Gold IRA: Ultimate Guide for Retirees (A Must Read for Retiring Baby Boomers)
By Donny Gamble
When you consider all the turbulence taking place in the world today, it’s not hard to make a convincing case to hold at least some gold or silver in your investment portfolio – or even an emergency fund.
There’s an equally compelling reason to invest in a gold IRA, as a way of protecting your retirement assets from the troubles in the world, and those that we can reasonably expect to unfold in the future.
A gold IRA is a way to move at least some of your retirement assets out of your paper investments, and into a time honored commodity like gold or silver.
What is a Gold IRA?
A gold IRA is just what the name implies – it is an individual retirement arrangement that is established for the purpose of holding gold, silver or some other precious metal as its investment. A gold IRA is just like any other IRA in terms of the basic rules surrounding it, the only difference is that it holds only precious metals.
You can hold both bullion coins and bullion bars in a gold IRA. What you can’t hold in the account is paper gold – gold stocks, gold funds, or gold ETF’s. These plans are set up to hold the metal itself, and not any of the various derivatives. That’s an important distinction.
The account is maintained by a trustee that has special provisions for gold IRAs. Typically will not find household names among gold IRA trustees, such as Fidelity Investments or TD Ameritrade. The concept is fairly recent, and most of the major IRA trustees have not stepped into the waters yet.
Like other IRAs, a gold IRA is self-directed. This allows you to make your own investment decisions, and to maintain any level of precious metals holdings that you consider to be necessary for your overall financial stability.
It’s worth mentioning that current IRS regulations also permit gold 401(k) plans. However, since this is a specialized form of employer-sponsored plan, it’s not hard to figure out that the vast majority of employers will offer it. This is another reason why the self-directed gold IRA is the preferred way to diversify at least some of your retirement holdings into precious metals.
Are Precious Metals Even Allowed in an IRA?
The answer is a resounding yes. Not many people are aware that you can hold physical gold in an IRA. In fact, precious metals are a permissible IRA asset under IRS regulations.
The confusion over precious metals in an IRA comes from the fact that collectibles of any kind are prohibited in a traditional or Roth IRA. But the IRS makes exceptions for certain bullion coins:
Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
Notice that the IRS regulation specifically mentions bullion. This precludes holding most numismatic coins in an IRA. This is because numismatics are considered to be collectibles, since they are valued primarily for their numismatic value, and not their bullion content.
Popular gold coins included in gold IRAs include:
- American Eagle coins
- American Buffalo coins
- Australian Kangaroo/Nugget coins
- Austrian Philharmonic coins
- Canadian Maple Leaf coins
Popular silver coins included in silver IRAs include:
- American Eagle coins
- Australian Kookaburra coins
- Austrian Philharmonic coins
- Canadian Maple Leaf coins
- Mexican Libertad coins
Also be aware that gold IRAs can be either Traditional or Roth options
Why Invest in a Gold IRA?
Perhaps the more basic question is why invest in gold, or any other form of precious metals?
There’s a common belief that precious metals react primarily in relation to the level of inflation. That idea is based primarily on the spectacular performance of gold during the inflationary decade of the 1970s.
During the decade, gold went from $35 per ounce in 1970, to over $850 in 1980 – a nearly 25-fold increase in price.
But inflation doesn’t account for all or even most of that massive increase in the gold price during the 1970s. The Consumer Price Index (CPI) roughly doubled during the decade, rising from 38.8 in 1970, to 82.4 in 1980.
So what counted for the majority of the increase in the price of gold? Probably general instability.
While the conventional wisdom is that gold increase in price in reaction to inflation. But the 1970s was decade of rampant instability.
It included the US defeat in Vietnam, the Watergate Scandal that forced then President Richard Nixon to resign the presidency, the 1973 OPEC oil embargo, the seizing of US embassy personnel by Iran, and the increasing military assertion of the former Soviet Union that culminated with the invasion of Afghanistan by that country.
It seemed for all the world that the US had lost control of both its global dominance, and its domestic integrity during the 1970s. And gold reacted the way gold always does, as the ultimate safe haven.
Fast-forward to the early 2000’s. Gold saw another explosion in price, that took it from around $250 in 2000, to a peak of more than $1,900 in 2011. Yet that period is not marked by a surge in inflation at all.
But once again, the early 2000s found the US losing control once again, the dominant position it had rebuilt during the 1980s and 1990s.
