You've probably heard about gold IRAs if you're planning your retirement strategy. These special retirement accounts act as an excellent alternative to diversify your portfolio and even build your wealth in the long term. However, many inexperienced investors jump right into these accounts without knowing everything about them.
Not knowing what you're dealing with can lead to financial issues later. Your retirement money is something delicate to take care of. Even though investing in gold and other precious metals offers plenty of benefits to people, you must consider a few things first.
I'll guide you through all the pros and cons of having a gold-backed IRA. If you've already decided on opening one of these retirement accounts, you can go directly to the guide I wrote here.
Overview - Pros and Cons of Investing in Gold IRAs
Let's not waste any time. Keep all of the following statements in mind if you're planning on opening a precious metals IRA account.
Pros
Diversification
Opening a gold IRA account is an excellent method to diversify your current portfolio. You may have heard the phrase: "Don't keep all your eggs in one basket." This applies specifically to retirement funds.
Diversification allows you to protect yourself from economic uncertainty. If you have all your money invested in one asset, and it fails, you risk losing everything.
On the contrary, if you allocate a portion of your portfolio to stocks and another to physical gold, for example, you'll have a better chance at dealing with these unexpected market movements.
You shouldn't invest all your money in gold coins, either. Even though the value of these precious metals is known for being stable, it's better not to risk it.
Tax Benefits
Gold IRA investing can give you a few tax benefits once you're ready to retire. If you open a traditional IRA or SEP IRA, you can make tax-free contributions. You'll have to pay taxes once you make your first withdrawal.
Another benefit of traditional/SEP IRAs is that your contributions are tax-deductible.
On the other hand, if you open a Roth IRA, you'll pay taxes when contributing. However, you can make tax-free withdrawals when the time comes. Feel free to choose the gold IRA investments that suit your needs the most.
The IRS has strict rules when it comes to investing in physical gold for your IRA. Make sure to follow all guidelines correctly to enjoy the tax benefits once you retire.
Protection Against Inflation
Everyone in the world is exposed to inflation at some point. While you can predict whether the dollar's value will increase or fall with some expert help, there's no 100% guarantee for that.
Most of the time, gold coins and other precious metals maintain their value even if the dollar's price changes drastically. Its value even increases in some cases.
In other words, you can get consistent returns if you invest in precious metals.
Preserving Your Wealth
As mentioned, gold's price tends to remain stable. Other assets like bonds don't have the same luck.
If you want to protect your retirement savings, investing in gold, silver, platinum, or palladium can be a great idea. Gold IRAs, overall, are a great option to preserve your wealth even during times of financial uncertainty.
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Cons
Restrictions
The IRS set annual contribution limits for gold IRAs. In 2023, you can contribute up to $6,500 if you have a traditional or Roth IRA. If you're over 50 years old, you can contribute up to $7,500 per year.
Those who have SEP IRAs can contribute up to $66,000 or 25% of their self-employment income, whichever is higher.
Even though this may become a problem for those wanting to invest high amounts of money right away, it's not a big deal if you're far from your minimum withdrawal age.
Tax Risks
The minimum withdrawal age is 59 ½ years. In other words, you can't make any withdrawals from your gold IRA until you reach that age.
If you try to make a withdrawal before reaching the minimum age, you'll have to pay taxes on the withdrawal plus a 10% penalty. This only applies to traditional and SEP IRAs. What happens in the case of Roth IRAs?
As long as you withdraw an amount of money equivalent to what you contributed in the first place and do it after you're 59 and a half years old, you'll have no problems. The distribution will not be considered taxable or subject to penalty. However, if you make a withdrawal that's higher than what you initially contributed, or you withdraw before the minimum age, you'll get penalized.
According to the IRS, you'd have to meet certain "distribution requirements" for Roth IRAs if you don't want to get penalized in any way:
- You can only make a distribution five years after you first contributed to the account.
- The withdrawal can be made by a beneficiary or estate manager after you pass away.
- You can make withdrawals if you have a permanent disability.
- The distribution is used to buy or build/rebuild a home that meets the "first-time homebuyer" rule.
No Dividends
Having gold in an IRA won't give you passive income. Many people invest in stocks and bonds because they often give them a share of the company's dividends. However, this isn't the case with a gold IRA.
