How Does a Gold IRA Work?

How Does a Gold IRA Work?

With recent weakness in financial markets, many investors have been looking for ways to safeguard their wealth, and particularly their retirement savings. Stock markets are set to take a beating, bond markets are on the verge of a corporate downgrade deluge, and the Federal Reserve’s recent monetary policy actions have ensured that the dollar will lose value even faster than ever. So, what’s left to invest in? Only an old standby – gold.

Gold has served to protect investor assets against economic uncertainty and financial crisis since time immemorial. It stands the test of time, with millions of investors over the years having benefited from the protection that only gold can offer. But for many investors who understand intellectually why gold is such a great investment, the difficulty becomes in applying that knowledge of gold’s benefits to actually acquiring gold.

You may be asking yourself, where do I buy gold? How do I buy gold? What kind of gold do I buy? If you’re just dipping your feet into the gold world for the first time, the sheer number of options out there can be overwhelming. Thankfully, there’s one option out there that is not only straightforward to set up, but it also allows you to roll over your existing retirement savings into gold: a gold IRA.

Retirement Accounts in a Nutshell

If you’ve been saving for retirement, you’re probably familiar with the major types of retirement accounts. Those who have employer-sponsored retirement plans often take part in a 401(k) program. Other employers may offer individual retirement accounts (IRAs), while some investors may open up their own IRAs with brokerages.

There are other similar types of retirement plans, such as 403(b)s for teachers and employees of non-profit organizations, TSP accounts for government employees, SIMPLE IRAs for small businesses, and SEP IRAs for the self-employed. But they all have one common denominator, namely that they offer some sort of tax-advantaged status for your retirement assets.

Traditional 401(k) and IRA

Most investors are familiar with the traditional 401(k) and traditional IRA, because those have been some of the most commonly offered retirement plans for years. Traditional 401(k)s and IRAs offer the ability to invest with pre-tax dollars, often through contributions from your paycheck, and allow gains on those investments to accrue tax-free until you take a distribution. Then your distributions are taxed.

If you participate in a workplace-sponsored 401(k) program, there’s a 99% chance that your plan is a traditional 401(k) plan. And if you have an IRA, there’s also a good chance that it’s a traditional IRA.

Roth 401(k) and IRA

Roth 401(k) and IRA accounts are a more recent addition to the retirement savings landscape. Roth accounts allow you to invest with post-tax dollars, and your investment gains accrue tax-free. Then your distributions aren’t taxed, because you paid taxes already before you invested. That offers Roth accounts an advantage over similar investments through normal brokerage accounts. The only catch is that annual contributions to Roth accounts, just like with IRAs and 401(k)s, are strictly limited.

Roth accounts have traditionally been seen as a benefit to those who think they may find themselves in a higher tax bracket at retirement than they are in today. For those with rising salaries, or those who think that tax rates will be significantly higher in the future, Roth accounts have been a popular investment choice. And with recent changes to retirement accounts made by Congress, there’s speculation that Roth accounts, and conversions from traditional IRA accounts to Roth IRAs, will become more popular.

Why Can’t I Invest in Gold With My Current 401(k) or IRA?

You may be thinking to yourself, if I really want to invest in gold, why can’t I just invest in gold through my current 401(k) or IRA account? That’s because your current 401(k) plan or IRA custodian in all likelihood doesn’t offer gold as an investment option.

401(k) plans can be expensive for employers to offer, so they often limit the investment options available to their employees. Even in plans that offer dozens of investment choices, gold is never an option offered by the plan administrator. If you’re lucky, you might be able to invest in things like an index of gold mining companies, or a gold exchange-traded fund (ETF). But those aren’t investments in real gold, they’re just investments in paper assets. If you want to invest in gold that you actually own, you’ll need a gold IRA.

Your current IRA custodian probably also doesn’t offer gold as an option. Many IRA custodians may not be familiar with gold as an investment, may not recommend it, or they may just not want to offer it as an investment. So many investors are content with stocks, bonds, mutual funds, and exchange-traded funds, so why would the custodian want to offer assets like gold, silver, and other precious metals?

