Analysis: Should you get a gold IRA?

Imagine turning your retirement nest egg into gold. Literally. That’s what many people are doing, by adding a gold IRA to their investment mix.

Since late 2017, prices of the yellow metal have been climbing pretty steadily and are well over $1,300 per ounce as February 2018. But is putting a gold IRA in your portfolio the right move for you?

A gold IRA is a specie (pun intended) of Investment Retirement Account (IRA) that allows the investor to own physical gold, silver, platinum and palladium, instead of the usual assets (like cash, stocks and bonds) that regular IRAs are limited to. It was created by Congress in 1997, says Edmund C. Moy, chief strategist for Fortress Gold and who, as former United States Mint director, oversaw the largest production of gold and silver coins in the world.

Gold IRAs appeal to investors who want a diversified retirement portfolio. “Because gold prices generally move in the opposite direction of paper assets, adding a gold IRA to a retirement portfolio provides an insurance policy against inflation,” says Moy. "This balanced approach smooths out risk, especially over the long term, which makes it a smart choice for retirement investments like IRAs.”

During his tenure as director of the Mint, Moy says there was little demand for gold IRAs because they involve a very complicated transaction that only the most persistent investor was willing to pursue. “You must find a trustee or custodian for the IRA along with an approved depository. Then, you need to buy the approved gold or other precious metal and have it transferred to the depository in a way the custodian can account for it,” he explains.

Since the financial crisis of 2008 and the resulting Great Recession, however, gold IRAs have become significantly more popular. Record gold sales combined with the appearance of many more companies to handle and simplify the transactions have made investing in a gold IRA a one-stop shop. The result: robust gold IRA growth.

Then, of course, there's the impact of economic and world news. “Strong interest in gold IRAs has continued because of the potential inflationary impact of the Federal Reserve’s stimulus programs and a sharp increase in geopolitical risk,” says Moy.

“Gold IRAs can be either traditional or Roth options,” says Daniel Sentell, former director of communications at Broad Financial, a Monsey, N.Y.-based financial services company that offers these accounts. Whichever version, a gold IRA can only be invested in actual gold, be it coins or bullion.

According to Brett Gottlieb, an investment advisor representative and founder of Comprehensive Advisor in Carlsbad, Calif., the first thing to consider is whether you want to have a physical investment in your portfolio rather than a gold-company stock, mutual fund or an exchange-traded fund that tracks a gold index.

If you do opt for the actual metal, certain criteria apply to be held in an IRA. “The precious metal coins or bars must meet IRS fineness standards and must be held by the IRA trustee instead of the IRA owner," says Moy. "The gold must be stored in an IRS-approved depository." No stashing the bullion or specie in home safes or closets, in other words.

“All other rules about IRA contributions, disbursements and taxes apply,” Moy adds.

To put IRA funds into gold, you have to establish a self-directed IRA, a kind of IRA that the investor manages and can be invested in a wider range of products than other types. For a gold IRA, you need a broker (to buy the gold) and a custodian to create and administer the account. This company will store or hold your actual bullion, says John Johnson, president of Goldstar Trust, headquartered in Canyon, Texas.

Custodians are usually banks, trust companies, credit unions, brokerage firms or savings and loan associations that have been approved by federal and/or state agencies to provide asset-custody services to individual investors and financial advisors.

Custodians do not select metals dealers for their IRA clients. This is the investor’s responsibility. But established custodians have relationships with several hundred dealers throughout the country and may be willing share that list.

Or it can work the other way. “Some metal dealers may recommend an IRA custodian,” says Johnson. “However, consumers are always free to search for custodians on their own."

Choosing which company to use is complicated, as it is a specialized task that major brokerage firms generally don't offer, according to Moy. “When I did my homework, there were a few criteria that were important to me,” he says. These include:

• Transparency. Knowing all your costs up front can avoid any nasty surprises, such as hidden fees after you invest.
• Track record. Look for a company with an outstanding reputation from objective third parties, such as the Better Business Bureau or the Business Consumer Alliance. Moy says it may also be helpful to dig into what customers say about the company, especially the number of complaints filed. He looked for firms that were "educational and not pushing a hard sell."
• Flexibility. Each investor’s needs and goals are different, so Moy suggests choosing a company that will cater to you, rather than having a one-size-fits-all approach.  
• Qualifications. You should only deal with a company that has all the appropriate and required licenses, registrations, insurance and bonds to protect your investment. Ask for verification of those licenses and other information.

