Key Facts to Know About Gold IRAs

Gold is at or near record highs, and that’s generating interest in different ways to own the precious metal. Gold has been in most of my recommended portfolios continuously since August 2017. We reduced the size of our positions in March 2021.

Recently I’ve received a number of queries about “gold IRAs.” A gold IRA is not a certain type of IRA named in the tax code, such as a Roth IRA or traditional IRA. It’s an IRA, either traditional or Roth, that holds physical gold. Not all IRAs (individual retirement accounts) can own physical gold, but it’s not because of the tax code. Many custodians will handle only financial assets and usually only publicly traded financial assets, such as stocks, bonds and mutual funds.

They won’t let their IRAs own gold or other unconventional investments. To have your IRA own gold, the IRA needs to have a custodian that offers what I call a true self-directed IRA. Most custodians describe their IRAs as self-directed, but they mean you can directly trade in any of the financial assets the custodian allows. The true self-directed IRA is subject to the same tax rules as conventional IRAs, such as contribution limits, distribution rules and prohibited transactions and investments.

The difference is that the custodian of a true self-directed IRA allows the IRA to own a broader range of assets. Some allow the IRA to own and trade any legal asset. Others specialize in holding certain non-financial assets, such as gold and precious metals. There are far fewer true self-directed IRA custodians than conventional IRA custodians.

Yet, there’s no shortage of custodians marketing their gold IRAs or self-directed IRAs. Or you can do an internet search for “self-directed IRAs” or “gold IRAs” to find some custodians to consider. After opening the true self-directed IRA, you fund it through either direct contributions or a rollover from an existing IRA or other qualified retirement plan, such as a 401(k). After that, direct the custodian to buy the gold or other investments you want in the IRA.

Some custodians allow you to choose the metals dealer from whom the gold is purchased. Other custodians have a related metals dealer through which you must trade. These firms are in a precious metals brokerage or trading business, and the IRA custodianship supports that business. The tax code allows an IRA to own only certain types of precious metals bullion or coins. Be sure the metals dealer or custodian certifies that it is selling you bullion or coins that are permitted in IRAs.

A gold IRA often has additional costs. True self-directed custodians tend to charge higher fees than conventional IRA custodians. There’s often an annual fee for having the account, and there might be an account-opening fee. There are likely to be fees for each transaction, and they’re probably higher for these types of IRAs than conventional IRAs. There also might be fees for making distributions and other transactions.

You should see the full fee schedule and compare it with costs at other custodians before selecting a custodian. When bullion or coins are purchased, there’s usually a bid/ask spread, or a difference between the prices for buyers and sellers. The difference is profit to either the metals dealer or the custodian.

Explore the pricing and spreads of the custodians and dealers. Find out if you’ll pay a commission or transaction fee in addition to the bid/ask spread. You can’t transfer precious metals you already own outside a retirement account to the IRA. You also can’t buy the metals yourself and have them transferred to the custodian.

All IRA contributions must be either in cash or transfers from other qualified retirement accounts. Once the precious metal is purchased by the custodian, it must be transported to a depository, stored and insured. You’ll pay all these costs, and the storage and insurance costs will be ongoing. Under the tax code, you can’t have personal possession of precious metals, coins, or other assets owned by your IRA.

The assets need to be in the control of the custodian or an approved depository under contract with the custodian. If you take possession of coins or bullion, that is treated as a distribution to you. The value of the metals on that date will be included in your gross income for the year and taxed as ordinary income. That’s why, before setting up a gold IRA you, need to decide your reasons for wanting to own gold.

When your goal is to have physical possession of bullion or coins in case of a disruption in the currency or financial system, IRA ownership might not be the best approach. You probably want to purchase the metals with assets that are outside of a retirement account. Take physical possession of the metals and store them somewhere that is secure and insured but readily available to you. When your goal is to profit from potential appreciation in gold through the IRA, the best strategy usually is to have a conventional IRA purchase an ETF, such as iShares Gold Trust (IAU).

The ETFs are very liquid. You can buy or sell any time your custodian lets you make trades. There’s usually only a small difference between the cost of the ETF shares and the market price of gold bullion. Most custodians now let you trade ETFs without commissions or trading fees. The ETFs also negotiate low storage and insurance costs for the metals they own.

These factors make ETFs the most liquid, lowest-cost way to invest in gold and some other precious metals. Before setting up a gold IRA, understand the reasons why you want to own gold and decide whether you should own physical coins or bullion or invest through an ETF or other vehicle. When a gold IRA is your choice, compare costs and other features of several custodians.