Self-Directed IRA

If you want to invest in physical gold for your retirement, you’ll need to start a gold IRA. A gold IRA is what is known as a self-directed IRA, which means that the IRA is managed by you, the IRA account holder. You are in control, and you decide what is done with your assets.

What Is a Gold IRA?

A gold IRA is a self-directed IRA that offers investors the ability to invest in physical gold coins and bars while still enjoying the same tax advantages of a conventional IRA. A gold IRA can be a traditional IRA, in which you invest with pre-tax dollars, or it can be a Roth IRA, in which you invest with post-tax dollars. The decision of what type of gold IRA to invest in is up to you.

What Other Assets Can You Invest In?

You may wonder if you can invest in other assets with your gold IRA. The answer is a very definite maybe.

The assets your gold IRA invests in are dependent on what services your IRA custodian offers. Some custodians may only offer gold storage. Other custodians may also store silver, platinum, palladium, or even cryptocurrencies. In that case, your gold IRA could be expanded to become a precious metals IRA, investing in gold and silver. Or you could turn your gold IRA into an alternative assets IRA, investing in precious metals and cryptocurrencies. Again, your investment choices will be dependent on what your IRA custodian offers.

How Does It Work?

Now’s the point at which many investors may wonder how all of this works. All IRA accounts have a custodian. You can’t hold and store IRA assets yourself, regardless of whether you have a traditional, Roth, or self-directed IRA. If you have an IRA with Charles Schwab, Vanguard, or other similar brokerages, they are the custodian. Self-directed IRAs also require a custodian who holds the assets in which you invest. In the case of a gold IRA, the IRA custodian is the one who will hold and safeguard your gold investments.

Choose What Type of Gold IRA You Want

Once you’ve made the decision to invest in gold and open a gold IRA, you have to choose what type of gold IRA you want. In many cases this choice is dictated by how you’re going to fund your gold IRA:

  • If you want to roll over existing retirement assets from a 401(k), 403(b), TSP, IRA, or similar retirement account, you’ll probably want to set up a traditional IRA;
  • If you’re rolling over assets from a Roth 401(k) or Roth IRA, you’ll want to set up a Roth gold IRA;
  • Roll over assets from a traditional 401(k) or traditional IRA into a Roth gold IRA if you want to do a Roth conversion;
  • Set up a traditional gold IRA or Roth gold IRA and fund it with either pre-tax or post-tax contributions from your paycheck.

These are all options that are open to you, but your ability to exercise each option will be dictated by what your current retirement account allows in terms of rollovers, what your custodian offers in terms of IRA types and services, and of course tax laws related to IRA contributions. You’ll want to consult your tax adviser to see what tax consequences, if any, you may incur, and you’ll want to check with your current retirement plan administrator to see what limits there might be on rollovers.

Choose Your Custodian

Once you’ve determined what type of IRA you want to set up, you’ll determine which custodian you want to store your metal. The gold IRA custodians with which Goldco works have many years of experience storing and safeguarding precious metals investments.

Fund Your Gold IRA

After you’ve chosen your custodian and established your gold IRA, you’ll need to fund that IRA. Since most people choose to roll over existing assets from a 401(k), IRA, or similar retirement account, they contact their plan administrator to start the rollover process. Once the rollover process is started and funds are distributed from your current retirement account, those funds need to then be deposited into your new gold IRA.

Goldco’s experienced specialists can help you with the process of working with your current retirement plan administrators and ensuring that your funds are transferred from your current retirement account into your new gold IRA.

Purchase Gold

Once your gold IRA is funded, you can use those funds to purchase gold coins or bars. It’s important to remember that not all gold coins and bars are eligible for purchase by a gold IRA. Purchasing gold coins or bars that are not eligible for IRA investment would normally be classified as a distribution from your IRA and would incur taxes and penalties.

For instance, you may already own some gold coins and want to hold them in your IRA. You can’t do that because it violates the provisions against self-dealing.

