Gold IRA – Good Investment or not

Gold IRA - Good Investment or not

To determine whether a Gold IRA is a good Investment or not we have to first set the context for our discussion.

Every Investor has a unique Portfolio which takes into account their specific Investment preferences, time horizons, and tolerance for risk.

Because there are too many variables in the ‘Good Investment or not’ question let’s focus on a specific scenario where an IRA holding physical Gold can definitely be a good Investment.

In this short article we will assume that our hypothetical Investor already has one or more tax advantaged retirement accounts and they want to move some of those funds into physical Precious metals.

Like many of us real humans today, our pretend Investor cited these reasons for moving money into a Precious metals IRA:

Once the decision has been made to add Precious metals to the overall Investment Portfolio, the only question is how to do so.

The ideal Silver and Gold Portfolio begins with physical metal that the Investor has easy access to. That could be a local vaulting facility (in bigger cities), a home safe, or a hole dug in the back yard.

These personally-held Precious metals form the foundation of our ideal Portfolio and they are purchased with after-tax income outside any tax-favored retirement account.

After we take personal possession of some physical Silver and Gold we can then build the rest of our Precious metals Portfolio using a mix of pre-tax and post-tax income.

Gold IRAs allow us to allocate tax-preferred funds into physical metal.

What is a Gold IRA rollover

There are two ways you can move retirement funds into a Gold IRA.

The first is to contribute directly to a Traditional or Roth Gold IRA up to the IRS-allowed $6,000 annual limit ($7,000 over age 50).

The second is to do an IRA rollover where existing retirement funds are moved into a Precious metals IRA.

There are no tax consequences from performing an IRA rollover as long as the account types are maintained.

Funds from a Roth IRA can only fund a Gold Roth IRA and funds from a Traditional IRA can only fund a Traditional Gold IRA.

Account rollovers and account transfers accomplish the same objective but there is a key difference between the two transactions.

Rollover

In a rollover the Investor never takes personal possession of their retirement funds. The money is transferred directly from one account Trustee to another so the IRS 60-day time limit is never triggered. 

Transfer

When the Investor takes a distribution from a retirement account and personally receives a check, that transaction starts a 60-day window in which the Investor has to redeposit the funds in another IRS-approved retirement account.

Any funds that aren’t redeposited within 60 days will be treated as normal income by the IRS and early withdrawal fees will be assessed on Investors under the age of 59 ½.

Roth Gold IRA vs. Traditional Gold IRA

Investors can fund a Precious metals IRA with either pre-tax or post-tax funds.

Post-tax income is used for Gold Roth IRAs while pre-tax income is used to fund a Gold Traditional IRAs.

Investors typically use a Roth IRA when they think their taxes will be higher in retirement than today.

A Roth IRA may also make sense if the retirement funds could be needed before age 59 ½. The money in a Roth Gold IRA has already been taxed so distributions can be taken without penalties.

A Traditional Precious metals IRA appeals to Investors who expect their tax rate to be lower during retirement. They set aside pre-tax income today for distribution at a (hopefully) lower tax rate in the future.

Gold IRA fees

Holding physical metal in an IRA is quite different than holding Mutual funds or Stocks.

There are Gold IRA fees that Investors have to pay and we can use these fees as a comparison factor when shopping for the best Precious metals IRA.

Types of IRA Fees

* Sell commission can be avoided by taking a distribution of the physical metal instead of distributing cash

Account setup fee – Buy commission

Some companies offering Gold and Silver IRAs charge an account setup fee, others charge a sales commission on the physical metal purchased for the IRA.

For accounts under $100,000 the overall cost to setup an IRA is likely to be similar regardless of which company you choose.

Above $100,000 the fee structure for account setup should drop noticeably and some Precious metals IRA companies waive these fees altogether for accounts above $250,000.

Promotional offers

Another factor affecting overall account setup cost is the promotional offers available from the IRA companies.

The companies are competing for your retirement funds so they run promotions as part of their growth strategy.

Smart consumers will take advantage of these promotions.

Because the fees charged by the IRA companies are based on the size of the Investment and the promotional offers change periodically, you will have to do a little research to determine your exact account setup cost.

Metal storage fees

Storage fees are an additional cost of participating in a Precious metals IRA.

Remember that we are talking about physical metal that an IRS-approved Custodian will store for us in their approved vaulting facility.

There is a cost incurred by the Custodian to store our metal securely so it is reasonable that we pay the Custodian for their service.

Segregated vs non-segregated metal storage

An important aspect of Gold and Silver IRAs comes to light when we consider annual storage fees.

Precious metals Custodians make a distinction between segregated (or ‘allocated’) and non-segregated (or ‘unallocated’) metal storage and charge different fees for each service.

In segregated storage specific Coins and Bullion bars are set aside or ‘allocated’ specifically for the Investor.

In non-segregated storage the Custodian makes an accounting entry designating a certain amount of their operating Precious metals inventory as belonging to the Investor.

In other words, no actual metal is set aside specifically for the Investor in non-segregated storage.

Custodians prefer non-segregated storage and charge more for segregated storage. For example, we are likely to find annual fees for non-segregated storage are around $100 while segregated storage costs $150 or more.

Conservative Investors will want to pay the premium for segregated storage.

To setup a Precious metals IRA and opt for non-segregated storage is like stopping the winning touchdown run just a few yards short of the goal line.