Fresh off the heals of the dot-com bust, and the subsequent stock market collapse (2000 to 2002) that took the Dow Jones Industrial Average down by some 40% (and the NASDAQ even more), came the 9/11 bombings on US soil.
For more than a decade the economy was wobbly, and a full blow global financial meltdown began in 2007, dropping the economy even lower, and causing a second crash level event in stocks, bringing them down by more than 55% by 2009.
There was no significant inflation during that decade, yet the price of gold increase by more than six-fold.
What is gold responding to? Once again – general instability.
In the chart below, you can track the incredible rise in the price of gold in both the 1970s, and the first decade of the 21st Century. The pattern is clear, gold is THE safe haven asset in times of turbulence.
Chart historic gold price – In picture folder
(Chart source: World Resources SIM Center.)
But that was the past – what’s in store for the future?
No one can know for certain what the future holds, but most of us have a solid understanding of the problems that led to the financial meltdown have never been fixed.
Note the following:
- Despite improvement in the official unemployment rate, the labor participation rate is at it’s lowest level since the late 1970s, while the under-employment rate is more than twice the official unemployment rate.
- The US national debt has climbed from $5.7 billion in 2000, to nearly $18 billion today. That’s a tripling in less then 14 years.
- Assets held by the Federal Reserve have increased from less than $900 billion at the end of 2007, to $4.5 trillion at the end of 2014. That’s a five-fold increase in Fed assets in just seven years, as the Fed has bought up US Treasury debt, sour mortgage debt, and assorted other failing obligations.
If the economy is fundamentally sound, where are the living wage jobs? Why is the US national debt climbing so rapidly? And why does it continue to be necessary for the Federal Reserve to buy up so many of the nations debt related assets?
It’s likely that we are entering a new time of turbulence. It is even more likely that we had not recovered from the last one in any meaningful way.
And when times get turbulent, investors turn to precious metals to ride out the storm. It is likely that they will again, just as they did in the 1970s and early 2000s.
Even though it doesn’t make the front page, gold fever is slowly building around the world. In the past couple of years Germany has been looking to repatriate its gold reserves for France and the US. (See Why Germany wants its 674 tons of gold back.) Having experienced the devastation of the two world wars and a runaway inflation between those wars, Germany’s more jittery than most countries, it has a deeper understanding of the stability that gold provides even on a national level.
The Mechanics of Investing in a Gold IRA
We just covered the “why” of owning gold, but what are the advantages of owning gold through a gold IRA?
Simply put, while having gold in your physical possession is an excellent survival strategy, a gold IRA represents monetary insurance for your all-important retirement savings.
Ultimately, the purpose of a gold IRA is to protect your retirement assets, so that you will have a comfortable retirement the matter what happens on the macro level.
So how does a gold IRA work, and how can you set one up?
Here is a brief summary of the process:
- Open and fund your gold IRA just as you would any other IRA, but using a trustee that specifically sponsors gold IRAs.
- You designate a precious metals dealer, and the depository that will store your gold.
- You must complete a Buy Direction Letter and Depository Election, enabling the IRA trustee to purchase and store your gold from the dealer and depository you chose.
- You must agree on a purchase with the dealer, who then bills your IRA trustee for the purchase price of the gold.
- The IRA trustee pays the dealer from the IRA funds, then sets up an account at the depository in the name of the IRA.
- The precious metals are shipped by the dealer to the depository.
It’s important to understand that it is not you who owns the gold in your IRA, but rather the IRA trustee. The trustee owns the metals in the account, but you are the owner of the account.
And if you ever take physical possession of the gold from the IRA, then he will be considered a distribution from the plan, and subject to applicable IRS taxes, penalties if you are under the age of 59 ½.
The Fees Involved in a Gold IRA
Just as is the case with any type of IRA, there are fees associated with a gold IRA. Those fees include:
- The seller’s fee, or mark-up on the metals purchased for the IRA.
- Retirement account set-up see, which varies by IRA trustee.
- Custodial fee, which is an annual fee.
- Transaction fees for any subsequent purchases or sales of your precious metals.
- Storage fees, which are paid to the depository takes physical custody of your gold.
Because of the fact that precious metals or a physical commodity, they are more expensive to hold in an IRA than paper assets are. You should be thoroughly aware of any and all fees associated with a gold IRA account, and factor them into your retirement and investment strategies.