In other words, you shouldn't open a gold IRA if your goal is to earn passive income. Your goal with these assets should be to preserve your wealth and prepare for any potential market crashes.
Limited Returns
Following up with the previous fact, physical gold won't necessarily yield high returns. If you want to earn more money from your investments, you should look for riskier assets. I recommend you diversify your portfolio with different asset types (including precious metals) if you want all the benefits you're looking for.
Potential Account Fees
Most gold IRA companies charge extra fees for managing your account. You can expect setup, maintenance, storage, and custodial fees, depending on the people you work with. If you don't choose your gold IRA companies carefully, you could earn less money in the future.
Analyzing the Pros and Cons of Having Gold in an IRA
The disadvantages of precious metals IRAs aren't enough to offset the benefits. Most of the cons I mentioned happen if you don't open and manage your account correctly.
However, if you're smart about your investments and choose the best gold IRA companies to work with, you'll have no issues with your retirement money in the future. If you're planning on investing in gold and silver coins, make sure you take your time to analyze every possibility and consult with an expert.
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What Is a Gold IRA?
If you're convinced of the benefits of a gold IRA and want to open an account, read this section. I'll give you all the information you need to get started on the right foot!
A gold IRA is a specialized retirement account. It allows you to hold certain assets that traditional accounts can't, such as:
- Gold
- Silver
- Platinum
- Palladium
Something that makes gold IRAs unique is that you won't hold paper assets only. You can invest in physical precious metals and store them in an approved depository.
You can choose between traditional or Roth IRAs for your new account, whichever sounds better.
Why Gold?
Gold has been popular for thousands of years. Not only is this asset used as a representation of wealth and status, but it has also been part of many civilizations throughout history.
You could argue many reasons for gold's popularity. Maybe it's because of its unique look or all its uses. In any case, gold has always been a valuable asset. Keep in mind that gold is always in demand; this is why it helps investors preserve their capital throughout the years.
With that being said, gold is not the ultimate solution to retirement. If you're not smart with your investments, you'll still go through a few financial issues throughout your life. On the contrary, you'll experience several benefits upon retirement if you're smart with your gold IRA purchases.
How Do You Make a Gold IRA Investment?
The first thing you need to do to enjoy the benefits of your gold IRA is to open your account with the right person. Let's go over all the steps necessary to get started:
Finding a Reputable Custodian
This is the most important step to follow. You must look for professional and reputable gold IRA companies, as they'll be responsible for managing your account. There are many options on the market, so make sure to review each one carefully before deciding.
Choosing Your Funding/Rollover Option
You have two options when opening your gold IRA. If you already have a retirement account, you can do a gold IRA rollover or transfer to make things easier.
- In a rollover, you ask your current custodian to send you the funds for your gold IRA. They will deposit the money, and you'll have 60 days to wire them to your new account if you want to avoid penalties.
- Transfers are more comfortable. All you have to do is ask your custodian to make the transfer. They'll give you some paperwork to fill out. Once you're done, they'll send the money to your gold IRA. You won't have to do anything.
The second option (if you don't have an existing retirement account) is to go straight with your gold IRA custodian. Remember to follow the annual contribution guidelines stated by the IRS.
Buy Your Precious Metals
You can start buying your precious metals through your gold IRA! Keep in mind that the IRS has a few requirements on which type of precious metals you can buy. If you don't buy approved assets, you'll be subject to taxes. The IRS asks for a minimum purity level of 99.5% for gold, for example. Also, the precious metals in your gold IRA must be produced by an accredited refiner/manufacturer or by a national government mint. With that being said, you have a wide range of precious metals to choose from:
- Bars/Bullion
- Gold Coins - U.S. Gold Buffalo, Canadian Maple Leaf, etc.
- Silver Coins - American Silver Eagle, Canadian Silver Maple Leaf, etc.
- Platinum Coins - Australian Platinum Kangaroo, American Platinum Eagle, etc.
Palladium Coins - Canadian Palladium Maple Leaf Now, these are the items you can't include in a gold IRA:
- Gold with a purity level lower than 99.5%
- Silver with a purity level lower than 99.9%
- Platinum with a purity level lower than 99.95%
- Palladium with a purity level lower than 99.95%
- Gold Krugerrands
- Collectible coins
- Coins not manufactured by a national government mint or approved manufacturer
- Pre-1933 gold
- U.S. silver coins that have 90% of silver content.
