Gold IRAs: A Comprehensive Guide to Retirement Investing with Gold

Investing in a diversified portfolio allows you to spread out your risk when you’re saving for retirement. Fortunately, you have a variety of options to diversify your portfolio depending on your financial goals and investment style.

You may have seen commercials advertising the ability to invest in physical gold within an Individual Retirement Account (IRA). The product these commercials are promoting is a gold IRA. But are gold IRAs a good investment option to help you diversify or are they a common retirement money mistake?

Here’s what you need to know to make the right decision about gold IRAs based on your situation.

In this article

• Why people buy gold
• What is a gold IRA?
• How does a gold IRA work?
• How to do a 401(k) to gold IRA rollover
• Are gold IRAs a good idea?
• Pros of gold IRAs
• Cons of gold IRAs
• How to get started with a gold IRA
• Alternatives to a gold IRA
• FAQs
• Bottom line

Why people buy gold

Each person may buy gold for different reasons, yet a few common themes pop up. Many people believe gold is an essential part of how to diversify your portfolio. A diversified portfolio aims to hold some investments that may perform well while other investments perform poorly and vice versa. This helps balance overall returns over long time periods.

The idea behind including gold in a diversified portfolio is that it is one of many alternative assets that could outperform stocks during a market crash. While this may not always be the case, many people strongly believe in this argument. In reality, gold’s returns have historically lagged behind the Dow Jones Industrial Average.

Others believe in gold as a physical representation of value. If the value of the U.S. dollar drastically decreases, gold may be a store of wealth you could sell for other currencies or barter for goods. While this is true, bartering a one-ounce gold coin for small dollar-value items would be impractical due to the gold’s immense worth compared to everyday needs like food.

Gold also is a finite resource. There is only so much gold that exists on the planet. Some people speculate its price may increase as humans continue to mine, process, and use gold to the point where it becomes cost-prohibitive to mine more.

What is a gold IRA?

Usually, the IRS defines gold as a collectible. You cannot hold collectibles in retirement accounts, including an IRA. But an exception to these IRS rules was introduced in 1986 that allows investing in gold coins in certain IRAs and was later expanded to allow investing in 99.5% pure gold bullion. A gold IRA is this special type of IRA account that allows you to buy actual gold and certain other precious metals within an IRA. These IRAs are also sometimes called silver IRAs.

Physical metals you can invest in with a precious metals IRA include:

• U.S. American Eagle gold coins minted by the Treasury Department (one, one-half, one-quarter, or one-tenth ounce)
• U.S. American Eagle silver coins minted by the Treasury Department (one ounce)
• Certain platinum coins
• Certain gold, silver, palladium, and platinum bullion

How does a gold IRA work?

You must follow specific guidelines to hold physical gold within a gold IRA. First, you cannot physically hold the gold yourself. You’ll have to open a self-directed IRA account with a bank or an IRS-approved non-bank trustee who will keep the gold on your behalf. These accounts enable you to invest in non-traditional investments such as physical real estate and gold.

Not all companies that offer self-directed IRAs offer this service, though. Instead, you’ll have to find a custodian or trustee willing to hold the gold on your behalf at an approved depository. A depository is just a fancy name for a place to hold things, such as a bank vault. You then purchase gold through a broker and the custodian takes physical possession of the gold by storing it at the depository.

Self-directed gold IRAs can be either a traditional or Roth IRA depending on your preferences. No matter which option you choose, the contribution limits for both types of IRAs are the same for a gold IRA as a regular IRA. In 2021, you can contribute up to $6,000 to the account if you qualify. People aged 50 or older can contribute an additional $1,000 catch-up contribution.

A traditional IRA may allow a tax deduction when you make account contributions. Any earnings grow tax-deferred until you withdraw the money, at which time you have to pay ordinary income taxes on it.

The Roth IRA does not give taxpayers any tax benefit for their contributions. But the investments within the account grow tax-free and you can withdraw them tax-free after you reach age 59.5 as long as you meet all the requirements.

How to do a 401(k) to gold IRA rollover

Many people invest in their workplace’s 401(k) plan. Unfortunately, these plans don’t typically allow you to invest in physical gold. When you retire or leave the job, you can roll over your 401(k) to an IRA. This means you could move the funds from your 401(k) to a self-directed gold IRA if you wish.

A rollover is a tax-free transfer of assets from a 401(k) plan to another tax-advantaged retirement plan, such as an IRA. You must handle rollovers carefully to ensure you don’t accidentally make distributions that would result in income tax consequences. First, you must open the gold IRA you wish to transfer your funds into. Once the account is open, you can have the 401(k) plan and gold IRA custodian work together to transfer the funds from your 401(k) to your new IRA.