How Gold Functions as a Safe Haven Asset in a Gold IRA
The future of our economy is uncertain. At the end of last month, the Dow broke 20,000 points for the first time ever, but many financial experts warn that this is only a harbinger of serious downturn to come.
When the 2008 market crash occurred, many people lost huge chunks of their 401(k)s in the blink of an eye, derailing their plans for retirement. How can you prevent this from happening to you? It’s important to put a portion of your nest egg into a safe haven, which can guard against market volatility. One of the best safe haven assets is a gold IRA. Here’s how it works.
What Is a Safe Haven Asset?
In order to keep from losing your life savings as the result of an investment gone bad, you need to diversify your portfolio as much as possible. Many people believe this means simply putting your money into a wide variety of stocks. However, in the event of a market crash, this can still end up wiping you out.
A true safe haven involves putting your money in other types of investments, such as bonds or commodities, which are insulated from overall market volatility. That way, when stocks go down, a portion of your assets are protected, and you still have something to fall back on.
One of the best options in this regard is gold. Its value not only remains steady over time, but tends to increase when the market drops. For this reason, a gold IRA is one of the smartest financial decisions you can make, particularly when it comes to planning for your retirement.
How a Gold IRA Works
Gold IRAs were established by Congress in 1997. They follow all the basic rules of a regular IRA, such as contribution limits and applicable taxes. But instead of putting the money that you contribute to your retirement fund out of each paycheck into stocks and bonds, it allows you to use it to purchase physical gold, in the form of either coins or bars.
This isn’t the same as storing gold in a safe in your house. First, it must meet a certain quality standard, as set by the IRS, in order to qualify for an IRA. And you’re not allowed to keep the gold yourself, but rather it must be held by a trustee. Furthermore, it must be stored in a depository that’s approved by the IRS for that purpose. This protects you from the possibility of having your nest egg stolen if, say, your house is broken into.
Gold protects your savings against inflation. As a physical asset, it retains its value over time, unlike, say, cash. $20 today buys far less than it did 20 years ago, and 20 years from now it will likely be able to purchase even less. This can make retirement planning difficult, as it’s hard to know exactly how much you’ll need to save up today, to support you when you’re 65. Gold, however, maintains its buying power, making it easier to save.
In order to include gold in your retirement portfolio, you must first establish a self-directed IRA. This allows for a wider range of investments than other types of retirement accounts. Once you’ve done that, you can diversify your portfolio in a number of different ways and protect yourself against market volatility.
If you don’t have a portion of your assets in a safe haven, then you’re opening yourself up to significant risk. By establishing a gold IRA, you’re protected against market volatility and can ensure your future and your retirement.