Quick Summary
- Gold IRAs self-directed IRAs that allows investors to hold physical gold, silver, and other precious metals. These retirement accounts have tax benefits that are similar to conventional IRAs, including tax-deferred growth or withdrawals that are tax-free (depending on the type of IRA account). Precious metals IRAs come with specific rules, however, including storage rules and extra fees.
- Ownership of physical precious metals, including gold coins or silver bars, offers direct control over assets without the typical retirement account regulations. This investment type offers liquidity, and the physical metals can be traded and sold. However, unlike having a gold IRA, there are no tax advantages to holding physical gold or other precious metals. They also might have capital gains tax applied. Finally, those who hold physical gold are responsible for storing and insuring their investment.
- When making a choice between physical gold and a gold IRA, it's important to look at factors including tax implications, liquidity needs, storage fees, and investment goals. Gold IRAs are used for long-term retirement planning, which comes with tax benefits. Physical metals offer immediate access and more flexibility. Find out more about what's best for you by talking to a financial professional.
Introduction
These days, people are more interested than ever in buying gold. They see the economic uncertainty that the country is experiencing every day, and they want to invest in something safe. One of the most common and traditional ways to do this is to invest in a product that, historically, has shown to be a safe bet in times of economic trouble. This project is physical gold.
People have been using gold as a fairly safe investment for thousands of years, but these days, there is another option. Instead of going out and buying physical gold coins, gold bars, or bullion, you have another choice: gold IRAs. The question most people have, however, is this: Which is better?
Here's the truth - no investment type is better than the other. It comes down to the individual, their goals, their wealth, and what's best for that person. So, what's the best route to take? Learn about both options, talk to a professional, and then make the choice that works best for you.
Gold IRAs - What Are They?
A gold IRA is a retirement account that allows you to hold physical gold or other precious metals as part of a retirement plan. This means that you can invest in gold and other precious metals now, and then when you reach the age of 59 1/2, you can start liquidating. A gold IRA is similar to conventional IRAs in regard to taxes, too. A Roth IRA, for instance, has tax-free withdrawals, and Roth gold IRAs have the same advantages.
Now that you know the basics of a gold IRA, you might want to know how you can invest in one. Well, you simply choose an IRS-approved custodian, and they will guide you through the process. They can also guide you in rolling over your existing IRA into a gold IRA.
The custodian you choose to handle your gold IRA account generally takes care of it all, including opening the account and assisting with the choice of precious metals to add to the IRA.
Keep in mind that though most people refer to these as 'gold IRAs,' they often also include other precious metals like silver, platinum, and palladium, so, you might see these referred to as a gold or silver IRA, etc.
Just as you might choose a traditional IRA, a Roth IRA, a SEP IRA, etc, you can also choose traditional gold IRAs, Roth gold IRAs, and SEP gold IRAs.
Once you have chosen your assets, your custodian will help to send the metals to a depository, which must be an IRS-approved depository. This is where your gold, silver, platinum, and/or palladium is stored until you reach retirement age.
What Does it Mean to Invest in Physical Gold?
If you aren't quite sure about using gold as your retirement savings, you might consider simply buying physical gold and storing it yourself. There are a few things to keep in mind about this, however.
You can buy gold coins, gold bars, gold jewelry...there are no restrictions here. These assets are available from gold dealers, pawn shops, or even online retailers. You can buy it and sell it whenever you want. However, similar to a gold IRA, there are some regulations to keep in mind. Specifically, holding gold or silver means you are subject to capital gains tax. This is equivalent to 28% max. In other words, you have to pay taxes when you sell these assets.
The Process of Gold Investments
Are you going back and forth about which option to choose? This means it's a good time to consider an investment strategy. To do this, let's look at some of the things to include in a strategy that will help you make the best choice for you.
Diversifying and Risk Tolerance
When you are deciding between a gold IRA or purchasing physical metal, risk tolerance is important.
A gold IRA is a retirement account that allows you to invest in gold-backed product. You do not physically hold this metal. It is stored in a depository. However, there may be less risk here than holding physical gold.
Why? Well, it's because physical gold is an asset that is more susceptible to market conditions. Plus, there is always the risk of damage or theft, since it is in your possession. The gold you have as part of a gold IRA is fully insured, as long as you store it in an IRS-approved depository.
Since both gold IRAs and holding physical gold have risk, you must look at your personal risk tolerance capacity.
Think About Short-Term vs Long-Term Goals
When considering either a gold IRA or purchasing gold to hold yourself, you should also consider your goals.
A gold IRA is generally best for those who are considering long-term goals, particularly a retirement account. There are tax advantages, and it allows the value of gold to rises over time. If you are more focused on short-term goals, buying and storing physical gold yourself might be a better option, but don't forget about taxes and risks.
If you aren't sure about your goals, consider talking to a financial advisor.
Do You Have to Choose One Over the Other?
No. You don't have to choose either a gold IRA or buying physical gold. In fact, it can be a great investment strategy to have both of these investments, as it will diversify your portfolio and boost your retirement assets.
Gold, in general, and other physical metals, often also serve as a hedge against inflation, and both a gold-backed IRA and buying physical gold can limit risk when the economy begins to struggle.
