to be paid for somehow or the company couldn’t be in business – so it may mean the price of the gold you purchase is overpriced. There is no such thing as a free lunch, as they say. If it seems too good to be true, it probably is.
In another questionable scenario, a company might claim that it has a special one-time deal or that an economic disaster is coming. These types of tactics are designed to make you feel the fear of missing out or fear of getting into a bind with your money. These tactics are exaggerations and probably far from the truth. If you feel pressured into the purchase of a gold IRA for any reason, you may want to keep looking for better company.
The truth is there are many good reasons to open a gold IRA—if it’s really right for you. You just read some of those reasons above. Buying a gold IRA should be a part of your comprehensive financial strategy for retirement (or outside of a retirement account) that you have carefully formulated on your own, with the help of your own financial professionals. Then, a reliable, trustworthy, experienced gold IRA company can help you make it happen.
Is a Gold IRA Right for Me?
No one can decide for you whether a gold IRA is the right solution for your personal financial goals. A certified financial planner may be able to give you viable suggestions about the best way to fit a gold IRA into your strategy and plan, but the final choice is yours.It's a good thing, then, that there are so many resources available for you to teach yourself more about physical self-directed retirement assets such as gold IRAs. The most important thing is to do your due diligence on precious metals—do all the research necessary, so you understand the pros and cons. Furthermore, be sure you carefully vet any gold IRA specialty companies, custodians, and storage facilities you use to carry out your strategy.
This article is a good start to understanding and making use of physical gold in your retirement plan, but don’t stop here—keep looking online, ask lots of questions when you connect with providers, and maybe even find out what other people are saying about gold IRAs and the gold IRA companies that serve investors like you.
Information is the greatest tool you have to learn about gold IRAs, vet gold IRA companies, and improve your chances of realizing the kind of retirement you expected when you began saving.
Free Guide: Gold IRA Dealer Lies: Get This Guide & Learn to Avoid Them!
See also: 3 Best Gold IRA Companies in America for 2022 With ⭐⭐⭐⭐⭐ Reviews
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