Is Gold a good Investment for retirement?
Once you understand how Gold IRAs work, there's another very important question to answer. Is a Gold IRA a good Investment? A Gold IRA is an alternative Investment that can be suitable for many different Investment goals. Here's what you should look at to decide if it's a good Investment for you personally.
Gold IRA Guide: The Basics
A Gold IRA is a special type of Individual Retirement Account that holds Gold and other Precious metals. Gold IRA is just the common name but it can also hold Silver, Platinum, and Palladium.
A Gold IRA can either be a Roth or Traditional IRA. As with any other IRA, you have to hold your Precious metals Investments within the IRA. This usually involves selecting a Custodian to handle the IRA paperwork and a physical Depository to hold the actual Precious metals.
Benefits of Gold IRA: What investors should consider
The first thing investors need to consider with any Investment is taxes. While taxes are unavoidable in life, they aren't unavoidable in investing. With normal investing, Uncle Sam takes a cut every time you sell an Investment or receive income from an Investment. This reduces your Investment returns along the way.
An IRA is a special type of tax shield. You do not pay taxes on transactions within an IRA. For example, let's say you had $100 in Gold gains and wanted to buy Silver. Outside of an IRA, you might need to pay taxes and only have $70 to buy Silver. Inside of an IRA, you don't need to pay any taxes and can reinvest the full $100. If you use a traditional IRA, you will pay taxes when you take distributions and use your money in retirement, but you're only paying taxes once instead of after each transaction.
The second thing to consider is the benefit of investing in Gold or Silver. Simply put, thousands of years of experience shows you how Gold and Silver can be a good Investment. Societies around the globe have seen the continued value of Precious metals and they continue to hold value even as Inflation destroys fiat currencies.
It is true that the hottest Stocks might have higher annual returns than Gold or Silver in many years, but that's not what you're using Precious metals for. Gold and Silver are commonly used as an Inflation hedge in your Portfolio and frequently replace Bond holdings. In addition, if you feel that the Stock market is grossly overvalued or don't trust the Stock market in general, Gold and Silver give you a physical asset that has generally increased in value over time even when Financial markets have gone down.
Gold IRA Rollover: Is it for you?
If you want to invest in Precious metals in your IRA, you have two options. The first is to use all or some of your annual IRA contribution to start building up a Gold IRA.
You can also move existing retirement funds to your Gold IRA. As long as you move from the same type of account to another, there are no taxes or penalties. This could be a Roth IRA to a Gold Roth IRA, a Traditional IRA to a Gold Traditional IRA, or an eligible 401(k) to a Gold Traditional IRA.
An eligible 401(k) rollover to an IRA is slightly more complicated in terms of paperwork. There are no taxes or penalties to roll over because both account types are taxed the same way, but you're moving from an employer-managed account to one that you independently manage. The reason you need to do this is because most 401(k)s don't have a good choice of Mutual funds let alone alternative Investments like Gold.
A Gold IRA rollover lets you move an unlimited amount of your tax-advantaged savings into Precious metals all at once. Otherwise, you are limited by the $6,000 per year maximum contribution that the IRS allows for IRA accounts. In other words, if you want to invest in Gold in your IRA without building up an account from scratch, you need to do a rollover.
Gold IRA tax rules
Gold IRA tax rules are the same as for other types of IRA. There are two types of IRAs.
A traditional IRA gives you a tax deduction for your contributions to your IRA. You deposit pre-tax money into your IRA and pay taxes when you withdraw money in retirement. These distributions are taxed as ordinary income. Any withdrawals taken prior to age 59 ½ are subject to a 10% early withdrawal penalty.
A Roth IRA has no taxes when you withdraw money because you have already paid taxes on the money you deposited in the IRA. Roth IRAs benefit investors who think they will be in higher tax brackets after retirement. Money can be withdrawn from a Roth IRA at any time without paying early withdrawal penalties.
Keep in mind that there may be penalties if you withdraw money before reaching retirement age. In addition, it's important to follow the IRA rules carefully. If you don't, your account could lose its status as a qualified IRA and you could face substantial tax penalties.
Home storage Gold IRA
One of the major components of the tax rules for an IRA are that you hold your assets with a third-party Custodian. A home storage Gold IRA attempts to get around this by forming an LLC or other legal entity to act as the Custodian who holds your assets.
There are two significant risks with this strategy.
First, an IRA Custodian has to meet a set of lengthy legal requirements. If you don't comply with these requirements, you may not have a valid IRA.
Second, if you storing your own Precious metals there is a temptation to move assets in and out of the IRA without making proper IRA contributions and withdrawals. This type of commingling of funds can work against your attempts to demonstrate that you're holding your IRA assets separately.
So, while a home storage Gold IRA is theoretically something you can do, most investors will find it easier to use an existing Custodian rather than set up their own structure.
There have been several legal challenges between investors and the IRS over home storage Gold IRAs. In every case, the US Tax Courts have ruled against the investor and in favor of the IRS.
Investing in Gold - Roth IRA vs. Traditional IRA
As an investor, you need to make the decision between a Roth IRA and Traditional IRA. If you have both types of accounts, you also need to decide where to put your Gold.
Generally, you use a Roth IRA when you think your taxes will be higher in retirement than they are today. Some investors also use a Roth IRA when they think there is a high chance of needing their money early. That's because you can take out your already taxed contributions without additional taxes or penalties. You use a Traditional IRA if you want the tax deduction now and think you will be in a lower tax bracket after you retire.
If you have both Roth and Traditional IRA accounts, it usually makes sense to put the highest-returning assets in your tax-free Roth account. Putting lower-growth assets in Traditional accounts means there's less growth to get taxed on.
For example, if you have both Gold and Stocks, you might want to put the Stocks in your Roth account and the Gold in a Traditional account. On the other hand, if you think an early withdrawal is likely, you may want to put your less volatile Gold Investments in your Roth account to have funds available to withdraw without worrying about large Investment losses.
Gold IRA diversifies a Portfolio
One of the significant benefits of Gold is that it is an alternative Investment that diversifies the traditional Portfolio of Stocks, Bonds, and Mutual funds. Computer models show that the standard 60/40 Portfolio of Stocks and Bonds performs better when it has an allocation of 3 to 10% Gold. This improved performance is true throughout all phases of the market cycle, both Bull and Bear markets.
Another aspect of this diversification is the fact that Gold is a tangible asset while Stocks, Bonds, and Mutual funds are all paper assets. These paper assets have counterparty risk that can take their value all the way to zero. Think about the Enron scandal or the Bernie Madoff scandal. Investors with money in either of those paper Investments lost all of their money. Gold, on the other hand, has value simply by existing and there are no counterparties who can affect the value of Gold.
So is a Gold IRA a Good Investment?
Many investors can benefit from using a Gold IRA. The tax benefits of an Individual Retirement Account are clear. Gold and other Precious metals serve a number of Investment purposes including diversification, reducing volatility, or avoiding traditional Financial markets. For many people, this makes opening up a Gold IRA for at least part of your Portfolio a good choice.
About Satori Traders
Satori Traders LLC is a California-registered Investment Advisor specializing in the Precious metals.
Bryan V Post is a California-registered Investment Advisor Representative and the founder of Satori Traders.
Bryan has worn numerous hats during his life: Engineer, Portfolio manager, Precious metals Investor, Technical analyst, Proprietary trader, Swing trader.