Doing a Gold IRA Rollover
In addition to setting up a gold IRA, you can also do a gold IRA rollover. That gives you the ability to transfer funds from an existing IRA or an employer 401(k) plan into a gold IRA.
The rules for the transfer are similar to what they are for transferring a fund comprised entirely of paper assets into any IRA.
The best way to affect the gold IRA rollover is to choose your IRA trustee (if you don’t already have a gold IRA), and discuss the rollover with them.
You will need to complete paperwork for the transfer with the holder of an employer-sponsored plan, but it will be easier for you if you get the gold IRA trustee involved, so that they will make the transfer quick, efficient, and without running afoul of any IRS regulations.
The Pros of Investing in a Gold IRA
Before moving more money into a gold IRA, you should have a complete appreciation for the reasons for doing so.
Those reasons include:
Gold is strong during times of turbulence. We’ve discuss this in some detail above, but you will have to make a determination as to whether or not those considerations are relevant, and if so to what degree.
Gold is the only asset that’s not also someone else’s liability. This is a major reason why gold does so well during times of turbulence. It represents value unto itself, and there is no counterclaim against it as is the case of paper assets.
Gold has been used as money since Biblical times. We can obsess on stocks, bonds, and even currency, but gold has been around for thousands of years – as a monetary asset – before any of those other paper assets were ever dreamed of.
Gold can’t be “printed” into existence. Precious metals are a physical asset, like oil and natural gas, and unlike paper assets, they cannot be printed into existence in unlimited quantities. This gives them a built-in scarcity that paper assets can never have.
With a Gold IRA you don’t have to be concerned with physical custody . Unlike physical gold which you hold in your possession, with a gold IRA you can hold your metals remotely, freeing you of the concerns over the physical safety of your asset.
The time is right for a Gold IRA. Once again, considering the tenuous nature of the world situation right now, this is an outstanding time to diversify some of your retirement holdings into a gold IRA.
Diversification – A gold IRA allows you to put invest a percentage of your savings in precious metals. Your gold IRA can represent a portfolio of assets that will extend to stocks or government securities like real estate or collectables.
The Cons of Investing in a Gold IRA
That doesn’t mean that a gold IRA is the perfect investment. It does have certain limitations that you need to be equally aware of, including:
Limited number of trustees. Most of the gold IRA trustees are small companies that are hardly household names. You won’t find many gold IRA trustees among the more familiar IRA custodians.
Gold tends to perform well in very select market environments. While gold does extremely well during times of general instability, it tends to be a poor performer in times of prosperity, or even during times when the economy seems to be drifting.
Gold is not an officially supported investment. Unlike that stock and bond markets, the US Government and the Federal Reserve are waiting on the sidelines to backstop the price of precious metals in the event of a major slide. In official circles, gold and all precious metals are in orphan investment.
Central banks have large gold positions. A disproportionate amount of the monetary gold in existence in the world is held by central banks. Despite whatever is happening in the global economy, the price of gold could decline in the face of heavy sales of the metal by central banks.
Confiscation is a possibility. It’s happened before. Officially known as Executive Order 6102, it was in order signed into law by President Franklin D Roosevelt in 1933. Will it happen again? That’s debatable, since gold is no longer recognized as legal tender, the way it was up until that point. But it is always a possibility in the event that government finances get that far out of control.
What to Look Out For When Investing in a Gold IRA
Should you decide to open a gold IRA, there are a few things to look out for:
Avoid numismatic coins. No matter how much of a fan you might be of numismatic coins, they have no place in your gold IRA. Your IRA trustee should help you stay informed of this matter.
Your Gold IRA shouldn’t be your primary retirement asset. It’s important to understand that gold is not an all weather investment. It works in certain economic environments, but performs miserably in others. It should not represent your primary retirement holding, but rather a small percentage of the total, that you consider sufficient to ensure your entire retirement portfolio in the event of serious trouble.
There are only a few trustees who work with Gold IRAs. As mentioned earlier, there are only a small number of gold IRA trustees. We offer no endorsement of any specific IRA trustees, but you can check out Gold IRA Guide’s Reviewing 2015’s Top Gold IRA Companies & Bullion Dealers for some possible candidates. The page provides a list of 67 different gold IRA trustees, complete with their rankings of each company.
You’re going to open a gold IRA, please consider all of the facts – both good and bad – and make sure that such an investment will be consistent with your overall investment goals, as well as your understanding of the predominant economic trends of the next few years.
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