The current banking crisis has left many investors worried about the financial system. While gold may be viewed as a boomer asset, it has been historically proven and is more lindy compared to cryptocurrency.
Hence, more are turning to gold as an investment option in order to protect their assets and hedge against the current weakness in the financial system, and the resultant market volatility. In fact, gold prices has been climbing steadily since the revelation of the US banking crisis.
Investing in gold through a Gold IRA is becoming increasingly popular due to its potential for long-term growth and stability. But it has its downsides. Here, we give you the information you need to decide if you should get a gold IRA now.
What is a Gold IRA?
A Gold IRA is an self-directed individual retirement account (IRA) that allows you to hold physical gold and other IRA-accepted precious metals which include silver, platinum and palladium. It is also referred to as the precious metals IRA.
A gold IRA is available in both traditional and Roth forms. Depending on the option you choose, it will offers the same tax benefits as the regular IRAs.
However, there are specific criteria you need to meet – the IRS specifies the type of approved physical gold (and precious metals), brokers, custodians as well as the storage conditions.
While these sounds tiresome, the rules help to ensure that you buy and own legit gold (and precious metal) assets, and that they are stored securely.
Benefits of investing in a Gold IRA
1. Tax Benefits
Unlike direct physical gold investments, gold IRAs come with tax benefits that allow you to defer taxes on your investment until retirement when withdrawals are made.
2. Hedge against inflation
Gold is often seen as a safe haven for investors in times of market volatility. It also serves as a hedge against inflation and helps to balance your portfolio risks over the long term.
3. Long-Term Growth Potential
Gold tends to do well when stocks underperform. With the right strategy, you could enjoy long term growth potential over multiple market cycles.
Investing in a gold IRA also provides a form of diversification and inflation protection for your portfolio over time.
Just be sure that your Gold IRA is seen as a portion of your overall portfolio, instead of being the only investment you ever make!
Disadvantages of investing in a Gold IRA
1. Higher Fees
A gold IRA comes with higher fees compared to the regular IRA. You’ll need to pay:
- Account setup Fees: expect a one-time account set up fee when you set up your new gold IRA account. This would range between $50-$150, depending on the broker you use.
- Markup Fees: Gold bars, bullions and coins come with a markup fee and tend to be slightly more expensive than the market price. Dealers also impose a similar fee when you sell, which will eat into your sales price and overall return
- Storage Fees: Storing physical gold will cost a fee. Do note that you can only store gold for your gold IRA with IRS-approved facilities. It is illegal to store them at home.
- Custodian Fees: An annual fee you’ll need to pay the financial institution that acts as your custodian.
2. Slow Growth
While gold prices tend to do well in market crashes, it tends to limbo when the markets are well. This means that you should not expect hyper growth from gold (or even other precious metals).
Instead, use it as a hedge and a form of diversification for your overall portfolio.
3. Storage
Investing in gold through a Gold IRA requires the services of a custodian to store the physical gold, which incurs additional fees and charges.
Furthermore, gold is a bulky commodity and can be difficult to store safely over long periods of time.
4. Liquidity
In general, physical gold is less liquid compared to stocks and bonds. This could result in issues with finding a buyer, especially if you’re dealing with larger sized gold.
Keep in mind that you’ll need to start taking distributions from your gold IRA once you hit 73 years old. You need to start planning for the sales of your gold IRA in advance to ensure that you’re selling at a price that you are comfortable with.
Differences between buying physical gold versus investing in a Gold IRA
1) Enjoying Tax Benefits of an IRA
The main benefit of investing in a Gold IRA is the tax benefits provided by the IRA.
If you choose to set up a traditional gold IRA, you can fund your gold IRA with pretax dollars and enjoy tax deductions on your contributions today. Withdrawals will be subject to income tax when you start taking distributions in your retirement years.
If you choose a Roth gold IRA, you’ll fund it with after-tax dollars. While you don’t enjoy tax deductions today, your distributions will be tax-free when its time to withdraw during retirement.
Keep in mind that you must start taking distributions by age 73. And, there’ll be a 10% penalty if you withdraw before 59.5 years old. So plan your withdrawals carefully!
2) Higher costs
With the gold IRA, you’ll need to store your physical gold with approved custodians and storage options. Although these services may cost slightly more than non-approved vendors., it does give you peace of mind.
On the flip side, if you were to buy physical gold directly, you can choose to store it in a safe at home.
3) Ease of sale
Likewise, with your gold IRA, you’ll need to work with IRS-approved dealers who may charge a higher markup.
Depending on where you are located, working these approved dealers may not be as convenient either.
Comparatively, owning physical gold directly gives you the flexibility to buy and sell any physical gold in the markets. You’ll just need to do your own due diligence and work with trusted dealers.
Conclusion
With the ability to diversify your portfolio with precious metals such as gold, silver, platinum and palladium, investing in a Gold IRA can be an attractive option for those looking for a long-term hedge against inflation and future market volatility.
However, you’ll need to weight the cons and decided if you are comfortable with the disadvantages of getting exposure through a gold IRA.
Good luck investing!