Owning gold in a Gold IRA does come with some special expenses. The charges that an investor will face include:

• The seller’s fee (markup). "Although gold has a going rate, there are markups depending upon whether you want gold bullion, coins, proofs, etc.,” says Sentell. The markup, which can also vary depending on the vendor, is a one-time fee. But “similarly, each form of gold presents its own set of requirements when an investor has to sell," he adds.
• Retirement account set-up. Also a one-time fee, this is charged to establish your new IRA account. This also varies by institution – but it might be more than the usual set-up fee, since not every financial services firm deals with gold IRAs.
• Custodian fees. Again, while you'd encounter these annual costs (as well as any associated asset or transaction fees) with any IRA, they may be higher for this sort of account, especially if you're having to go to a different financial institution than the one holding your other accounts.
• Storage Fees. The gold has to be held by a qualified storage facility for which storage fees are charged.

There is one possible way to avoid having a custodian and the costs associated with one: You can open what's known as a “checkbook IRA," a self-directed IRA which does not require custodial management. Setting up a checkbook IRA is complicated: You must be an LLC and have a business checking account, to name two of the requirements.

However, as Sentell points out, it does allow investors to purchase gold American Eagles, a U.S. Treasury-minted coin for their retirement accounts, and hold them personally, sidestepping custodian and storage fees. No other coin enjoys this tax-code exception, described in Internal Revenue Code 408(m).

The IRS is said to be currently scrutinizing this type of IRA, so proceed cautiously with this option.

If you already have an IRA or 401(k), either regular or Roth, you have the option of rolling over some or all of its funds into a gold IRA. The rollover process is the same as for any other retirement fund. You typically fill out an account application (whether online or on paper), and the account is usually established within 24 to 48 hours of completion and receipt of the application.

“Once the signed transfer request is received by all parties, the two custodians will communicate with each other to transfer the funds to the new custodian and fund a new gold IRA,” says Gottlieb. When funds are available in the new IRA account, an account representative will review the current precious-metal options a consumer can purchase.

“You advise them as to the exact type you want to purchase and prices are locked up at that time,” adds Gottlieb.

All investments come with risks and rewards, gold included.

“In many ways, gold IRAs have the same risks that any investment has,” says Moy. “The price of gold can go up or down and have volatility. No one can accurately predict its future.”

But despite the risk, Moy says there is a reason to invest some of your retirement funds in the yellow stuff.

“Gold has a 5,000-year history of being a store of value," sayd Moy. "Stocks can go to zero [causing havoc to companies] as we’ve seen with Lehman Brothers, bonds can default like in Argentina or get big haircuts like in Greece. The value of the dollar has steadily gone down [at certain periods]. But gold will never be worth zero."

If the price of gold does dip, Moy says that likely means your paper assets will be doing well. So if your portfolio is balanced with both gold and paper-based investments, a loss on the gold side will be balanced by the gain experienced by other assets.

“Many of these risks exist for traditional IRAs, too. And traditional IRAs have risks that gold IRAs do not have,” he adds.

But there are also some risks specific to investing in physical gold. Any physical commodity is subject to theft. Someone could break into the depository where your gold is being stored. However, to qualify for gold IRAs, depositories are required to be insured, which would protect your investment as long as your account doesn’t exceed the custodian’s stated value on accounts,

“There are also untrustworthy custodians who might steal from their customer’s accounts or commit fraud by selling you precious metals that they do not actually have nor are planning to buy,” says Moy. “These risks can be mitigated by choosing a custodian that insures the financial transaction.”

Gold IRAs are normally defined as “alternative investments,” which means they are not traded on a public exchange and require special expertise to value. While gold has the potential of a high return, it’s easy to be blinded by its glitter. Gold can be volatile (see When And Why Do Gold Prices Plummet?). When gold is rising, you also have to decide whether you'd be buying at – or close to – the top of the market if you invest at that point. Waiting could make more sense.

If you're considering a gold IRA, consult a financial advisor to determine how the metal would fit with the overall goals of your portfolio. In general, it's never a good idea to put all of your eggs in one asset basket. If gold seems like a solid choice for you, Sentell suggests putting no more than one-third of your retirement funds into a gold IRA. 

Gottlieb recommends people have no more than "10% to 15% of a personal total portfolio invested in gold, whether in paper form [note: not permitted in a gold IRA] or the physical holdings."