Gold IRA: Should you open one to save for retirement?

Investors are often drawn to gold during times of high inflation or market turmoil. It’s viewed by many as a safe haven asset and a store of value. If you’re looking to invest in physical gold through an individual retirement account (IRA), you’ll need to open a special type of account known as a gold IRA.

But gold IRAs can come with high fees and may not grow your wealth the way traditional investments such as stocks and bonds do. Here’s what you should know before opening a gold IRA.

What is a gold IRA?

A gold IRA is a special type of IRA that allows investors to hold physical gold and other precious metals in their portfolios. In general, physical gold investments are not allowed in a traditional IRA because they’re considered collectibles. The IRS considers IRA money that is invested in collectibles as an immediate distribution and you may owe taxes and a 10 percent penalty on the investment.

Gold IRAs can be opened with many different brokers or custodians and the contribution limits are the same as traditional IRAs: $7,000 for 2024 or $8,000 if you’re age 50 or older. 

How gold IRAs work

Gold IRAs work similarly to traditional IRAs, the key difference being that they allow investors to hold physical gold and other precious metals in their portfolios. IRAs allow investors to set aside money for retirement, allowing it to grow tax-deferred until you start making withdrawals. You can also invest in a Roth IRA using after-tax funds, which allows your withdrawals to be tax-free during retirement.

Gold IRAs allow you to purchase and store physical gold and precious metals, which means you’ll need a bank or other institution to store the physical asset. That’s one reason why gold IRAs come with higher fees than traditional IRAs. Keep in mind that you cannot store your physical gold at home or the IRS will consider it a distribution from the IRA.

Pros and cons of gold IRAs: Top reasons to consider opening an account

Pros

• Tax advantages: Gold IRAs come with the same tax advantages that traditional IRAs do. Your money will be able to grow tax-deferred until you start taking withdrawals during retirement. Roth IRA withdrawals will be tax-free.
• Diversification benefits: Gold typically doesn’t have high correlations with traditional assets such as stocks, so having a small amount of your portfolio in gold can bring diversification benefits.
• Possible inflation hedge: Many investors view gold as a store of value and protection against long-term inflation.

Cons

• Fees: Gold IRAs come with higher fees than traditional IRAs that can be opened with most brokers for free. Storage fees are charged by custodians for holding physical gold and there may be other fees that also eat into investors’ returns.
• Gold has no underlying cash flows: Gold doesn’t produce cash flows for its owners, which makes it difficult to value. You won’t earn dividends the way that stock investors do. If you purchase 10 ounces of gold, you’ll still have 10 ounces of gold in the future; the value depends on the price at a given time.
• Can’t hold traditional investments: A gold IRA is required to hold physical gold as part of an IRA, but it can’t also be used to hold traditional investments such as stocks and bonds. You’ll need to open a separate IRA, though the contribution limits across all your IRAs remain the same.

Alternative ways to invest in gold through a traditional IRA

One way to get exposure to gold without opening a gold IRA is to invest in gold-focused securities, such as ETFs, in a traditional IRA. This simplifies the investment process and allows you to work with more well-known brokers while avoiding the excess fees often associated with gold IRAs. Here are some of the top funds for investing in gold.

However, if you’re looking to hold the physical asset, you’ll need to open a gold IRA.

Bottom line

Gold IRAs allow investors to hold gold and other precious metals in their tax-advantaged retirement accounts. Be aware that these accounts typically come with higher fees than traditional IRAs. Gold may provide some diversification benefits to a portfolio and many view it as protection against inflation, but it has underperformed stocks over the long term.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.