What is a gold backed IRA or individual retirement account? Firstly you need to be familiar with a traditional IRA account. Traditional IRA is basically an individual retirement account that is used to save money till the time of retirement. Traditional IRAs are usually consist of stocks, mutual funds and other investment vehicles, the main advantage of this savings account is that firstly it facilitates the saving of money for retirement and secondly it carries tax advantages, being that with a traditional IRA what you put into it is not taxed or its tax deductable and at the end when you take your money out of the IRA when you’re ready for retirement, years down the line then you’re taxed at that future rate whatever it may be. This can also be considered as a disadvantage because who knows what the tax rate is going to be when you’re 60 or 65 years old and that’s as opposed to a Roth IRA, the advantage there is that you are taxed for the what you put into the fund but then you’re not taxed when you pull out later on, so that is a better way of locking in your tax rate early and then not have to worry about later on.
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Gold-backed IRA`s have basically the same structure as a traditional IRA except for stocks, mutual funds and other paper assets you have physical gold and silver that can be stored in that account and be built up over time. There is also the tax advantage on the money that you use to purchase that physical gold and silver, it is not taxed but when you cash out years down the line, then you’re going to be taxed at the future rate may be. One downside of a gold-backed IRA is that you cannot just have any gold or silver bullion or coins, whatever commodity you deposit in the gold IRA, has to be approved investment grade physical gold and silver.
The precious metals cannot simply be stored at home, they have to be stored with a certified custodian, under a gold backed IRA you can’t hold the physical gold and silver yourself it has to be stored with a certified custodian and in most cases the storage vault is not going to be in a location that is easily accessible for you, clients can arrange to actually see the physical gold but that may be more of an inconvenience. Most people like to have their physical gold and silver under their possession, so this is one another downside of a gold backed IRA. Especially if you consider the fact that people store precious metals that they have purchased out of their retirement savings, their future depends on those savings and so most people would prefer to be close to their gold or silver just to have that peace of mind.
There is however a tax loop around this, what you need to do is that your custodian will help you set up a LLC company and then the custodian becomes the holding of the LLC company owned by you. In this manner you can become the manager of your gold and silver, working under the custodian. Quite a few people do this so they could actually receive they could receive the physical gold and silver and store it themselves. But it needs to be remembered that this is a very obvious loophole and one which the IRS is aware of, at the moment there is no legislation against this loophole but this is a legal grey area and if in future IRS decides to close this loophole then people benefiting from this loophole may get in trouble.
Given this, many people still chose to take advantage of this loophole and have personal possession of their precious metals, doing so may result fines and penalties if ever IRS decides to act against it, as the whole procedure goes against the spirit of law. Nevertheless, this loophole allows people to have personal possession of their precious metals.
Argument For And Against A Gold IRA
Having looked at the pros and cons, let us now look at it from another perspective. Is it wise to invest your retirement savings in a Gold IRA? It depends on what you want to achieve with it. Gold or simply precious metals do not carry periodic returns like dividends and bonds, the only way to make money from precious metals is to utilize the capital appreciation through capital gains and for this reason, from a retirement perspective it is not advisable to invest in a gold IRA because your savings will not grow in value, instead they will become static.
If however you want to achieve stability then you may want to invest in a gold IRA because in times of economic downturn, gold remains stable because it does not lose value. In case of an economic collapse, other financial assets may lose value, hyper inflation erodes away the purchasing power of money but gold does not get affected as it has got intrinsic value, this means that the value of gold can never be zero.
So if you are looking for stability over increasing returns, then gold IRA is the option for you but those who are looking for increasing returns on their retirement savings, gold IRA is not an ideal option. This however does not mean that precious metals should not be in your portfolio. Ideally speaking 3-5% of the portfolio should comprise of precious metals for stability and reducing risk.