The advantage to having a Gold IRA (also known as a Precious Metals IRA) is that it can reduce the volatility of your overall investment portfolio. Gold and other precious metals have historically moved counter to the direction of stocks, bonds and mutual funds. Therefore, it is wise to dedicate a small percentage of your investment portfolio to physical bullion coins and bars. This will help balance your portfolio and protect it when recession hits.
If profitability and safety are goals you have established for your retirement portfolio, Gold is a tangible asset that can help make it more attainable. In fact, if this is not a goal of yours it should be.
By including gold into your investment portfolio you could improve investment performance in one of two ways. First, by increasing returns without increasing risk. Second, reducing risk without adversely affecting returns.
For example, if you had purchased gold in the amount of $33,000 in 2001, you could have sold that gold in 2017 for around $129,500. That averages out to a 18.75% return per year and an overall 300% return on investment. How does your current retirement account compare?
If you had purchased that same $33,000 of gold in 1971 when President Nixon removed us from the gold standard, you could sell that gold today for $1,155,000.
From the early traders of antiquity to today’s investor, gold has stood the test of time. In light of volatile stock markets and fluctuating commodity prices, gold has always proven to be the safest investment. Let’s take a closer look.
For a moment, imagine turning your retirement nest egg to gold. When you add a gold IRA to your investment portfolio, that’s essentially what you are doing. However, is adding a gold IRA to your retirement portfolio the right decision for you?
A gold IRA is like any other IRA except that it allows the investor to own physical gold, silver, platinum and palladium, instead of paper-based investments like stocks and bonds. In 1997 Congress created the ability for investors to invest in a gold IRA.
There is a certain required criteria for gold to be held in an IRA. Edmund C. Moy, chief strategist for Fortress Gold and former United States Mint director stated, “The precious metal coins or bars must meet IRS fineness standards and must be held by the IRA trustee instead of the IRA owner. The gold must be stored in an IRS-approved depository.” Investors cannot take personal possession of the precious metals while they are part of the gold IRA. Moy continued, “All other rules about IRA contributions, disbursements and taxes apply.”
Gold IRAs appeal to investors who are seeking diversification in their retirement portfolio.
Traditional and Roth IRAs are susceptible to inflation when invested in stocks and mutual funds. Moy emphasizes the need for diversification, “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. This balanced approach smooths out risk, especially over the long term, which makes it a smart choice for retirement investments like IRAs.”
Gold, a Growing Trend
Moy says that during his tenure as director of the Mint there was little demand for gold IRAs. The reason is because it was a very complicated transaction and only pursued by the most persistent investors. Moy explains, “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.”
The popularity of gold IRAs has increased significantly since the financial crisis in 2008 and the recession that followed. With record gold sales came the appearance of many more companies that simplified the transaction process making investing in a gold IRA much easier. The simplification of the transaction process resulted in healthy gold IRA growth.
In addition to the aforementioned causes of increased interest in gold IRAs, there’s the impact of economic and world news. Moy explains, “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.”
Finding a Reliable Broker/Custodian
If you wish to place IRA funds into gold, you must establish a self-directed IRA. This is an IRA that the investor manages and in which he or she can be invested in a wider range of products than other types. Specifically for a gold IRA, you need a broker to buy the gold and a custodian to create and administer the account. The gold company you select will store your actual in a depository.
Custodians are usually banks, credit unions, trust companies and brokerage firms. These financial institutions must be approved by Federal and/or state agencies to provide asset-custody services to individual investors and financial advisors.
Dealers must be selected by the investor, custodians do not select them for you. Established dealers have relationships with hundreds of metal dealers and may be willing to provide you with a list.
Or some metal dealers may recommend an IRA custodian. Customers are free to search for custodians on their own.
There are many choices for investors regarding gold IRAs. Choosing the right company is important and selection can be a complicated task. God IRAs are a specialized and typical brokerage firms do not offer them. So the doing your homework is important when choosing the right gold IRA company. Here are a few things to look for.
• Transparency. Know all your costs up front to avoid nasty surprises. If a company is not transparent move on.
• Track record. Look for a company that has been reviewed by non-biased third parties and has an outstanding track record. You can check with the Better Business Bureau, Business Consumer Alliance and TrustLink. Discover what customers say about the companies. Avoid companies in which customers felt pressured by the sales person.
• Flexibility. The needs and goals of every investor are different. Choose a company that is willing to address your needs and that does not try to squeeze into one of their predesigned programs.
• Qualifications. You should only deal with a company that has all the required licensure, registrations, insurance and bonds. You want the assurance that your investment is protected. Don’t be shy, ask for verification of those licenses and other information.
You can avoid the need and cost of a custodian by opening what’s called a “checkbook IRA.” This is only suggested for those investors that are truly confident in their investment experience. Two of the requirements are you must be an LLC and have a business checking account. These accounts allow investors to purchase and hold Gold Eagles which is a U.S. Treasury minted coin. If you’re interested in this type of setup, it is suggested that you consult with a financial advisor and do be careful.
Gold’s Special Risks
There are no sure fire investments, they all come with risks and rewards, including gold IRAs. Moy says, “In many ways, gold IRAs have the same risks that any investment has. The price of gold can go up or down and have volatility. No one can accurately predict its future.”
Despite the risk, Moy says there is one important reason to invest some of your retirement funds in gold. “Gold has a 5,000-year history of being a store of value. Stocks can go to zero 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. But gold will never be worth zero.”
Typically when paper assets do well gold will take a dip and when paper assets take a dip gold does well. So if you have a balanced portfolio with gold and paper-based funds, you will experience less volatility in your retirement portfolio.
There some risks specific risks to investing in physical gold.
Any physical asset is subject to theft. There is the potential of someone breaking into a depository where your gold is stored and leaving with it in hand. This is why it is so important to check the registrations and insurance coverage of your gold IRA company.
There is also the possibility of fraud. Moy explains, “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. These risks can be mitigated by choosing a custodian that insures the financial transaction.”
Gold IRAs are normally defined as “alternative investments.” This means they are not traded on a public exchange and require special expertise to determine value. Gold has the potential of a high return. However, it is easy to be blinded by its potential as it can be a very volatile asset. However, historically gold has proven to build and preserve wealth in the long-term. The historical track record of gold is undeniable and it’s this rich history that attracts investors to gold.
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