Gold IRAs are gaining favor with US retirement savers. Is that wise...?
OVER THE LAST YEAR, retirement programs based on stock- and money-market funds such as 401(k)s and IRAs have ceased to be a safe haven for Americans' nest eggs, reports the team at Big Gold for Casey Research.
In 2008, US employees lost on average 14%, some $10,000 on average, of their retirement money. Those with more than $200,000 were even worse off. They lost more than a quarter of their savings.
No wonder that more and more people are asking whether they can, or should, use an Individual Retirement Account (IRA) to hold physical Gold Bullion. Our answer to the first part of the question is yes, indeed you can. The tax rules governing IRAs leave room for gold.
But should you buy gold in your IRA? Our answer to that second question is equivocal. First, some background.
Gold IRAs: History
In 1986, as the US Mint began issuing Gold Coins for the first time since 1933, a tax rule against holding "collectibles" in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin.
These easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE). The only stipulation is that all bars and coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. (Numismatic or "rare" coins are also impermissible for an IRA.)
Gold IRA: How to do it
The procedure for putting physical gold into an IRA is somewhat more complicated than with paper assets, but the requirements aren't onerous.
To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Don't look to your discount broker or a fund family like Vanguard; they won't touch the stuff, since it's outside their investment management or dealing. Instead, you'll need a specialist, such as the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust.
These are just two of the more respected names in the business, however, and an internet search will turn up other providers who can arrange both your IRA and its holding in gold. If you do your due diligence elsewhere – marrying an IRA account with a lower-cost custody service you know of – remember that it's important to choose a custodian with a solid reputation. Within the United States, preferably find a recognized gold depository for settling Comex Gold Futures.
Chances are, if you already have an IRA, you'll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy or where to transfer money, ready for you to do your buying. (Dropping in coins you already own is against the rules – a "prohibited transaction.") And if you want to mix in some paper – for example, to consolidate your gold, ETF, and mining stock holdings into one account – that's fine, too.
The custodian will charge either a fixed annual fee or a percentage of the IRA's value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.
You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000 or a "catch-up" limit of $6,000 for those aged 50 and over. Most gold custodians generally set their minimum initial investment at that same $5,000 mark, but many will then accept smaller subsequent contributions.
When the time comes to withdraw from your gold IRA, you don't get any coins or bars, alas. You get cash. The custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA.
Gold IRA: Right for you?
That takes care of the how-to. The trickier part is whether it's a good idea. For most readers, the answer is likely no. Here's why.
The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5,000 or $6,000. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.
Physical gold, of course, doesn't generate income. So you might be wasting part of your IRA's tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.
Does that mean it never makes sense to have physical gold in an IRA? No. There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold.
- No-income portfolio: If you've decided that the outlook for bonds and dividend-paying stocks is so bleak that you don't want any at all, then putting gold into your IRA won't crowd out any income-earning investments.
- Strategic switching: Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.
- IRA Only: If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to Buy Gold may be the only way for you to hold it.
In researching this article, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.
He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight-to-quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.
Making the move is simple if the pension fund is already an IRA. You're free to transfer funds from an IRA that's invested in stocks or anything else directly into a gold IRA.
Or if the pension fund is run by your employer, then when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.