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Gold IRA VS. Physical Gold – Which One Is Best for Investors?10 min read

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If you’re looking for a way to prevent your money from losing value, investing in gold is your safest bet, as this metal is known for maintaining its worth over time. However, there are two main ways to do this, which are purchasing physical gold and putting your assets in a Gold IRA. Most investors tend to wonder which is the best option for them. However, there’s not a straightforward answer to this predicament, as it will depend on how risky you’re willing to be regarding your investments.

A Gold IRA is your best option if you want to invest in gold but don’t want to take care of all the hassles that come with investing in physical gold. Most Gold IRAs allow you to invest as little as you want and still enjoy all the benefits of owning precious metals.

Various analysts predict that gold prices might reach $1,770-2,000 this year. However, does that justify purchasing the golden metal in its physical form?

Although physical gold used to be a fantastic investment, this is no longer the case for several reasons. In this article, we will go through all the aspects of investing in a Gold IRA vs. physical gold and help you decide which is best for you.

Individual retirement accounts (IRAs) are tax-advantaged accounts that help people save for retirement. They are available in various formats, including gold IRAs, Roth IRAs, and standard IRAs. A Gold IRA enables investors to store their cash in precious metals such as gold. These accounts have to be kept apart from regular IRAs.

Precious metals IRAs are another name for Gold IRAs. Either pretax or posttax money can be used to purchase a Roth IRA. In contrast to conventional IRAs, these accounts demand acquiring and storing physical gold. Because of this, Gold IRAs need a custodian, which is often a bank or brokerage company that will take care of the account.

Investors can only own stocks, mutual funds, or other conventional investments in traditional IRAs. The Internal Revenue Service (IRS) permits holders of self-directed IRA accounts to buy gold- or other acceptable precious metals—such as silver, platinum, or palladium—made into bars and coins.

How to Invest in Gold IRAs

You must follow many steps to open a Gold IRA. The first step is picking a brokerage company to guide you through the entire process. These businesses provide services such as account opening, metal purchases, money transfers, and storage at authorized depository facilities.

Nonetheless, all Gold IRA companies have their own pricing program, history of satisfied clients, and commitment, so you must check all of this out before committing to one of them. Making the correct Gold IRA account provider selection will help you maximize the use of your retirement assets.

Like conventional investment accounts, gold IRAs exist in a variety of formats. Some of them are the following:

  • Traditional Self-directed Gold IRAs: A traditional Gold IRA is a pretax fund that is used to finance retirement accounts. All contributions and any gains increase tax-deferred, but retirement withdrawals are taxed.

  • Roth Gold IRAs: Roth IRA contributions are made with after-tax funds, so there is no immediate tax benefit. However, you will have to pay taxes when you start getting distributions during retirement.

  • SEP Gold IRAs: Employees of small firms and independent contractors are eligible for SEP gold IRAs, just like they are for standard SEP IRAs. In retirement, you are only taxed on the withdrawals you make, not the contributions. All SEP IRA contributions are subject to IRS restrictions. Moreover, people can save up to 25% of their pay.

Risks of Gold IRAs

Is keeping gold in a Gold IRA account a wise move? No, it hasn’t been during the vast majority of recent history. Gold doesn’t pay dividends, doesn’t have revenues, and must be kept in a specific financial institution. Although gold bars are used in jewelry and other precious metals industries, most of it is kept in bank safes and safe deposit boxes. In the 1980s, gold prices peaked, and from then until roughly 2006, they ranged between $300 and $500 per ounce. After the financial crisis of 2008, gold reached its highest price of over $1,700 per ounce before dropping to a range between $1,100 and $1,300. Still, it hasn’t dropped below $1,700 since it almost reached $2,000 in 2020, during the pandemic’s peak.

All of these previous analyses make it clear that gold performs well during times of financial instability. Nevertheless, despite its highs and lows, you shouldn’t dismiss gold as a promising investment possibility. An IRA would have gained more money if you had invested in the general stock market in addition to gold when its price remained still between 1980 and 2006. During that time, the S&P 500 would have produced an average yearly return of 14.49%, whereas gold didn’t move much. This doesn’t mean that you shouldn’t include gold investments in your portfolio. However, if we consider gold’s history, it will need to improve its earning possibilities before it can compete against other assets.

How to Invest in Physical Gold

Physical gold is one of the main assets people use to protect their money from losing its value over time. Some of the options for purchasing physical gold are the following:

Gold Bullion

You can buy gold bullion by the ounce, which is a fantastic way to begin investing in gold for your individual retirement account. Purchasing from a trustworthy dealer is the greatest method to ensure you receive genuine gold. A fantastic green flag is to find a place that offers several hassle-free gold purchasing options and review the coins you pick before making a purchase.

Gold Futures

Many people start investing in gold through gold futures contracts. This method is ideal for those who wish to predict the rapidly rising price of this precious metal. Additionally, gold futures give investors a low-cost way to begin investing in gold. The only potential danger is that there will always be a slight risk of losing money if gold prices don’t move in the direction they predicted.

