Editors Note: Gold recently traded above $1,000 for the first time in over a year.
To help you take advantage of the rising price, we asked Casey Research for insight on how individual investors could invest in the precious metal. They responded with this great article that explains how can put gold into your IRA.
Casey Research has expertise in precious metals and publishes the popular Big Gold newsletter.
--Charles Rotblut, CFA, Senior Market Analyst, Zacks.com
As you undoubtedly know, last years market meltdown meant that 401(k)s and IRAs ceased to be a safe haven for Americans nest eggs. In 2008, employees lost on average 14% of their retirement money. Those who had $200,000 or more fared even worse - they lost more than a quarter of their savings. No wonder more and more people are asking whether they can, or should, use an Individual Retirement Account (IRA) to hold physical gold. Our answer to the first part of the question is yes, indeed you can. The tax rules governing IRAs leave room for gold. But our answer to the second part is equivocal.
In 1986, as the U.S. Mint began issuing gold coins for the first time since 1933, a tax rule against holding "collectibles" in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin. The easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE).
The only stipulation is that all bars and all coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. Numismatic coins are also impermissible for an IRA.
The procedure for putting gold into an IRA is somewhat more complicated than with paper assets, but the requirements arent onerous.
To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Dont look to your discount broker or a fund family like Vanguard; they wont touch the stuff. Instead, youll need a specialist like the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust. These are the most respected names in the business. An Internet search will turn up others, and if you do your due diligence on them, you might find one that works for you.
But remember that its especially important to choose a custodian with a solid reputation, because your gold will be stored at a location twice removed from you. A firm such as GoldStar or Sterling would be merely your IRAs legal custodian; for vaulting your IRA gold, it will employ a certified depository, likely either HSBC Bank USA (which is also a COMEX gold depository) or Delaware Depository Services.
So chances are youll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy. (Dropping in coins you already own is against the rules - a "prohibited transaction".) And if you want to mix in some paper - for example, to consolidate your gold, ETF, and mining stock holdings into one account - thats fine, too.
The custodian will charge either a fixed annual fee or a percentage of the IRAs value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.
You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000, or a "catch-up" limit of $6,000 for those 50 and over. Custodians generally set their minimum initial investment at that $5,000 mark but will accept smaller subsequent contributions.
When the time comes to withdraw from your gold IRA, you dont get any coins or bars, alas. You get cash. The custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA.
Who Should Consider It
That takes care of the how-to. The trickier part is whether its a good idea.
There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold....
No-income portfolio. If youve decided that the outlook for bonds and dividend-paying stocks is so bleak that you dont want any at all, then putting gold into your IRA wont crowd out any income-earning investments.
Strategic switching. Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.
IRA Only. If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to buy gold may be the only way for you to hold it.
For many other readers, holding in gold in an IRA is not be a good idea. Heres why.
The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5K or $6K. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.
Physical gold, of course, doesnt generate income. So you might be wasting part of your IRAs tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.
Transfers and Rollovers
In researching this topic, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.
He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight to quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.
Making the move is simple if the pension fund is already an IRA. Youre free to transfer funds from an IRA thats invested in stocks or anything else directly into a gold IRA.
Or if the pension fund is run by your employer, when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.
Of course, holding physical gold - in your possession and under your control - is Rule #1 in this crisis. Buying and holding it will protect your assets, whether its in your IRA or stored somewhere else safe.
It is no accident that gold is currently trading at around $980 again. Physical gold is a hedge for troubled times - in an economic crisis, the gold price is bound to go up dramatically and so are, by extension, stocks of major gold producers and near-producers. If you want to preserve, and multiply your assets, BIG GOLD is the go-to advisory for all things gold-related. Click here to learn more.