Investing in gold may be a desirable move for those interested in diversifying their retirement portfolios and overall assets. One of the oldest forms of exchange, gold appeals to many for its physical form and separation from fiat currencies, which many believe have a higher risk of inflation. In fact, many purchase gold as a potential hedge against inflation.
While many adults commonly have one or more individual retirement accounts with investments in stocks, bonds or mutual funds, a lesser-known type of IRA allows individuals to invest in gold. These are known as self-directed gold IRAs and may be a great option for seniors looking to invest in gold. Because gold IRAs are less common, and the IRS has some specific rules and regulations pertaining to gold investments, however, it can be difficult to find the right trustworthy, unbiased information to discern how to go about deciding between the two.
This article covers the main factors to consider when investing in gold directly in the form of physical gold or through a gold IRA, and the pros and cons of each. Learning about tax benefits and regulations as well as what goes into purchasing and managing physical gold vs. gold IRAs can help you decide which type of investment may be right for you.
Gold IRA vs. Physical Gold – What You Should Know Before You Invest
There are several important factors to know and consider if you’re trying to decide between investing in a gold IRA or physical gold. These include the limitations and options available with each, associated IRS regulations and tax implications, related costs, and your responsibility and options related to securing and storing your investments.
Gold IRAs
A type of investment retirement account, a gold IRA is a self-directed IRA that can hold physical gold and other alternative investment types, rather than stocks, bonds or mutual funds.
Here are a few things to know before investing in gold IRAs:
- They’re self-directed. A gold IRA can be either a traditional IRA or a Roth IRA. Unlike standard IRAs, self-directed IRAs require investors to manage their own accounts. This means you must designate a custodian or trustee to hold your investments, and this entity isn’t allowed to give you any financial advice.
- They can hold alternative assets, including other precious metals. Along with gold, gold IRAs can hold precious metals, such as silver, platinum and palladium. Because of the complexities regarding IRS regulations and reporting, most larger companies that offer standard IRAs don’t offer precious metal IRAs.
- Tax benefits. The tax benefits associated with IRAs are one of the primary reasons many investors choose to use them. Like standard IRAs, gold IRAs allow investors to take tax deductions on their investments. With traditional IRAs, investors may defer paying taxes on their IRA-deposited income until they withdraw funds. Roth IRAs require investors to pay taxes on their income upfront rather than when they withdraw funds.
- The IRS requires gold IRA investors to go through a custodian. With a gold IRA, you can’t physically hold or store your gold. Instead, the gold must go through a custodian. Custodians act as gatekeepers between investors and their funds, and they’re responsible for releasing disbursements and handling compliance issues and other concerns.
- Fees. All IRAs have associated fees, but gold IRAs have additional costs due to their physical nature. Along with typical IRA startup, annual and miscellaneous transaction fees, some gold IRAs have brokerage fees, and most, if not all, require investors to pay for shipping and storage costs.
- Contribution limits. Self-directed gold IRAs have the same contribution limits as standard IRAs. In 2022, this is $6,000 per year of earned income, with an additional $1,000 allowed for those ages 50 and older.
Physical Gold
Physical gold exists for purchase in many forms, ranging from pure nuggets to jewelry, collectible coins and gold bars. While all forms hold some intrinsic value as gold, gold bars, also known as bullion, are typically the best bet for anyone seriously interested in purchasing and holding gold as an investment.
Still, purchasing any form of physical gold can be considered an investment, and unlike with a gold IRA, if you invest in physical gold, you have the opportunity to buy and hold gold purely for the sake of investing, to wear it as jewelry or to enjoy collecting it as a hobby.
If you want to maximize your gold’s investment potential, however, be aware that bullion offers the best likelihood of obtaining the highest return upon selling it as well as the best chance of easily finding a buyer in the first place.
Before you invest in physical gold, you should also know a few things:
- You must buy, hold and securely store (and insure) the gold yourself.
