While I believe in owning gold (also silver) and also having an IRA account for retirement savings, I don’t think you should own physical commodities in an IRA account. It’s trying to mix oil and water together.
I’m sure you’ve seen the late night commercials (especially on Fox News) stating you should move your physical gold into a self-directed IRA. It doesn’t make any sense, and is the dumbest thing you can do.
Why? One of the purposes of owning physical gold and silver is lack of counter-party risk. Meaning unlike other types of asset classes where your asset is someone else’s liability.
This is perhaps one of the reasons why commodities correlate differently than other asset classes. When other assets classes go down in value, in most cases the value of gold and silver go up.
It’s commonly misunderstood to think that gold and silver are an “investment”. They are not! Owning gold and silver is a hedge, and a form of currency.
Just like the dollar bills in your wallet that aren’t doing anything, the same applies to owning physical gold or silver. So unlike owning a stock, gold doesn’t generate a profit, dividend, or increase in value because productivity increases.
The two reasons gold and silver increase in value are:
- Long-Term Inflation – While the correlation between measured inflation and the price of gold isn’t perfect, over the long term (30+ years) it comes pretty close.
- Uncertainly Risk – Examples are: the solvency of sovereign nations, or the chance of going to war. Meaning you will need to use gold and silver to barter for goods.
To put it simply — gold and silver are a store of wealth.
So the way to think of owning gold or silver is no different than having money in your checking account, with one primary difference. No one else is in possession of it.
What’s the Problem with Owning Gold in an IRA?
By owning gold in an IRA you just removed one of the advantages of owning gold or silver yourself — counter-party risk. Putting gold or silver in a self directed IRA means someone else must manage and hold your physical commodity.
One of the requirements of IRAs is a custodian must manage it. You can’t be in direct possession of any of the assets owned, and this is for obvious reasons. This is to prevent fraud, and ensuring you’re following IRS rules. Though this more than likely removes the use during uncertain times.
The other issue is regarding taxes. Commodities do not generate income or any dividend. Owning gold coins or bullion is very tax efficient.
You are wasting tax deferred space for something that doesn’t generate any payable taxes while being held. The only time a taxable event occurs is when you sell.
If you own your gold or silver in a traditional IRA, then the taxes when you sell would be at ordinary income rates. Traditionally selling gold outside an IRA it’s considered a long term collectable tax (assuming more than one year ownership) or currently 28%. So it’s possible with a traditional IRA you could paying a higher tax rate when selling your gold. The only possible advantage in an IRA is when owning gold in a Roth IRA.
Ok you’ll then say: “Larry, I understand why a self directed IRA owning gold or silver is a bad idea for uncertainty risk, but I still want to hedge against inflation”.
Owning physical gold in an IRA is still a bad idea. The more efficient and cheaper option is owning the ETF equivalent.
These are much more liquid versions than owning the physical commodities in a self-directed IRA. You can buy and sell them anytime the financial markets are open.
Just don’t expect them to be available if the proverbial “you-know-what” hits the fan.