Gold IRA vs Physical Gold: A Comprehensive Comparison

While the United States dollar is a strong fiat currency, it does not perform well during economic uncertainty, and many investors look towards alternative investments to protect their savings and grow their wealth. 

During these times, many people invest in gold for several reasons, including the lack of correlation between its value and the market performance.

Although gold can be a fantastic way to diversify one’s retirement portfolio, investors must decide between investing in paper gold and physical gold. 

When it comes to short-term investments, it’s best to trade paper gold to achieve one’s financial goals. However, those looking for more security and stability might find that there is no substitute for owning physical precious metals.

Fortunately, there is also a third option, thanks to the IRS code 408. Investors can now use their money in their individual retirement accounts (IRAs) to invest directly in physical gold. This is commonly referred to as a gold IRA.

Before you jump on the opportunity to invest in physical gold, it’s important to carefully assess the IRS rules and regulations pertaining to a gold IRA and whether or not it is worth paying the relatively high custodian fees.

This informative guide offers a comprehensive comparison of gold IRA vs physical gold. It will cover the key factors that aspiring investors should look out for and the benefits and drawbacks of choosing one investment product over the other.

The guide will also go over the tax implications and how you can set up a gold IRA. Keep reading until the end, as we will also cover a few frequently asked questions to help you understand what goes into purchasing and managing physical precious metals and gold IRAs.

Understanding Gold IRAs

While holding physical gold is one of the greatest advantages of directly purchasing precious metals, setting up gold IRAs also offers numerous benefits to account holders with different financial objectives.

Let’s quickly go over what a gold IRA is and the role of a custodian in managing the retirement account.

Defining Gold IRA

To begin understanding a gold IRA it needs to be said that it is similar to an individual retirement account (IRA), allowing investors to invest their retirement savings into financial assets.

However, unlike a traditional IRA that lets investors purchase stocks, bonds, mutual funds, cash equivalents, and other investment vehicles, a gold IRA allows the account holder to hold physical gold along with other precious metals, such as silver, platinum, and palladium.

There are many different forms of gold or precious metals investors can invest in through a gold IRA. These include IRS-eligible bars, rounds, and coins.

Role of a Custodian in a Gold IRA

What makes the gold IRA unique from investing in physical gold is that the investor needs to set up a specialized individual retirement account with a self-directed custodian or a brokerage firm.

A custodian is a financial institution that lets investors set up their retirement accounts to buy or sell gold to diversify their savings. It provides a secure way of storing and managing precious metals while maintaining their physical integrity.

The role of a custodian goes beyond simply overseeing the transactions within the gold IRA. It can guide the account holders on their concerns, manage their portfolios, and ensure compliance with the IRS regulations.

It’s important to note that not all gold custodians provide storage facilities under their roof. They may partner with secure depositories across the United States and ship the account holder’s physical precious metals to them for safekeeping.

Understanding Physical Gold Investments

While a gold IRA lets investors invest in physical gold and other precious metals, the account holders do not have direct access to them. Those looking for more control over their financial assets may want to consider physical gold investments.

Let’s quickly explore what physical gold investments are and go over the different forms of precious metals investors can purchase.

Defining Physical Gold Investment

Physical gold investments refer to investing in gold without the involvement of a custodian. 

Unlike a gold IRA, where the financial institution handles the transactions and the depository stores the precious metals, investors have direct access and control of their assets when investing in physical gold.

Types of Physical Gold: Coins vs Bullions

Since investors are not holding gold or other precious metals in an IRA, some of the rules of the IRS do not apply. There are no eligibility requirements, which means you can purchase gold coins, bullion, and rounds, among others.

Before purchasing any form of physical gold, it’s crucial for investors to understand that each has their own unique advantages and distinct characteristics, which is critical in making an informed investment decision.

Often issued by government mints, gold coins are legal tender in the United States and are aimed at investors and collectors. While it contains gold, its value may be far greater than its gold content.

Some gold coins may hold a numismatic value, which means that collectors may be willing to pay a higher price for the item due to their unique characteristics and rarity.

