I believe in owning gold. I believe in owning an IRA. But I do not believe in owning gold inside an IRA. In fact, I think it’s the dumbest thing you can do.
It’s a common mistake to think of physical gold and silver as “investments.” They are not!
Gold and silver are forms of currency, and owning them is a hedge. Gold and silver don’t produce income or pay dividends or increase in value the way a stock does.
They increase in value for two reasons:
- Long-term inflation
- Uncertainty risk (solvency of foreign nations, going to war, etc.)
Since IRAs — including self-directed IRAs — are required by law to be in the possession of someone else (a custodian), owning gold in an IRA removes one of the key advantages of owning it in the first place: counterparty risk. If you suddenly needed gold to barter for food, you would first have to call your custodian and fill out the necessary paperwork to gain access to your own gold.
Other Issues With Owning Gold in an IRA
Rules Against Holding Collectibles
The tax code prohibits IRA holders from investing in life insurance, the stock of an S-corporation, or collectibles. Some types of gold coins are classified as collectibles and would violate the rules. What’s confusing and frustrating is that some gold coins and types of bullion are allowed, while others are not. And it’s not like the IRS maintains a master list of what is and what is not permitted.
Standard custodians such as Fidelity, Schwab or TD Ameritrade will not handle physical gold in an IRA. So if you want to hold gold in your IRA, first you need to set up a self-directed IRA and then you need to find a custodian that specializes in self-directed gold IRAs. A quick search on Google for “self-directed gold IRA” yields plenty of results. I know American Bullion has been around for years, as has APMEX.
Costs of Purchasing and Storing Gold
Once you settle on a specialized self-directed gold IRA custodian, you need to remember there will be fees involved in all aspects of purchasing, storing and selling the gold. None of this is free. These costs end up raising the bar on how much the gold needs to appreciate in order for you to profit! I had a quick look through a few sites and could see that the fees really range; some charge a flat fee for management, while others charge depending on what you invest in.
The other issue is regarding taxes. You are wasting tax-deferred space for something that doesn’t generate income; thus, it is not saving you from any taxes. Just like any other traditional IRA account, the value of the account will be subject to taxes upon withdrawal. Unlike owning stocks, mutual funds, ETFs, etc., physical gold doesn’t throw off dividends, interest or capital gains distributions, all of which are sheltered in an IRA.
Required Minimum Distributions
Once you reach the age of 70½ your gold IRA will be subject to a required minimum distribution (RMD) just like any other non-Roth IRA account. The RMD is based upon the account value as of the prior Dec. 31. This means that the gold in the IRA will need an official valuation. Further, if this is the only IRA account or if there is not sufficient liquidity in the other accounts, you will need to have some of the gold sold to raise the cash to make the RMD.
Alternatives to Physical Gold
If gold and precious metals are an asset class that you want to include in an IRA, there are easier ways to do this than holding the physical metal. These include a number of ETFs and mutual funds. Here are a couple to consider:
- The SPDR Gold Shares ETF (GLD) is a pass-through for the physical ownership of gold. As an ETF, GLD offers the daily liquidity that owning physical gold does not. The expense ratio is a reasonable 0.40%. One issue is that the “middlemen” are not required to offer full insurance, so ETF shareholders may not be fully insured against losses that are not due to the negligence of the custodian or others in the chain.
- The Vanguard Precious Metals and Mining Fund (VGPMX) is a low-cost mutual fund that invests in companies involved in gold and other precious metals mining and exploration. Though not a pure gold fund, VGPMX’s results will track the price of gold and related metals to a large extent.
Read here more about how to invest in gold.
Owning physical gold in an IRA may seem tempting, but don’t do it. If you truly believe it is a good idea, at least double-check the rules from the IRS and the fees from the custodian before putting gold into your IRA. Be sure you understand all the rules surrounding physical ownership of gold in this type of account.