Always opt for segregated storage and have the winning ball placed in the vault with your name on it.

Gold IRA tax rules

Here’s a quick summary of the key Gold IRA tax rules to keep in mind:

401K to Gold IRA rollover

One of the simplest ways to gain tax-advantage ownership of Precious metals is to perform a 401K to Gold IRA rollover.

This process allows Investors to use existing retirement funds when building a physical Silver and Gold Portfolio.

Before age 59 ½ an Investor has limited options available for their tax-preferred retirement funds. The funds have to remain invested in some kind of IRS-approved retirement account or there are tax consequences.

Following the traditional guidance for retirement savings most Investors will have their retirement funds allocated into a mix of Mutual funds, ETFs, and Stocks.

In most cases the options for adding Precious metals exposure to these existing retirement accounts will be quite limited. Perhaps a Mutual fund or ETF related to the Precious metals but certainly no access to physical Silver or Gold.

It is the 401K to Precious metals IRA rollover that lets an Investor leave their retirement funds inside IRS-approved tax-advantaged accounts while Investing in physical Silver and Gold.

Keep in mind that funds can be rolled into a Gold or Silver IRA from a 401K, 403b, SEP, TSP, annuity, or other retirement account.

Vanguard Gold IRA

Vanguard is a good example of a company offering Investors limited exposure to the Precious metals.

An Investor trying to add Silver and Gold to their retirement accounts at Vanguard may find that their only option is the Global Capital Cycles Fund (VGPMX). This Mutual fund allocates at least 25% of its capital into Precious metals and Mining stocks.

While Vanguard is a well-respected Investment management company, they simply don’t offer Precious metals products - for that an Investor has to go elsewhere.

Schwab Gold IRA

Several companies consistently show up in search results for Precious metals IRAs. Schwab is one of them.

There is no Schwab Gold IRA so it isn’t obvious why the company appears in a search related to Precious metals IRAs.

Schwab cites the inherent volatility of the commodity markets as their reason for not offering Precious metals Investments.

The company suggests that Investors use commodity ETFs to gain exposure to those markets if desired.

Gold IRA Fidelity

Like most Investments the Gold IRA at Fidelity has pluses and minuses.

Pluses

Investors wanting to setup and fund a new Precious metals IRA may be attracted by Fidelity’s low minimum Investment. Given the annual IRS contribution limit of $6,000 ($7,000 over age 50) it isn’t possible to setup an initial account at IRA companies where the minimum Investment is over $6,000.

Because Fidelity doesn’t offer proof Coins their sales representatives aren’t tempted to earn a higher commission by selling Investors these premium Coins.

Minuses

The low BBB rating is a concern. While a rating of A-minus or B-plus might be understandable, a rating of C-minus suggests that customers are consistently unhappy with this company for some reason.

That’s a red flag but we have to keep in mind that this is only one data point in our evaluation.

Each of the Precious metals IRA companies charge fees to setup a new account. The fees will be called ‘sales commissions’ or ‘setup fees’ and they will likely vary based on the size of the account being opened.

Fidelity charges sales commissions on the metal purchased in an IRA and these fees start at 2.9% for accounts under $10,000.

Gold IRA reviews

There are quite a few Precious metals IRA companies to choose from so having a strategy for making a selection is important.

Because we are talking about having physical Precious metals stored by a third-party, the important selection factors are related to trust.

The Investor has to feel comfortable with the IRA company and the company’s Custodian.

Gold IRA reviews from actual customers provide valuable insight into the companies and how trustworthy they are.

Those reviews can be found at the following consumer websites: 

In the table below we list several candidate IRA companies and factors that may help you sort through your own candidate list.

Years in business

Years in business is obviously a trust factor. Shady businesses don’t stay around for long, and if they do it becomes harder and harder for them to hide the fact that they are shady. 

BBB

The Better Business Bureau (BBB) is the most widely-known rating company for businesses. Most of the Precious metals IRA companies are listed with the BBB and maintain A+ ratings.

If a company chooses not to list with the BBB or has a rating below A+, we don’t have to cross them off our list. This rating is only one factor in our evaluation.

If the company survives our selection process we can ask the company’s representative to explain their BBB rating.

Proof Coins

An IRA company that doesn’t offer proof Coins can’t try to foist those overpriced Coins onto Investors.

Most of the Precious metals IRA companies offer proof Coins, however, so Investors have to protect themselves from buying overpriced metal.

In the Gold IRA page we suggest asking company representatives a loaded question about proof Coins.

Minimum Investment

Investors wanting to setup a new Precious metals IRA using only the IRS allowed contribution of $6,000 ($7,000 over age 50) will need a company offering low minimum Investments. 

Conclusions

Instead of trying to determine whether a Gold IRA is a good Investment or not, in this brief article we focused on a hypothetical Investor wanting to build a Precious metals Portfolio.

Within that context moving tax-preferred retirement funds into physical Precious metals makes a lot of sense.

Tax-deferred retirement funds are essentially stuck inside IRS-approved Investment vehicles until the Investor reaches age 59 ½.

Precious metals IRAs allow Investors to diversify their overall Investment Portfolio using tax-favored funds.

The ideal Investment Portfolio will look different for each Investor. Always do your due diligence and consult your Investment advisor, tax advisor, and Financial planner before making significant changes to your Portfolio.