One of the major benefits of holding gold coins is its storage and divisibility. Unlike gold bullion, coins are not heavy to carry and are easy to store and divide, which makes them highly liquid.

On the other hand, bullion is typically made from refined gold and shaped into bars and ingots. Its value is often determined by its weight and its precious metal content.

Since it’s a relatively straightforward investment, some investors prefer investing in physical gold bullion over coins, as there are no additional premiums. It’s an excellent option for all those people with long-term financial goals.

Although the premiums are much lower than gold coins, bullion may not always be the best option for some investors due to its lack of flexibility. They’re bulky to carry, store, and even divide, making the transaction a bit more challenging to execute.

An alternative may be to invest in small gold bars. However, the premiums on these financial assets are often much higher, even greater than those on gold coins.

Evaluating Gold IRAs and Physical Gold: Pros and Cons

Investing your hard-earned retirement savings can be scary, especially if it’s your first time venturing into gold IRA or physical gold investments. It’s crucial for investors to consider the pros and cons of all the options so that they can make an educated decision.

Analyzing Gold IRAs

Gold IRAs are specialized individual retirement accounts that offer several advantages. However, due to differing investment goals, it may not be the best option for some investors.

Let’s quickly explore the advantages and disadvantages of gold IRAs to help you determine whether it is the best investment option for you.

Advantages of Gold IRAs

Here are some benefits of setting up a gold IRA: 

• Tax Advantages

One of the most important reasons of benefitting from a gold IRA is the tax benefits the retirement account offers. The IRS treats gold and other precious metals in IRAs as income, which means that investors do not have to pay capital gains tax. This makes it a tax-efficient investment.

That said, it’s crucial to understand that since the IRS treats gold IRAs as income, investors must make tax-deductible contributions or pay income taxes upon withdrawals depending on the type of precious metals retirement account.

• Diversification

Besides the tax advantages, gold IRAs are an excellent way for investors to diversify their retirement savings, allowing them to invest in physical gold and other precious metals.

You may have heard the age-old saying, “Don’t place all your eggs in one basket.” When the economic situation in a country worsens, an investor with all their money parked in one financial asset faces a greater financial risk than those with a diversified portfolio.

A well-diversified portfolio is a fantastic hedge against economic uncertainty. With a gold IRA, investors can invest their savings in physical gold, allowing them to weather through the storm during market volatility.

• Custodian Assistance

Investors who want to invest in physical gold through individual retirement accounts have access to experienced custodians. The experts at the financial institution can assist in ensuring compliance with the IRS regulations.

A custodian can also help the account holder understand the tax advantages of setting up an IRA. It can guide them on paying tax liability to avoid trouble with the IRS.

Disadvantages of Gold IRAs

While there are several advantages to setting up a gold IRA, these retirement accounts come with certain drawbacks, including the following:

• Higher Custodial Fees

Since investors have to work with an approved custodian if they wish to set up a gold IRA, they are subject to custodial fees. Custodians charge fees for offering their services, which may vary from one financial institution to the other.

Although a Roth or traditional IRA also has fees, a gold IRA has a complex fee structure. Investors must not only pay the financial institution for overseeing and managing the transactions but also cover the storage costs.

Custodian fees for gold IRAs can adversely impact the returns of the investment. It’s crucial for investors to assess the cost-effectiveness of setting up a specialized retirement account before investing in physical gold or other precious metals.

• Limited Control or Access

When investors set up a gold IRA and invest in gold, they’re giving up a greater degree of control to the custodians responsible for managing the precious metals.

If the account holder wishes to see their investments, they must head over to the secure depository. This can make it difficult to access one’s financial assets.

Lower Liquidity

Specialized retirement accounts offer lower liquidity than other investments like stocks, bonds, and mutual funds. It may take time for an account holder to access funds from their gold IRA, and the custodians may place certain restrictions on withdrawals.

When facing unexpected expenses, limited access to funds can make it challenging for account holders to make withdrawals. However, some gold IRA companies have buyback programs that let their investors liquidate their financial assets quickly.

