Bankrate: ‘Does investing in gold with a gold IRA make sense?‘ by Sheyna Steiner Dec. 16, 2015
Invest in gold with an IRA?
Some conspiracy theorists speculate that humans were put on Earth to mine gold for aliens. That would partly explain people’s fervent obsession with the stuff, including investing in gold.
As jewelry, gold shines. But as an investment, the track record is mixed. “From a return basis, the return on gold has been less than other investment asset classes and is volatile and cyclical,” says Matt Rinkey, founder and president of Illumination Wealth Management in San Diego.
Investing in gold pays no interest or dividends, but many investors believe that gold will always be worth something. Because it’s seen as a safe haven during turbulent times, many advisers heartily endorse a small allocation to gold in a portfolio.
Does that mean you need a gold IRA? Or can you skip it?
Pros of gold IRAs
The best reason to invest in gold is for the diversification benefits. Gold provides a hedge against inflation and is also not correlated to the stock market.
“Diversification is good in a portfolio. You don’t want to hold all of one sector or (market) cap or asset,” says Megan Petruska, director of portfolio research and advisory at McMahon Financial Advisors in Pittsburgh.
Instead of holding all stocks, or all large-cap stocks, investors should hold several types of investments.
“You want investments that will almost play against one another,” Petruska says. When the stock market is booming, the price of gold may fall. But when the stock market is falling, gold usually regains its luster for investors.
Adding assets to a portfolio that are not correlated to the stock market can have a stabilizing influence when market volatility strikes.”
After being burned by ’08 and ’09, people are looking to hedge their portfolios. When everything is going wrong, it can be psychologically satisfying for investors to have a little that is going right,” says Robert Laura, president of Synergos Financial Group in Brighton, Michigan.
Gold IRA cons
Unlike many stocks, gold does not pay dividends. It’s a very tax-efficient investment — until you sell it. That tax efficiency may not be needed in a traditional IRA, where assets are taxed at ordinary income tax rates when withdrawn.
“You’re wasting that tax-deferred space for an asset that is not going to generate any taxable event,” Petruska says.
“Typically the IRA is where we can put huge dividend-paying stocks or mutual funds. We can have the benefit but not worry about the taxes,” she says.
On the other hand, the IRA may be the best place to own gold. That’s because the sale of gold would be taxed as a collectible at a rate of 28% in a taxable account, says Rinkey. Even the sale of some exchange-traded funds, or ETFs, is taxed as a collectible outside of IRAs. It depends how the fund invests in gold.
An investment in gold held for less than 1 year is taxed as a short-term capital gain at ordinary income tax levels.
“Gold could be better in the IRA than outside. It’s all about risk and reward and costs and benefit. There’s no one right answer,” Rinkey says.
How do you invest in gold?
The most convenient way for most investors to buy gold is through an ETF or mutual fund.
“We would recommend holding gold in a more liquid way than physical gold. That way you can more easily get out of the investment,” says Petruska. “Like in an ETF.”
The easiest way is not the only way to invest in gold. Investors can also buy gold coins and bars. The IRS limits the types of gold coins that can be held in IRAs to those minted by the Treasury Department and a few other government entities. For instance, the Canadian Maple Leaf gold coin is approved for IRA investors, as is the Austrian Philharmonic.
Investing in gold doesn’t have to be limited to the actual metal. Some investors prefer to invest in the companies that do the actual mining.”
(Gold) doesn’t generate income. You need price appreciation to make money on it. But there are some gold miners that are paying small dividends,” Laura says.Investors can buy funds that invest in gold mining companies or purchase individual stocks.”
Go into it with a good understanding of the risks,” Laura says. There can be geopolitical risks if the company has mines in politically unstable countries.
Gold IRAs are self-directed
To actually keep a gold coin in an IRA, investors need to go through custodians that provide self-directed IRAs.”
We’re here to provide a platform for clients who have decided to use their retirement funds outside of the cookie-cutter options of stocks, bonds, mutual funds and ETFs,” says E. Brian Finklestein, partner and CEO at Broad Financial, a provider of self-directed accounts.
There are essentially 2 options for holding physical gold in an IRA. In the first option, investors tell the custodian what they would like to buy and the coins are purchased and held in a depository.
Alternatively, investors can go out and buy the gold coins on their own and keep them in a safe-deposit box, in what is known as the checkbook control model of self-directed IRAs.”
Many lawyers feel comfortable with that and others feel it has to be in depository,” Finklestein says.
The fine print
In order to keep the gold coins within the retirement account and keep them in a bank, investors must first open a limited liability corporation, or LLC.
“Typically the provider will do this. They set up the LLC,” says Finklestein.Plus, the IRA LLC needs a checking account in order to make transactions. If keeping the gold in your own bank is your plan, it will need to be held in a safe-deposit box under the name of the IRA LLC.
The cost of the whole shebang — establishing an LLC and the checkbook control account — is around $1,300 to $1,700 at Broad Financial, according to its website. The fees for establishing an LLC range from $40 to $520, depending on the state.
Other custodians may have different fees, but the bottom line is that a self-directed IRA is going to cost more than an IRA through a brokerage, mutual fund company or a bank or credit union. For investors who want to put their retirement money into physical gold, or any of the other alternative investments allowed by the IRS, the added cost may be worth it.