- You must learn about gold pricing and understand that profit isn’t guaranteed when it’s time to sell your gold.
- You incur shipping and handling costs.
- You must do some research to ensure you buy from a reputable dealer.
- You must learn where and how to sell your gold when you’re ready.
Additionally, you must learn about taxes and related IRS regulations.
Taxes
When it comes to taxes, the IRS places any form of gold in its “precious metal” category and considers all precious metals as “collectibles” and subject to capital gains tax.
Short-term gains (sold within a year of purchase) are taxed at typical income rates.
Long-term gains (sold after one year of purchase) incur a capital gains tax equal to an investor’s marginal tax rate up to 28% (anyone in a higher tax bracket still only pays 28% on any gold profits).
IRS Reporting Requirements
The IRS also has specific reporting rules related to the sale of precious metals. If you invest in physical gold, you’re responsible for complying with these requirements and should familiarize yourself with them. Some specific types of gold must be reported immediately upon making the sale, and others just need to be reported at the time regular taxes are filed. Any tax liability from gold sales needs to be paid along with your regular taxes for that year.
Pros and Cons of Gold IRAs and Physical Gold
Of course, there are pros and cons to investing in physical gold and there are pros and cons to investing in gold IRAs, which are listed below.
Pros
- A gold IRA may include other precious metals or alternative investments, such as real estate or cryptocurrencies.
- A gold IRA can diversify your overall retirement portfolio.
- A gold IRA comes with the tax-deductible or tax-deferred benefits of standard IRA accounts; They are also not taxed at the IRS’ capital gains rate of a collectible as with physical gold.
- Custodians handle reporting paperwork and any required disbursements.
- Custodians hold the gold and should be insured, likely making investments more secure than self-storage.
- The long-term holding strategy is ideal for this asset type.
Cons
- The IRS doesn’t allow IRAs to hold types of gold considered to be collectibles.
- Gold IRAs come with more fees than physical gold.
- Custodians and IRA rules prevent you from having immediate access to your investments, meaning you could be in a bind if you need to withdraw some quickly or in an emergency.
- You must choose a custodian or trustee to buy the gold and have it sent to their depository.
- Custodian storage fees could cost more than storing and securing the gold yourself at your home or bank.
- You may face fees if you end up needing to make early withdrawals.
Pros and Cons of Physical Gold
Pros
- You have immediate access if your gold is self-stored in your home or somewhere else where you have easy, direct access.
- You incur fewer related fees than those that come with a self-directed IRA.
- You can buy gold in any of its forms, allowing for potentially more pricing options.
- You’re not restricted to gold IRA distribution timing or early withdrawal fees and can sell anytime.
Cons
- You’re responsible for safely securing and insuring the gold.
- You must still pay shipping and handling costs and find a reputable dealer and buyers. Liquidating precious metals outside of a controlled environment can be easier said than done.
- Gold outside of an IRA is considered a collectible by the IRA, so profits are considered capital gains, and sales must be reported and paid with that year’s taxes.
- Physical gold doesn’t offer the IRA tax benefits that come with holding long-term if that’s indeed your plan.
Who Should Invest in a Gold IRA?
You may want to invest in a gold IRA if you:
- Want to take advantage of IRA tax benefits
- Want to diversify in other alternative investments, such as other precious metals, real estate and/or cryptocurrencies
- Want to hold your gold long term and don’t mind paying fees in exchange for the security of going through an IRA
- Feel confident you can take on the responsibility of finding a custodian and managing your IRA
Who Should Invest in Physical Gold?
You may want to invest in physical gold if you want:
- More options regarding the specific types of gold you invest in
- Complete control over your gold, whether you’re storing it in your home for direct, easy access or in a bank’s safe deposit box
- Independence from IRA rules regarding the timing of withdrawals and disbursements
To avoid gold IRA custodian fees. Learn more about gold ira vs physical gold.