• Lower Returns

While gold individual retirement accounts are a great way to protect one’s retirement savings from economic uncertainty, traditional IRAs may offer better returns.

The price of gold, for example, increased by approximately 360% from 1990 to 2020. During the same period, the Dow Jones Industrial Average (DJIA) gained over 990%.

If you carefully analyze the trends and gold prices over the past 30 years, you’ll find that:

• The stock market has outperformed gold by about 3-to-1 in the long run; and 

• Gold investments are far superior over shorter time horizons due to geopolitical uncertainty and inflation.

Analyzing Physical Gold

If you don’t like the idea of a custodian or IRA provider overseeing and managing your transactions, you may want to consider physical gold investments. 

Let’s go over the advantages and drawbacks of investing in these types of financial assets.

Advantages of Physical Gold

Physical gold investments offer several advantages to investors, some of which include the following:

• More Control

Unlike a gold IRA that requires account holders to hold physical gold and other precious metals in an IRS-approved secure depository, physical gold investments let investors keep gold coins, bullion, and rounds in their homes or vaults.

Investing in physical gold allows investors direct access and control of their financial assets, something that is not possible with a specialized retirement account.

• Enhanced Privacy

Since you don’t need a custodian for physical gold investments, you have more privacy, which protects your investment details from the IRS. Some investors may not want the Revenue Service for the United States federal government to gain access to such information.

• Streamlined Transfers

Whether it’s transferring funds from traditional IRAs to gold individual retirement accounts or vice versa, many account holders fail to understand that they need approvals from the custodian before executing transactions. This is not the case with physical gold investments.

Those who invest in physical gold outside of the gold IRA have the freedom to transfer ownership of the financial assets without having a custodian or intermediary involved. This allows for greater control over one’s investments.

• No Fees

Unlike a gold IRA that charges custodian fees, there are no premiums or service charges when investing in physical gold outside of an individual retirement account. This ensures a cost-effective investment, providing much greater returns than precious metal IRAs.

Disadvantages of Physical Gold

While there are several advantages to physical gold investing, it has certain drawbacks, just like any other financial asset. Some of these include the following:

• Storage and Insurance Costs

Although physical gold investing does not come with custodian fees, as investors can store the precious metals in their homes, it’s highly discouraged to do so.

A gold IRA custodian ensures the safekeeping of the account holder’s precious metals. Owning physical gold means that you’re taking on that additional responsibility. You may have to invest in safe deposits for your home or pay storage fees to a bank for providing a vault.

Another concern is incurring insurance costs. A gold IRA provides precious metals insurance, which can be expensive if you decide to opt for physical gold investing. This can lead to additional costs, adversely impacting returns.

• Capital Gains TAX

The IRS treats physical gold as an asset rather than an income. Under its guidelines, investors must pay capital gains tax on their profits when selling their precious metals.

• Complex Process

Whether it’s a Roth IRA or a precious metals individual retirement account, the process of buying and selling assets is relatively straightforward.

Investors can execute transactions through the online portal or call the provider for assistance. This is not the case with owning physical gold.

Those with physical gold investments face a complex process. Suppose an investor wishes to sell their physical gold or other precious metals. In that case, they must find a reputable dealer, assess the market value of the financial asset they wish to sell, and negotiate a fair value to complete the transaction. This can be time-consuming.

Feasibility of Physical Gold in an IRA: Regulatory Perspective

When considering setting up a gold IRA, investors need to assess the feasibility of the investment by considering the tax implications.

In this section, we will go over the IRS regulations on purchasing physical gold in a specialized retirement account and how you can set up a gold IRA.

IRS Regulations on Physical Gold in an IRA

The rules for physical gold in an IRA govern the type of precious metals you can purchase and the tax implications. This is extremely important for account holders to understand, as it can affect their investments and retirement portfolio.

IRS Standards for Physical Gold in an IRA

There are certain restrictions on purchasing gold in an IRA imposed by the IRS, and most of these pertain to the purity of the precious metal.

