Gold IRA vs. Gold ETF

Gold IRA vs. gold ETF overview

If you want to add gold to your portfolio, you can choose between a gold IRA and a gold ETF.

A gold IRA is a self-directed retirement account that holds IRS-approved physical precious metals stored in approved depositories via a custodian (i.e., an investment company or bank).

A gold ETF is an exchange-traded fund that tracks gold prices through physical holdings or derivatives and is traded like stocks on exchanges. Instead of owning specific bars or coins, when you invest in a gold ETF, you’ll own shares in a fund that either holds gold collectively or tracks gold prices.

Derivatives are contracts whose value comes from another asset, letting investors manage risk or bet on price changes.

Cost differences between gold IRAs and gold ETFs

Gold IRAs incur multiple fees. In addition to a one-time setup fee, you’ll have ongoing administrative, storage and insurance fees, along with a dealer markup on the gold itself.

ETFs are much less costly to open and own since they don’t require the same care and handling as a physical asset.

Gold IRA investor profile

The typical gold IRA investor has a robust and well-diversified investment portfolio and is looking for long-term stability no matter the state of the economy. Investing in physical assets is a great way to preserve wealth across generations.

Gold IRA investors aren’t focused on short-term profits. Instead, they’re looking to invest a small portion of their money into physical assets to preserve their wealth and pass it down. Often, investors will roll over all or part of an existing retirement plan into a gold IRA.

Gold IRA investors typically:

• Have very large investment portfolios
• Are nearing or have entered retirement
• Are seeking to preserve wealth for future generations
• Want to shield some investments from economic uncertainty
• Are willing to forgo interest and dividends for long-term security

Gold ETF investor profile

Gold ETF investors are typically interested in dabbling in precious metals without storing it or navigating the strict IRS regulations for physical assets. These investors often seek to build wealth over time through a diversified portfolio that includes an ETF built on gold-adjacent companies.

ETFs pay interest and dividends, unlike gold IRAs or other physical asset-based accounts. Gold ETFs also allow you to purchase small amounts quickly and inexpensively. This attracts all but the most conservative, long-term investors.

Gold ETF investors are usually:

• Interested in gold but don’t want to deal with regulations or added fees
• Still building their investment portfolio and want to diversify
• Hoping to benefit from interest and dividends
• Seeking a combination of wealth-building and economic security over time

RELATED: What is an ETF?

Gold IRA vs. gold ETF differences

While gold IRAs and gold ETFs are both gold-based investment vehicles, they’re different in many ways. In this section, we’ll discuss the main differences between these two types of investments.

Ownership

The biggest difference between a gold IRA and a gold ETF is in the ownership. A gold IRA operates based on tangible gold that’s owned, tracked and stored in a depository.

Futures are contracts to buy or sell an asset at a set price on a specific date in the future.

An ETF, on the other hand, might invest in gold-adjacent companies, but you wouldn’t be considered a gold owner if you have a gold ETF. Instead, you might own shares in gold trusts, companies that mine gold or organizations that use derivatives and futures to track the price of gold.

Taxes

An IRA backed by gold is subject to the same IRS tax regulations as any other IRA. Traditional gold IRAs are funded with pre-tax dollars but are taxed as regular income upon withdrawal. Roth gold IRAs are funded with after-tax dollars, but qualified withdrawals are tax-free.

Taxation on gold ETFs is a bit more complicated.

Unless your gold ETF is held within an IRA, distributions are subject to short-term (less than 1 year) or long-term (more than 1 year) capital gains tax. Profits can be taxed at a collectible rate of 28%, which is higher than the standard capital gains tax rate (up to 20%) typically assessed on a regular, non-gold ETF.

Liquidity and access

When it comes to liquidity and ease of trading or selling, gold ETFs offer significantly greater flexibility and convenience compared to gold IRAs. You can buy or sell your shares of a gold ETF almost any time, day or night, with no waiting period or administrative hassle.

Gold in an IRA, on the other hand, requires coordinating with custodians and dealers, and navigating account administration processes to buy or sell.

If you’re a long-term investor, this slower pace may not matter much. But if you’re accustomed to quick and efficient trading, you may find the administrative processes associated with a gold IRA cumbersome and potentially frustrating.

Key differences between gold IRAs and gold ETFs

The table below outlines the main distinctions between gold IRAs and gold ETFs.

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Gold IRA pros and cons

If you’re a well-diversified investor who’s looking to get into tangible assets like gold and precious metals, a gold IRA can be a great choice. It combines the experience of owning physical assets with the tax-sheltered benefits of an IRA retirement account. But there are some drawbacks to consider. We’ll examine gold IRA pros and cons here.

Advantages of a gold IRA

• Tangible asset: Gold prices tend to remain stable even during periods of market volatility and economic uncertainty.
• Tax benefits: Gold IRA holders enjoy the tax-sheltered status of an IRA account.
• Generational wealth: Tangible assets like art, real estate and precious metals are reliable ways to transfer wealth from one generation to the next.

Disadvantages of a gold IRA

• Does not generate income: Unlike a securities-backed investment account, you won’t earn interest or dividends from a gold IRA. 
• Strict IRS regulations: The IRS maintains very rigid standards for both the purity of the precious metals backing your IRA and how the assets are stored.
• Complex procedures: The administration of your gold IRA — buying, selling, transfers — is a lengthy and complex process since you’ll be dealing with an account custodian, a depository and a financial institution. 
• Higher fees: You can expect to pay fees to set up and maintain your account, as well as fees to store your gold.
• Dealer markups: In addition to fees associated with your gold IRA, there are dealer markups on each buy or sell, representing dealer profit.

Gold ETF pros and cons

If you’re still building your portfolio and focusing on growth while exploring an interest in gold or other precious metals, a gold ETF might suit your needs. Here, we’ll take a look at the benefits and limitations of a gold ETF.

Benefits of a gold ETF

• Exposure without hassle: A gold ETF allows you to “dabble” in gold by owning shares of a group of companies engaged in gold-adjacent activities like mining or futures, without having to worry about storing, handling or transporting actual gold.
• High liquidity: Unlike a gold IRA, you can buy, sell or trade gold ETFs with just the click of a button. This investment option is much more liquid and simpler than a gold IRA.
• Return on investment: Gold ETFs do pay interest and dividends, which you won’t receive if you invest in a gold IRA.

Drawbacks of a gold ETF

• No actual ownership of gold: If your main goal is to own gold that you can handle and track, a gold ETF is not for you. ETFs are funds made up of a group of companies that deal in gold, rather than physical gold itself.
• Market volatility: A gold ETF, like stocks and bonds, is subject to daily market fluctuation and volatility.
• Tax implications: Profits from a gold ETF are subject to capital gains tax and possibly even collectibles tax rates, which are even higher. Consult your plan manager or a tax adviser to understand the taxes you might face.

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