Gold IRA pros and cons

How a gold IRA works

A gold IRA is a self-directed individual retirement account that allows you to invest in physical gold and other precious metals within a tax-advantaged account. The account follows the same contribution and withdrawal rules as a regular IRA.

You can contribute up to $7,000 per year into a gold IRA (as of 2024), but you cannot withdraw from the account until age 59½ without penalty. And you can typically choose between a traditional IRA to save on taxes now or a Roth IRA account to save on taxes in retirement.

Gold IRAs have some specific requirements, including:

• All physical gold and other metals must be held with an approved custodian
• Only certain metals can be held in a gold IRA, including ingots, coins, bars and rounds
• Must meet IRS-regulated purity standards

» MORE: Traditional IRA vs. Roth IRA

Advantages of gold IRAs

Gold IRAs can be a great option to diversify your investments while saving on taxes at the same time. Here are a few advantages of using a gold IRA account:

Tax savings

Gold IRAs allow you to save on taxes while investing in physical gold. This can be a huge advantage, especially since buying and selling physical gold outside of a retirement account is subject to a 28% capital gains tax rate (because the IRS sees it as a collectible).

You can save on income taxes on your gold now by opening a traditional IRA, or withdraw your gold tax-free in retirement by opening a Roth IRA. Both types of IRAs allow you to buy and sell gold within the account with no tax consequences.

Asset diversification

“A gold IRA operates as a self-directed IRA, enabling investors to embrace alternative investments that are typically prohibited in traditional IRAs,” said Arielle Tucker, a certified financial planner at Connected Financial Planning. “For savvy investors, this unlocks the door to a diversified portfolio with the classic benefits of a tax-advantaged retirement account.”

Gold is an asset that doesn’t necessarily correlate with the stock market and other traditional investments. It is seen as a “safe-haven” asset that many investors trust during times of uncertainty. Investing in a gold IRA can give your retirement portfolio more asset diversification, depending on your investing goals and risk profile.

Gold is typically subject to a 28% capital gains tax, but is tax-free when held inside an IRA.

Tangible investment

Gold IRAs hold physical gold and you can withdraw your gold investments in retirement. This is one of the only ways to own a physical asset within a retirement account.

Plus, gold has been around for thousands of years as a form of currency and as an investment asset, and is seen as valuable worldwide. Gold will likely continue to be around and hold value well into the future.

Hedge against inflation

Gold is known as a hedge against inflation. This means as inflation rises, gold tends to rise in value along with it. And gold can help preserve your purchasing power over time. Now, the price of gold isn’t perfectly correlated with inflation and does not always grow when inflation rises, but over long periods of time it has grown faster than inflation has risen.

» MORE: Is gold a good investment?

Disadvantages of gold IRAs

While gold IRAs allow you to diversify and own a physical asset within your retirement account, there are a few downsides, including:

High fees

“One notable drawback of gold IRAs is the presence of significantly higher fees compared to traditional or Roth IRAs that predominantly invest in more conventional assets like stocks, bonds or mutual funds,” said Tucker. “Investors should be mindful of these added costs when considering a gold IRA.”

Gold IRAs are self-directed accounts that require jumping through a few hoops to open and maintain. Gold IRA companies will handle the details, but typically charge high fees for opening and maintaining your account. This can include a one-time setup fee, trading fees and monthly account maintenance fees. Most other IRA accounts don’t charge high monthly fees or have setup fees included.

Lower returns

While gold is a trusted global asset that has been around for a long time, it hasn’t outperformed the stock market. Gold has generated around 7.5% returns annually since 1971, while the stock market is closer to 10% annual returns. This means investing in gold has a potential for lower returns versus other investment strategies.

Historically, gold has generated roughly a 7.5% return annually, compared to 10% for the stock market.

Less accessible

Gold inside your IRA can’t be accessed without penalty until age 59½. This makes it much less accessible than simply investing in gold outside of an IRA. And if you prefer to own and store your own gold investments, a gold IRA does not currently allow this.

No dividend payments

Unlike stocks or bonds, gold does not produce any income and therefore does not offer any dividend payments. This makes it a poor option for earning passive income or for fixed-income investors who want regular payments from their investments. Gold can go up in value over time, but you will not be collecting any income until you sell it.

Contribution limits

Gold IRAs have contribution limits, adhering to standard IRA requirements. This means as of 2024, you can only invest up to $7,000 in a gold IRA, and up to $8,000 if you’re age 50 or older. If you want to invest in more physical gold than those limits, you’ll have to purchase it outside of a gold IRA.

» MORE: What affects gold prices?

How to open a gold IRA

To open a gold IRA, follow these steps:

1. Find a gold IRA provider. There are several gold IRA providers online. They will help you open a self-directed IRA account and get everything set up to purchase gold. You’ll want to find a reputable one that is licensed and works with a trusted custodian to store your gold purchases.
2. Open an account. Opening an account is similar to applying for a bank or investment account. You’ll need to provide your personal and financial information, including your name, address, email and Social Security number. You may also need to pay a one-time setup fee.
3. Transfer funds. You can roll over funds from another IRA (though you’ll need to sell investments into cash first), or you can deposit funds from a bank account. Remember, deposits from your own bank account will count against your annual contribution limits, so make sure to keep track.
4. Purchase gold. Once the funds are in your gold IRA, you can purchase physical gold. Your purchased gold will be securely stored with an approved custodian.

» MORE: Gold IRA vs. physical gold: Which is better?

Bottom line

Gold IRAs offer a way to own alternative assets inside your retirement account and can add a layer of diversification to your investment strategy. But gold IRAs come with risks and downsides, too.

Gold IRAs limit the amount of gold you can purchase annually, and you can’t store your own gold — it has to be held with a custodian. And if you withdraw any of your gold investments before age 59½, you’ll be penalized by the IRS. It’s important to understand the account limitations before opening one.