Ask your custodian for guidance if you're confused. They'll give you an appropriate investment plan that meets IRS guidelines and your goals.
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Choose a Good Depository
You can't store IRS-approved precious metals at home. Otherwise, you risk getting penalized and taxed. The solution to this problem is to store your precious metals somewhere approved by the IRS. Some popular depositories include Delaware Depository, CNT Depository, etc.
Most gold IRA companies have a list of depositories you can choose from. Remember to check each company's storage and custodial fees before deciding.
Make Withdrawals Once You're Ready
Make your withdrawals once you meet all the IRS requirements. If you're over 59 years and a half old, you can make penalty-free withdrawals. You'll have to make "required minimum distributions" once you reach the age of 72.
On the other hand, if you have a Roth gold IRA, you won't have RMDs or taxation on withdrawals. However, make sure you're withdrawing at the required age and that your first IRA contribution is at least five years old.
What Makes Physical Precious Metals Better Than Other Assets?
It's not that precious metals are the ultimate investment solution to consider but rather that they have advantages over others. Asset classes like stocks and ETFs depend on political and market movements.
Any sudden event in the world can affect an asset's price considerably. In the case of stocks specifically, not all of them may be a good option to invest in.
Some stocks can experience low liquidity, meaning that shareholders may not get the benefits/dividends they expected. In other words, other asset classes depend on specific events, companies, or other external factors. Precious metals, on the other hand, don't depend on those things.
They've maintained their stability for thousands of years, meaning you can rest assured your retirement funds are safe for later. Something that precious metals may not help you with is high returns.
As mentioned, physical gold and other related assets are known for maintaining their value. However, they won't give you greater returns like stocks, for example. If you want to reduce your portfolio's risk, the best thing you can do is diversify it with different asset classes. You'll protect most of your funds by throwing precious metals into the mix.
What Are the Benefits of Hiring a Gold IRA Company?
You must open your gold IRA account with the right company if you want to enjoy its benefits. Gold IRA companies have all the experience needed to manage your account in the best way possible.
When you work with an experienced custodian, you'll avoid making investment mistakes that could hurt your portfolio in the future. Moreover, keeping up with all the IRS rules can be complicated, especially as you age.
You won't have to worry about that anymore since your custodian will take care of everything. Many gold IRA companies provide their users with financial advice to maximize their portfolio's potential. Not everyone is a seasoned investor, so having an expert by your side could make all the difference.
How Do You Choose the Right Gold IRA Company?
The best gold IRA company will be the one that checks all your boxes. If you don't know where to start, consider the following before you make your decision:
- Reputation/Customer Reviews
- Fees
- Credentials
- Transparency
- Storage Options
- Minimum Investment Amount
- Customer Service
- Educational Resources
- Product Offering
How Much Should You Invest in Gold?
It depends on your financial situation. As mentioned, you shouldn't allocate all your portfolio to precious metals. Your goal should be to diversify as much as possible, but how do you do that? Many investors recommend allocating about 5%-10% of your portfolio to gold and other precious metals.
Such a "small" amount is more than enough to protect your savings until you retire. If you're someone with a great financial situation, you could invest more. However, make sure to ask a professional advisor before doing that. You could save yourself from many headaches.
Where's the Best Place to Store Your Precious Metals?
There's no "best" place to store your metals. As long as you choose a depository approved by the IRS, you're good to go. Your decision will depend on which depository meets your needs the most. With that being said, there are plenty of depositories that will meet most people's goals:
- Delaware Depository
- Brinks
- JP Morgan Chase Bank NA
- HSBC Bank USA
- CNT Depository
- and more
Some gold IRA companies have partnerships with depositories. Feel free to ask to get the best deal for your retirement account.
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Bottom Line - Is a Gold IRA a Good Investment?
A precious metals IRA is an excellent option as long as you manage it correctly. You won't enjoy all the tax benefits if you don't follow IRS guidelines, for example.
It's also important to remember that investing in gold isn't just about depositing money and calling it a day. You must work with professional custodians that can guide you through the entire experience. Creating a great investment strategy is also essential to meet your goals.
To summarize, the pros of a gold IRA far outweigh the cons. I recommend you get your IRA gold investment journey started today and discover the benefits that come with these accounts.
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