What is a Gold IRA and how does it work?
For the purposes of this discussion we are going to be focused solely on physical Gold backed IRA’s where the IRA is backed by physical gold bullion bars or approved gold coins stored in an authorized depository.
There is another type of Gold IRA called a Roth IRA. This is a little bit different as it allows you to hold physical precious metals as well as investing in a range of tangible assets, including but not limited to art, antiques collectibles and even real estate. It also has a different tax structure to a physical Gold backed IRA account.
For a long time owning physical precious metals was quite challenging and enough to put many investors off exploring it as a realistic option. That changed in 1997, when Congress passed the Taxpayer Relief Act which enabled investors to own physical gold, silver, platinum, and palladium in their IRAs. This increased the liquidity of these precious metals and made them more accessible for individual investors in a way that was secure safe and regulated.
A precious metal IRA has many benefits over traditional retirement plans like stocks, bonds, and mutual funds. Not only do precious metal IRAs offer access to high-return investments with minimal risk, but they also provide tax advantages. Moreover, they help investors hedge against market volatility and financial uncertainty. As gold prices continue to rise, Gold IRAs will only become more popular among gold investors.
A Gold backed IRA account is a self-directed IRA which allows individuals to invest in gold and other IRS-approved precious metals and it works in a similar way to a conventional IRA or 401(k), with the same rules regarding contributions and tax treatment. You can use it to save for retirement or as an investment asset.
You can use a Gold IRA account to save for retirement the same way you would use a traditional IRA or a 401(k). You can make deductible contributions of up to $7,500 per year [as of 2023] if you’re age 50 or older. After that, you have access to your funds without limitations. With a Gold backed IRA account you have control over the investments in the account. By law a Gold IRA account requires an IRS-approved custodian to hold your precious metals. For obvious reasons of security home storage of your gold is not permitted.
What are the Benefits of a Gold backed IRA account?
A Gold backed IRA will be of great appeal to those investors who want a diversified retirement portfolio. Gold prices typically move in an inverse way to paper assets, thereby providing the investor with insurance against inflation, as well as reducing overall risk as part of a balanced risk management strategy. In this way savvy investors protect at least a portion of their portfolio from potential disaster for while it is quite within the realms of possibility for a bond or a stock to lose its value entirely, this will never happen to gold!
Another substantial benefit for many of a Gold IRA account is the self-directed aspect, giving investor’s direct control of their asset mix, something much less achievable with traditional IRA structures. Some account custodians have very rigid options as to asset groups. Precious metal IRAs offer the investor a much greater degree of flexibility to diversify away from predetermined asset classes. For those who want the opportunity to have a much greater level of control over their assets and hence their financial futures, a Gold backed IRA is a good option.
Many people look on a Gold bullion IRA as a type of insurance policy against economic disaster. It can hardly be argued that we live in interesting times both economically and geo-politically. At home there is rampant inflation and some of the most excessive money printing by the Federal Reserve that has ever been seen. Geo-politically there is a significant war being fought between Russia and Ukraine which America is significantly invested in, as well as a substantial likelihood that the US Dollar will no longer be the only currency accepted for global oil purchases. Losing its “Petrodollar” status will have huge implications for the long term value of the dollar. Fair to say we are living in turbulent times so many investors are looking at hedging risk by having precious metals as an insurance policy.
Another benefit of holding gold is that of its liquidity. In challenging financial times or in the event of an emergency, selling stocks bonds property and other assets may prove both time consuming and difficult particularly in a down market. Gold on the other hand is a very liquid asset which can very easily be converted into cash quickly should the need arise.
For those investors playing the “long game” a Gold Backed IRA account can be a good choice. Whilst the price of gold can fluctuate in the short term its potential for long term growth is unmatched. Just an interesting example of this based on the last 50 years. One thousand US Dollars bought 50 years ago would still [theoretically] be worth one thousand US dollars today. However that same one thousand dollars if it was used to purchase gold 50 years ago would now be worth almost $37,000. This is a pretty unmatched ROI!
Can I switch all or part of my existing IRA to a Gold IRA?
If you have an existing IRA account you can convert this over to a Gold IRA without taxation or penalty.
There is a specific step process involved in this. The first step is to open a new Self Directed IRA account. Due to the specific requirements involved in gold purchase most conventional 401k/IRA providers do not offer this option due to the insurance and custodial requirements involved. You need to find a trustee/custodial company which specializes in Self Directed IRAs and gold investment. A custodian will manage your gold backed IRA account and will provide all the necessary recording and documents required by the IRS as well as carrying out all the transactions on your behalf.
The second step is to initiate a transfer of funds to make your gold purchases with. Fortunately due to the ever increasing popularity of gold investment, this is now a fairly straightforward and streamlined process involving your chosen Gold IRA provider contacting your existing IRA/401k provider with your account details and requesting a transfer of your funds. There is no tax penalty of any sort for making this transfer.
The next step is to find a reputable precious metals dealer. A lot of Gold IRA providers will work with a preferred list of dealers, so this makes this step fairly easy. If you decide to choose a dealer other than those recommended, do your due diligence and ensure that the company is of good standing. It is never a good idea to purchase from newly established firms without a solid track record in the industry.
The penultimate step is to find a secure depository to store your gold purchases. The IRS specifically prohibits home storage of your gold, so this is compulsory. As previously you’re chosen Gold IRA provider will almost certainly have a list of reputable depositories that they work with, so this makes choosing a Gold IRA custodian a simple task.
The final step in the process is to purchase your physical gold. This involves the signing of something called an Investment Direction Form that your chosen precious metals dealer submits to the Self Directed IRA provider. It is basically permission to use your funds to purchase the gold options you have decided upon.
What types of Gold can I hold in my Gold backed IRA account?
There are fairly stringent restrictions around what specific types of gold you can hold in your Gold backed IRA account. The main requisite is around purity. Bullion bars must be of a 99.9 fineness. Typically this would limit the acquisition of these bars to either a National Government Mint or a refinery approved by either the COMEX or NYMEX.
The other restriction is around “collectibles”. An IRA is not allowed to own collectibles, and precious metals are defined as collectibles. There is however a work-around for this. Bullion coins that are legal tender can be owned by IRAs. A few examples of these are the current American Eagle and Canadian Maple Leaf coins. Your Gold Backed IRA provider will be able to clarify exactly what you can and cannot hold but these are the basic guidelines.
Other restrictions of significance are that you cannot move previously purchased gold which you already own into a Gold IRA. Gold must be purchased through an authorized supplier after your Gold IRA account has been created. This is to ensure that the strict purity requirements of a Gold IRA are met.
For most investors these restrictions don’t create any real problems, as they are effectively designed to protect the investor by only allowing them to purchase top quality gold investment products from authorized suppliers with stringent quality control systems in place.
