Gold IRA: What It Is, How It Works, Risks

What Is a Gold IRA?

The term gold IRA refers to a specialized individual retirement account (IRA) that allows investors to hold gold as a qualified retirement investment. The best gold IRAs allow investors to hold physical metals such as bullion or coins, as well as precious metals-related securities within the portfolio.

A gold IRA must be held separately from a traditional retirement account, although rules involving things like contribution limits and distributions remain the same. Investors can open gold IRAs through a broker-dealer or other custodian.

Understanding Gold IRAs

Individual retirement accounts are tax-advantaged accounts that help individuals save for retirement. They come in various forms, including traditional IRAs, Roth IRAs, and gold IRAs. As mentioned above, a gold IRA allows investors to stash their money in gold or other precious metals. These accounts must be held separately from normal IRAs.

Gold IRAs are also referred to as precious metals IRAs. They can either be set up with pretax funds or as a Roth IRA, which is bought with post-tax money. Unlike other IRAs, these accounts require purchasing and storing physical gold. As a result, gold IRAs require the use of a custodian—typically a bank or brokerage firm that manages the account.

Traditional IRAs allow investors to hold just stocks, mutual funds, or other traditional investments. The Internal Revenue Service (IRS) allows holders of self-directed IRA accounts to purchase bars and coins minted from gold or other approved precious metals, such as silver, platinum, or palladium. 

Gold IRA funds can also be invested in gold-related paper investments, such as:

• Exchange-traded funds (ETFs)
• Stock in gold mining companies
• Precious metals mutual funds
• Precious metals commodity futures

But keep in mind that these accounts come with higher fees because they require you to purchase and store precious metals.

Setting Up a Gold IRA

You can't set up a gold IRA with traditional custodians like conventional brokers. These companies don't offer specialty accounts like gold IRAs. If you're interested in setting up this kind of account, you'll have to look for a specialty custodian or firm that is able to handle all the documentation and reporting for tax purposes necessary to maintain a gold IRA.

Although the assets may be different from traditional IRAs, the rules are the same. This means you can't go over your annual contribution limits and you must follow the regulations involving distributions when it comes time to make withdrawals:

• The IRS set contribution limits at $6,500 for 2023, increasing to $7,000 for 2024. You can contribute an additional $1,000 if you are 50 or older for a total of $7,500 in 2023 and $8,000 in 2024.
• You can start taking distributions without incurring any penalties from your IRA after you turn 59½. Withdrawals made before that age are subject to an extra tax of 10%.

Storage is a consideration for those who hold gold IRAs. You have to keep your physical gold at an IRS-approved facility, such as a bank or other depository. You can also hold it with an approved third party. This means you can't store your assets at home. If you do, it counts as a withdrawal and you'll have to pay taxes.

Types of Gold IRAs

Gold IRAs come in different forms, just like traditional investment accounts. Investors can choose from:

• Traditional Gold IRAs: These are retirement accounts that are funded with pretax dollars. This means that contributions and any earnings grow on a tax-deferred basis. Withdrawals are taxed at retirement.
• Roth Gold IRAs: Contributions made to a Roth gold IRA are funded with after-tax money, which means there's no immediate tax advantage. You will pay taxes when it comes time to begin taking distributions at retirement.
• SEP Gold IRAs: Like traditional SEP IRAs, SEP gold IRAs are available to employees of small businesses or self-employed individuals. You are only taxed on your withdrawals during retirement rather than any contributions you make. The IRS limits contributions for SEP IRAs of any kind. This means individuals can set aside up to 25% of compensation or $66,000 for 2023 ($69,000 for 2024)—whichever is less.

Risks of Gold IRAs

Is holding gold a good idea for an IRA? For most of recent history, the answer is no. Gold has to be stored, doesn't pay dividends, and has no earnings. It has industrial and jewelry uses, but by and large, most of the yellow metal sits in bank vaults and safety deposit boxes. People believe it's a safe holder of value when times are tough.

Gold spiked in the early 1980s, then stayed in the $300 to $500 per ounce range until around 2006. Gold peaked at over $1,800 per ounce after the 2008 financial crisis, then fell back to the $1,100 to $1,300 range. It reached an all-time high over $2,000 in the summer of 2020 during the height of the coronavirus pandemic, but dipped below $2,000 following the economic recovery from the pandemic. As of January 2024, the price of gold remains bullish, over $2,000 per ounce.

It's easy to see that gold performs well during periods of financial uncertainty, especially when the broad stock market experiences times of extended volatility. But even with its highs and lows, don't rule this out as a viable investment opportunity.

During the period that gold traded sideways—at least between 1980 to 2006—an IRA would have made more money if you invested in the broad stock market in addition to gold. While gold didn't move much during that period, the S&P 500 would have generated an average annual return of 14.49%.

This is not to say that precious metals don't have a place in your portfolio because they should. But if history is a guide, gold will have to come a long way to match the returns of the overall economy as measured by the broad markets.

The Bottom Line

A gold IRA is a type of self-directed Individual Retirement Account that allows individuals to hold physical gold, silver, platinum, and palladium as investments within the account. It works similarly to a traditional IRA and has the same sorts of tax advantages attached to it—but with the added ability to hold precious metals, which is often used as a hedge against inflation and economic uncertainty. It is important to note that there are specific rules and regulations related to the use of gold IRAs, so it's best to consult a financial advisor before making any decisions.