With all the talk about gold as an investment, it’s easy to feel overwhelmed and intimidated. You might find yourself asking questions like: Can I invest in gold? Would an investment in gold make sense for me? What’s the best way to invest in gold?
Fortunately, the 1997 Tax Payer Relief Act opened the door for an investment in physical gold with the tax advantages of an IRA account. Gone are the days when gold was only an option for national governments and the super-wealthy. Using money you already have in your 401(k) or other IRA account, you can invest a piece of your retirement nest egg in gold. Real, physical gold.
A IRA rollover is a simple process whereby you keep money you have invested in a tax-advantaged retirement account, but transfer a part of it to the care of an IRA custodian that specializes in holding physical gold. Starting the process involves 3 steps:
1. Choose a custodian. Look for one with a trusted reputation, excellent service and value.
2. Decide how much of your portfolio to put into gold. You may consult an investment advisor for help.
3. Fill out rollover paperwork provided by the custodian.
Is gold right for me?
Gold as an investment makes sense for a lot of people. Over long periods of time, gold has historically moved in the opposite direction as the rest of the stock market in general. That means when the stock market has trended down, gold usually trended up and vice versa. So if you’re already invested in the stock market, gold can provide excellent diversification benefits to smoothe out the volatility of your portfolio’s returns. In addition, many investors use gold to reduce the risk of inflation, a serious problem when a government prints money to pay its debts.
But investing in gold also has drawbacks. Unlike bonds or other fixed income investments, gold does not pay interest. In fact, there are costs associated with holding gold in safekeeping. And whereas stocks and other equity investments have the potential to grow intrinsically from profit generation, gold can only increase in value from an increase in the market price.
Still, these differences are precisely what makes gold an excellent piece of a well-diversified portfolio. Exactly how much gold to include in your portfolio depends on many factors including your time horizon, risk tolerance, market outlook, and more. Talk to a professional about your individual situation if you have more questions.
Are there other ways to invest in gold?
Of course! There are many ways to invest in gold, even with the tax advantages of an IRA. The most direct way is through a gold IRA rollover as outlined above. This method allows you ownership of physical gold coins held in trust by a custodian. Custodianship is necessary for the tax-shelter of an IRA to remain intact. The primary advantage to holding minted gold coins in your IRA is that when it’s time to take your IRA distributions, you can elect to have the gold coins sent directly to you! By keeping your gold safe in your house (or safe deposit box) upon reaching the retirement age, you ensure you have legal tender within reach should the worst happen to the banking system. It’s happened within the last decade: when banks get into trouble, depositors make a run on the banks, and the money becomes frozen until the FDIC can straighten things out. Physical gold gives you another way to access the wealth you’ve worked to acquire. Some investors prefer to invest in gold mining companies. This may be an attractive investment if you believe a particular mining company is well-managed or if you want to add risk to your portfolio. However, the stock price of a mining company is affected by a great many factors beyond just the price of gold. The mining company will still ride the waves of the stock market as a whole, which means the diversification benefits of investing in gold will be diminished and the risk is increased. This could work out favorably if both stocks and gold prices go up simultaneously, but those price movements tend to not last in the long term. Many smaller mining companies have even gone bankrupt in the past due to mismanagement or scandal.
Other investors might decide to invest in gold by purchasing gold funds in their stock brokerage IRA. This avenue is most appealing to investors who want to save time by just using their existing accounts. Gold mutual funds and exchange-traded funds (ETFs) will either invest exclusively in gold bullion held by a custodian or invest in gold mining companies, thus exposing the fund shareholders to stock market risk, as described earlier. One major drawback of investing in gold funds is that investors still must go through the usual banking and brokerage channels, thus increasing their reliance on the integrity of that system. Furthermore, a gold fund mingles everyone’s gold together and therefore can not single out any piece of gold as belonging to an investor. The investor only owns gold on paper.
Another consideration is cost. Investing in a gold fund involves the transaction cost to the broker facilitating the trade, the fund company’s management fees, and the custodianship fees charged by the bank holding the physical gold. In order to pay the holding costs and fund fees, the fund manager must sell a small portion of the gold held in trust. This means the total quantity of gold owned by the shareholder shrinks a little each month. Check the fund prospectus to see exactly how much a particular gold fund would charge you.
In summary, an investment in gold can be advantageous for many investors for a variety of reasons. A gold IRA rollover might make the most sense for investors seeking tax relief and peace of mind. Be smart about choosing a gold IRA custodian with a strong reputation and a commitment to service.