You may want to invest in collectible gold coins, such as older numismatic coins. That’s not permitted because IRAs are not allowed to invest in collectibles.

Or you may like the look of early 20th-century American, Swiss, and Austrian gold coins. But you’re not allowed to invest in those coins with a gold IRA because their gold content isn’t high enough to allow them to be owned by a gold IRA.

Goldco’s experienced representatives have worked with thousands of customers over the years, and they know just what coins and bars your gold IRA can invest in. Goldco’s relationships with various mints around the world means that we offer one of the best selections of gold coins and bars in the industry, including numerous limited-edition investor gold coins that can’t be found elsewhere. Let our specialists help you identify the gold coins or bars that best suit your needs.

Have Peace of Mind

Once you’ve made your investment in a gold IRA, you can rest easy that your assets are safely protected. Your IRA custodian will keep your assets properly stored and secured, ready for you when you need them. When it comes time to take a distribution, you can either take a distribution in cash or in physical gold.

Why Gold?

Unlike most financial assets, gold isn’t dependent for its value on the performance of the economy or the strength of the dollar. In fact, many of gold’s best price gains have been made during times of economic uncertainty and a weakening dollar.

Defends Against Inflation

The weaker the dollar becomes, the better gold performs. In fact, the relationship between gold and the dollar is often seen as an inverse one. A weaker dollar normally results in a higher gold price, while a stronger dollar results in a lower gold price.

The trend of monetary history, especially over the past 100 years, has been one of ever-growing inflation. And ever since 1971, when President Nixon abolished the last official link between the dollar and gold, the creation of fiat money out of thin air has accelerated, with no restraints on the Federal Reserve’s ability to inflate the money supply.

That’s why, as the dollar has weakened over the decades, prices continue to rise across the board. And with the Federal Reserve adding trillions of dollars to its balance sheet just in the past few months, the odds of rising inflation over the next few years are growing.

Gold protects against inflation and maintains its purchasing power in a way that other assets can’t. When President Nixon closed the gold window in 1971, gold was officially valued at $35 an ounce. A men’s suit would have cost around $70, or two ounces of gold. If you had $70 in paper money today, it wouldn’t come anywhere close to buying a suit. But those two ounces of gold would now be worth nearly $3,500. You could buy a very nice suit and have plenty of money left over. That’s the power gold has to protect your wealth against inflation.

Defends Against Financial Crisis

Millions of investors saw their financial investments annihilated during the Great Recession. Stock markets lost over 50% of their value, while many investors lost even more than that. Years of hard-won investment gains were wiped out in a matter of months. Many investors gave up hope of ever recouping their losses, and even those who stuck it out found that it took years for stock markets to get back to their pre-crisis levels.

Gold, on the other hand, saw some of its best performance in the aftermath of the 2008 financial crisis. It nearly tripled in price in the years after the crisis, providing those investors who had the foresight to invest in gold with significant gains. Just imagine how your retirement savings would have fared had you had the prescience to know how well gold would do, and how badly stocks would fare.

Now’s your chance to test yourself. With stock markets poised for a major crash this year, and gold already having made great gains, all indications point to a repeat of 2008, but possibly even worse for markets. Are you ready to invest in a gold IRA and anticipate even further gains in the future?

Provides Stability and Growth in Good Times and Bad

Gold’s performance through both good times and bad is one of its most underappreciated traits. Yes, gold may have had some great years during the aftermath of the financial crisis, but it performs well over the long run too. Since the gold window was closed in 1971, gold’s annualized gains have been about 7.9%, versus 7.1% for the S&P 500 and 7.0% for the Dow Jones Industrial Average. With that kind of performance, are you ready to invest in that gold IRA yet?

The case for investing in gold has never been better. And with the ease of setting up and investing in a gold IRA, there’s no excuse for investors not to protect their investments today. With markets set for a dive and gold set to climb, don’t let yourself get left behind. Talk to the gold experts at Goldco today and find out how you can put a gold IRA to work for you in safeguarding your retirement savings.

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