A gold IRA, or self-directed precious metals IRA, is an account that lets a retirement saver invest a portion of savings in physical precious metals, usually bullion coins or bars.
It’s not for everyone and has several drawbacks. A gold IRA may work for some investors looking to diversify beyond stocks and bonds.
The Case for Physical Gold
The case for gold is that it offers a balance to stocks and bonds. Gold’s price has little correlation to paper assets, and it’s considered to be a store of value that may help hedge against certain situations that negatively affect the economy and markets.
However, gold isn’t a sure thing, and it does not produce an income like some other assets: investors can’t count on dividends or interest payments from gold. Its price can be affected by interest rates, currency prices, investor sentiment, and a number of macroeconomic conditions.
An investment in gold can lose money, and it may be worth less when you want to sell the coins or bars. For this reason, an investment in gold might not be best as a complete retirement plan, but it can be considered as one piece of a balanced, diversified portfolio.
What Does Liquidity Mean for Distributions?
Another key factor to consider when weighing gold is its lack of liquidity relative to other assets. There is a process involved in liquidating some or all of a precious metals investment, and it doesn’t happen as quickly as cashing out a stock or mutual fund holding.
Once an instruction is sent through to sell an investment, the proceeds need to be received before they can be turned over to the investor. Another drawback is that, because gold does not generate a yield, you may find yourself selling the bullion at a poor time, which is especially true once you reach the age of required minimum distributions – more info here. Planning around this in advance can help make sure distributions aren’t taken at the wrong times, when gold’s price is low.
A distribution can be taken in the form of a check once the bullion has been sold through the custodian, or it can be taken as the metal itself.
Custody and Storage Rules
A qualified custodian is required for a gold IRA to administer the account, keep the necessary records, and make required reporting. The bullion must be purchased through the account, only certain forms of bullion are allowed, and it must be stored in an approved depository.
Any distribution taken, either by taking possession or storing the coins or bars at home, would be subject to taxes and penalties. In addition, collectible coins and other specialty coins may not be allowed in a gold IRA.
Transfers and Rollovers
A gold IRA can be funded from new contributions or money from other eligible retirement plans and IRAs. Depending on the structure of the account, there are different rules about taxes and penalties for early distributions.
- Transfers: If moving money from an existing IRA, the new qualified custodian can typically set up a transfer with the other IRA company. The assets are transferred from one account to another without the retirement money passing through the hands of the IRA owner.
- Rollovers: Rollovers from an eligible workplace retirement plan can be handled in a couple of different ways. If structured as a direct rollover, the money is deposited with the new IRA custodian without the funds passing through the hands of the IRA owner. However, if the account is an indirect rollover, the IRA company distributes the funds to the account holder, who then must turn the money over to the new IRA. If the indirect rollover is from an IRA, the funds must then be deposited within a 60-day window into the gold IRA.
- Rollover deadline: There are consequences to rolling the money over to a retirement account after the 60-day deadline. Any money not turned over within that time frame is considered a distribution and could be taxed and penalized.
Costs Beyond the Bullion Price
The price of gold bullion fluctuates just like any other investment, and investors need to understand the process to buy bullion through the IRA and then sell the bullion back through the dealer. The spread, or the difference between the price to buy the bullion and what it pays to sell it back, may mean that there is a significant hurdle for an investor to make money on the investment.
There are also a number of potential fees associated with a gold IRA, and investors should ask questions to understand all of the expenses that will be incurred with the account; the Yahoo Finance report is another reference point for comparing providers. This can include an account setup fee, annual administration fee, and storage fees. Gold bars and coins can’t be stored at home and must be stored in an insured, regulated depository. There can also be fees associated with segregated and commingled storage options.
Traditional gold IRAs follow normal IRA contribution and distribution rules. Contributions to traditional accounts may be tax-deductible subject to income and coverage limits. Distributions from traditional accounts will be taxed at ordinary income tax rates.
Investors can also use a Roth gold IRA. Contributions to Roth accounts are made on an after-tax basis subject to income limitations. Distributions will not be taxed if qualified.
Regardless of what type of gold IRA is used, it’s important for investors to determine how much of a retirement portfolio should be in precious metals before making any investments. It’s equally important to decide in advance how often a portfolio will be rebalanced. If this is not done, it can lead to having too much of a portfolio in gold if the market happens to boom unexpectedly.
Sales Pressure Deserves Scrutiny
Some companies offering gold IRAs tout the advantages of gold with little consideration of the downsides and push a sense of urgency for investing, especially during times of uncertainty. Careful consideration and comparison of available options and associated costs should come before making any decisions about an IRA that holds bullion.
