Gold IRA vs. Physical Gold

Gold has remained a popular investment diversification tool for decades. It can serve as an inflation hedge and may help you offset the price volatility of less stable investment instruments. But did you know that there are multiple ways to invest in gold? 

In addition to traditional investments in physical gold, you can also invest in a gold individual retirement account (IRA). 

Why Are Gold Investments Valuable?

Gold can be a good investment for hedging against inflation and diversifying your portfolio. While gold does experience price fluctuations, these value changes are typically less extreme than those for other commodities and financial instruments. 

The returns on gold aren’t usually as fast-paced as the ones available when dealing in stocks. However, the stability can be a nice trade-off, as you won’t deal with as many fluctuations.

How Investing in a Gold IRA Works

A gold IRA is a self-directed individual retirement account that allows you to invest in precious metals such as gold, silver, platinum and palladium. Traditional IRAs typically hold paper assets like bonds and stocks, while a gold IRA lets you diversify into tangible assets with intrinsic value. 

The Internal Revenue Service classifies gold and other precious metal bullion as collectibles. The law discourages people from holding collectibles in IRAs, but there is an exception. 

An IRS-approved nonbank trustee or financial institution must hold your gold. In this case, your designee can hold collectibles in your IRA while you enjoy the tax benefits these investment accounts provide. 

You’ll need a qualifying custodian to manage the account and you’ll also need to ensure the gold meets specific purity standards. Usually, that number is a minimum of 99.5% purity. 

Several private gold-selling entities handle purity verification and can connect you with a custodian. This “everything under one roof” approach makes it easier to take advantage of the tax benefits while investing in a stable asset like gold. 

When setting up your gold IRA, you can select how to receive your tax advantages. Your options include tax-deferred (traditional IRA) or tax-free growth (Roth IRA).

Investing in a gold IRA comes with distinct advantages and disadvantages, including the following:

Pros

• Offers tax-free withdrawals or tax-deferred growth
• Allows you to diversify your retirement portfolio with tangible assets
• Gold is stored in a certified depository 
• Can add other precious metals to your IRA

Cons

• Roth option comes with high fees on early withdrawals
• Higher setup and storage fees
• Subject to required minimum distributions (RMDs) after age 73
• Selling gold from your IRA can take longer and minimize liquidity 

How Investing in Physical Gold Works

Investing in physical gold is a relatively simple process. You start by purchasing gold in the form of coins, bars or bullion. Some investors prefer this method because they can physically hold the asset. Possessing gold provides a sense of security and ownership. 

However, once you buy physical gold, you’ll need a safe place to keep it. You have several options, such as purchasing a home safe or signing up for a safety deposit box at your bank. 

The biggest hurdle associated with buying gold involves finding a reputable source. Fortunately, several great online dealers have been around for decades. Make sure to thoroughly research each source and compare prices to ensure you get a fair deal. Here’s a look at the good and bad of investing in physical gold.

Pros

• Physical possession of the asset
• Full control over assets with no need for a third party
• No tax penalties for holding physical gold outside an IRA
• Assets can be sold quickly and easily

Cons

• Asset storage can involve ongoing costs
• Holding physical gold has no tax advantages
• Assets can be stolen or lost
• No way to generate interest or dividends

Comparing Buying Physical Gold vs. Gold IRAs

Here’s a look at how a gold IRA vs. physical gold stack up against one another in terms of these crucial factors:

Growth Potential

Both physical gold and gold IRAs are dependent on the overall gold market. Precious metals have historically shown steady growth over time. IRAs may provide an edge if you add other precious metals to your account. However, the actual growth of gold will remain consistent whether you hold it in an IRA or take possession of it yourself. 

Fees

You will likely incur more fees when setting up a gold IRA than when purchasing bullion. You’ll need to pay for account setup, storage fees since the gold must be held in a certified depository and custodial fees for managing the account. 

Your costs associated with physical gold include the purchase price and any expenses for storage, such as a home safe or safety deposit box. You’ll also pay a premium when purchasing gold from a dealer. 

Ease of Investing and Diversification

Gold IRAs represent a great diversification opportunity. You can easily add other precious metals to the account, including palladium, platinum and silver. This flexibility can help reduce risk. The initial setup process is often a bit more tedious, but after that, managing your account should be simple.

Buying physical gold is about as simple as it gets. You find a reputable dealer, purchase the metal and store it. However, you will miss out on the convenience of professional account management. 

Tax Benefits 

Physical gold doesn’t provide any tax benefits. Gold IRAs allow you to deduct your investments to reduce taxable income (Traditional) or use after-tax dollars to enjoy tax-free withdrawals (Roth). You’ll pay taxes on a traditional gold IRA when you withdraw. Roth withdrawals are tax-free if you meet certain age conditions. 

If you want to lower your tax burden now, you might prefer a traditional gold IRA. Let’s say you invested $5,000 in your gold IRA. You could reduce your taxable income by that amount for that tax year. A Roth-style gold IRA could be the better option if you would rather enjoy tax-free withdrawals during retirement. 

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Should You Invest in Gold IRA vs. Physical Gold?

A gold IRA may be the way to go if you want to grow your retirement savings with tax benefits. Conversely, you might consider purchasing physical gold if you want to hold physical assets and have immediate access to them. 

To determine whether a Roth or traditional gold IRA will be better, consult with a tax professional. No matter your choice, you can diversify your holdings and access a resilient commodity in the face of inflation. 

Frequently Asked Questions