ETFs with Gold

Exchange-traded funds (ETFs) follow a collection of assets. They track the changes in the spot value of gold and fluctuate accordingly. In addition, they are extremely simple to buy, as you can obtain them directly from the stock market. Gold ETFs allow you to buy actual gold without worrying about storage difficulties such as insurance expenses, storage fees, or having to store it yourself, which is a huge advantage over other purchase methods.

Risks of Investing In Physical Gold Coins

Physical Gold Coins

Storage and Cost Issues 

The truth is that physical gold is expensive no matter how you acquire it. Due to the risk of theft, storing it requires a safe location, such as a locker at home or in a bank, which has an additional fee. Additionally, you will need to retrieve the gold from your individual retirement account whenever you need it. In contrast to other financial goods, your gold won’t be shipped to your location.

Impurities

Concerns about gold purity might arise, particularly in older gold pieces. Therefore, you must make sure to order your gold from a high-quality provider that’s sure to give you the very best pieces.

Lack of Interest Earnings

Physical gold does not offer returns while it is in your possession, in contrast to many financial products that do. You can only earn interest when investing in gold if you open a savings account.

Many Alternatives

You may invest in digital or paper gold through products such as sovereign gold bonds (SGBs), which offer interest in addition to the price of gold. This also helps you forget the previously discussed risks of owning physical gold coins. Paper gold enables you to profit from price increases. The wiser course of action is to invest in financial assets. With ‘paper’ gold, the risks and costs of storing are disregarded as the investor can store the investments much easier than its physical counterpart.

Higher-Returns Avenues

The goal of every investment is to generate profit. Gold coins profits have been substantially lower recently than, for example, stock profits. Any serious investor should consider alternative possibilities, such as paper gold, given the challenges of investing in real gold.

Tax Implications of Owning a Gold IRA

Tax Deferral 

Traditional IRA contributions are tax-deductible for most taxes returns, but withdrawals from one are subject to ordinary income tax rates. This means that your assets’ value will continue to increase tax-free until retirement comes and you start taking money from the account.

No Capital Gains Tax on the Appreciation

A fantastic perk of these accounts is that if you wait until you are 59 years old, no taxes will be charged once you start selling your assets. Nonetheless, if you sell them before this happens, you will have to pay taxable fees on the assets you purchased that increased their value since the acquisition date.

Tax Implications of Investing In Physical Gold and Other Precious Metals

Owning gold is a commodity purchase. This implies that you will generally owe taxes on all your losses and gains. You must typically record the fair market value of all your collectibles as income on your tax return. Any gain is taxed as a long-term capital gain if you wait for at least one year before selling it for a higher value than its original price. However, your gains will be taxed as ordinary income if you don’t wait for the stipulated time.

IRS Reporting Requirements

Gold IRA

Gold IRA accounts must be reported per IRS regulations. Form 1099-B will probably need to be sent when filing taxes. Moreover, all taxable income or losses from retirement funds are reported on Form 8606 and should be submitted with your 1040 form. If the value of your Gold IRA surpasses $1,000 at any time throughout the year, you could additionally need to disclose it on Schedule B of your 1040 in addition to Form 1099-B. The IRS handles precious metals IRAs in a different way than regular IRAs since the government views these assets as collectibles. Any gains from investing in gold might be subject to ordinary income tax.

Physical Gold

The IRS categorizes most precious metals, including silver, gold, palladium, and platinum, as capital assets and are treated as collectibles. That’s why they will be charged with capital gains taxes if they are sold more than a year after being purchased. Accordingly, if your tax rate is lower than most investors, you won’t have to pay a higher tax rate on your investment return, unlike other investors that choose different assets for their portfolios.

Should People Invest in a Gold IRA?

This isn’t an easy question to answer, as all investors should analyze their objectives and how willing they are to take risks before deciding to invest in a Gold IRA. Most people use Gold IRAs to expand their portfolios, prevent inflation, and prevent high taxes on their income. Nonetheless, it is the best option for those investors who already have a pretty wide retirement portfolio. Gold is also quite volatile, so it might not be the greatest investment for someone hoping for steady profits.

Should People Invest in Physical Gold?

On the other hand, owning gold is still a pretty solid option. It is considered a safe haven that many investors include in their portfolios to make them more extensive. It has been a pretty stable asset even during periods of economic turbulence. Nonetheless, investing in this precious metal might not be ideal if you’re seeking to have a safety fund for your retirement, as its price can greatly change over time. Instead, you should consider it if you’re looking for a safe strategy to generate income without many risks.

Bottom Line

Purchasing physical gold assets has many tax benefits, no matter if you use a traditional or Roth IRA account. Your self-directed gold IRA is sure to help you expand your investment portfolio and securely store your assets. However, please keep in mind all the previously described warnings.

If this article was useful for you, please check out the rest of our page for more retirement account and precious metal IRA advice.

About 

Edwin Cannon has spent his entire career in the financial industry and specializes in alternative investments and surviving marketing turbulence. He started My Retirement Paycheck to help educate consumers about retirement investment options that aren't typically introduced by advisors.