Understanding Tax Implications of Both Gold IRAs and Owning Physical Metals
One of the big considerations you must consider when choosing any type of gold investment is how the tax implications might affect you. Both gold IRAs and buying physical gold have tax implications. Before I explain more, however, I want to share these IRS tax regulations:
As shown above, when you choose either a traditional or Roth gold IRA, your taxes are determined by current IRS regulations. Both of these options, traditional and Roth, allow you to grow assets without immediate tax payments.
Gains are always tax-free, but you do pay taxes with your withdrawal from traditional gold IRAs, and Roth IRAs are funded with post-tax money. All gold IRA providers should fully explain this.
On the flip side, physical gold has fewer advantages. The IRS looks at gold as a collectible, which is why you must pay capital gains tax when you sell. Additionally, you must adhere to the requirements for IRS reporting.
Liquidity and Access to Your Investment
You also might want to consider the liquidity of your investment. Physical gold is considered a liquid asset because it can be quickly sold or traded for cash. Though, since its value is linked to market changes, the value of your precious metals can change quickly.
Gold IRAs, however, are not very liquid, and they are considered a long-term investment that you should have for many years. Because of this, you cannot access your gold before retirement age unless you pay a hefty fee. However, it is not subject to the same fluctuations of value that physical gold may experience.
Physical Gold Sales and Early Gold IRA Withdrawals
Buying gold is often a short-term investment, but you have to make sure that you are doing it in the right way. You might look at the spot price of gold, and think you can easily afford it, but when you go to buy the gold, you find that it might be more expensive. This is because most sellers mark up the price, and you may just have to accept it with the hopes that when you sell it, you can make up that cash.
However, when you sell physical gold, you might find a similar situation. If you, for instance, buy a gold bar for $3,200, and in a couple of days sell it, you might actually only sell it for $3,090, and end up losing money. Why? Because of fees, shipping, insurance, or other factors. Though you probably don't have to hold gold for years, it's generally not a good idea to sell quickly unless there is a huge price shift.
Alternatively, as with conventional IRAs, if you withdrawal from your IRA early, there is a 10% penalty. To avoid this, it's always best to wait until you are 59 1/2 before you liquidate.
The Costs Associated with Both Investment Options
In addition to the taxes and liquidity considerations listed above, there are also other fees and costs to consider.
Gold IRA Costs
Depending on which custodian you choose, there are likely going to be fees associated with starting the account. These might include account fees, annual maintenance, and storage fees.
Physical Gold Costs
When you buy gold directly, you aren't charged additional fees. However, you have to store the gold. Some people store their gold at home, but they need a very secure safe, which costs a lot of money. Alternatively, you can store gold at a safe deposit box at a bank, but you also must pay for that. Additionally, you probably want to insure your gold. Precious metals insurance plans are generally more expensive than you might think.
Comparing Costs
Are you still confused? The table below might help to make it more clear:
| Costs | Gold IRA | Physical Gold |
|---|---|---|
| Purchase/Account Setup Fee | Account set-up fees are usually added to the cost of setting up a gold IRA. This fee ranges, on average, between $50 and $150. | The only cost to purchase physical gold is the actual cost of the product. |
| Storing, Insuring, & Maintaining | There are annual costs to store your gold in a depository. This ranges from around $200 to $500 per year. It includes insuring the gold.
|
The cost of storing physical gold depends on how you choose to store it, i.e. in your home, a vault, or bank safe deposit box.
You should insure your gold, too. That will add into the total cost of storing your gold until you liquidate it. |
Note: Other fees might be applied depending on the custodian you choose.
Securing and Storing
There is also a difference between how you store and secure a gold IRA and physical gold:
Gold IRAs
You don't have physical gold when you have a gold IRA. Instead, your gold is stored in a depository. When stored, they are also insured. This means that if an IRS-approved depository has any type of loss, you won't have to worry because you will receive the cash value thanks to insurance.
Physical Gold
When you purchase physical gold, you can store it in any way you choose.
However, you have to be prepared to lose the gold if you don't secure it well and something happens, i.e. theft, damage, etc., unless you are insuring it.
I suggest storing your gold in a vault or safe deposit box at a bank.
Personal Control and Flexibility
Finally, we want to look at how flexible and controllable physical gold and IRA investments are.
Physical Gold
When you own gold, you have complete control of your assets. You can buy or sell at will, and you are always close to your assets.
Gold IRA
With a gold IRA, you don't have a lot of control. Remember, your gold is stored in an IRS-approved depository, and if you need to take a withdrawal from your account, there is a 10% penalty.
Some depositories do allow visitors, and most have some type of electronic means of checking in on your assets. So, this might help to ease your mind if you are uncomfortable knowing that your gold is stored elsewhere.
Final Thoughts
I hope you feel more comfortable and knowledgeable about the difference between having a gold IRA and owning physical gold.
Physical gold is more accessible, and you can buy and sell it at any time. However, there are fewer tax benefits and you have to take the proper steps to secure it.
A gold IRA, however, is not very accessible at all, and if you need to access it, there are penalties. However, there are several tax benefits that are associated with these.
The best way to decide which option might be right for you is to understand what your investment goals are. Also, keep in mind that you can choose both.
About Tim Schmidt Sr.
Tim Schmidt is an Entrepreneur and Serial Investor. Since 2012 he's been an advocate of alternative investments using a Self Directed IRA. His work has been featured in Yahoo! Finance, USA Today, Business Insider, and Tech Times, among others.