The IRS requires account holders to invest in high-quality precious metals. Under its guidelines, investors must purchase gold coins and bullion with a minimum fineness of 0.995 (99.5% purity).

While assessing the purity of gold coins and bullion can be challenging for investors, some gold IRA companies make this process easy by offering IRS-eligible products. Individuals can simply choose from a wide range of inventory without wasting much time.

Tax Implications of Physical Gold in an IRA

One of the major considerations when choosing any type of investment, including gold IRAs, is tax implications. While there are no capital gains taxes on specialized retirement accounts, there are tax deductions that investors must be aware of. These may vary depending on the type of account you open.

Similar to Roth IRAs, an account holder must pay taxes on their contributions in a Roth gold IRA, making all future withdrawals tax-free after the age of 59½.

On the other hand, a traditional gold IRA requires the account holder to make pre-tax contributions, allowing the investment to grow tax-deferred. However, under the IRS guidelines, investors must pay taxes on withdrawals after the age of 59½.

Although the IRS regulations determine the tax implications of a traditional and Roth gold IRA, both types of accounts offer the same tax advantages, allowing the investment to grow tax-free.

When it comes to physical gold investment, the IRS treats these types of financial assets as collectibles, which means that investors must pay capital gains tax on the profit they make when selling the precious metal. Typically, the tax rate does not exceed 28%. Also, the Revenue Service does not have any specific rules that apply to gold.

Another thing to note is that there are additional reporting requirements for physical gold investment. When you sell your precious metals, you must file Form 1099-B. 

To better understand the IRS reporting regulations, it’s crucial that you reach out to an experienced tax consultant.

Steps to Add Physical Gold to an IRA

Here are the two main steps for adding physical gold to your specialized IRA:

Selecting a Gold IRA Custodian

Before you can even start buying gold or other precious metals in an IRA, you must select a reputable gold IRA custodian.

Investors must take their time, carefully research the custodians, and narrow down the options to a select few. Once they’ve got a couple of names in their mind, they should reach out to the representatives working at these gold IRA companies to learn more about their products and services.

A couple of things that investors should look out for when choosing a gold IRA custodian include the following:

• A strong track record;

• Positive reviews on social media and other platforms;

• Knowledge and expertise of the staff; and

• Transparent practices and fee structure.

Buying Eligible Gold Products

After you’ve selected a custodian, call the custodian’s representative and ask them to set up an IRA for you. By setting up a specialized individual retirement account, you will be able to purchase IRS-eligible gold products to diversify your retirement portfolio.

Most gold IRA companies often sell IRS-eligible products. However, they may have other types of coins and bars aimed towards the needs of collectors. It’s best to contact an expert representative or do your own research before investing.

Factors to Consider: Gold IRA vs Physical Gold

If you’re still on the fence about setting up a gold IRA or investing in physical gold, here are a couple of factors that you should consider:

Aligning with Financial and Retirement Goals

When considering any investment, ensuring that your investing strategy aligns with your financial and retirement goals is important. Are you looking for stability in your retirement portfolio, or do you want to grow your wealth?

Your investment goals will help determine the type of financial asset you should invest in and the portion of your portfolio you should allocate toward it.

Long-term Wealth Preservation

Some investors who are risk-averse may prefer stability over high returns. They should consider setting up a gold IRA. It is a great way to hedge against rising prices and protect one’s retirement savings during economic uncertainty.

However, due to the high custodian fees and lack of control, it may not be the right option for those seeking capital growth potential.

Capital Growth Potential

If you’re looking for capital growth potential, you may want to invest in physical gold. Since holding precious metals in your home or vault does not incur custodian fees, investors can expect to make higher returns, especially during periods of high demand or recession.

Economic Climate and Market Volatility

Economic climate and market volatility are two crucial factors that investors must consider when investing their hard-earned money. Gold is known as a safe haven asset, whether you purchase it through a precious metals IRA or a physical gold investment.

Role of Gold During Economic Uncertainty

During poor market performance or uncertain economic times, the value of the US dollar may fall. When that happens, investors may seek safer financial assets like gold and other precious metals to ensure a stable investment portfolio.

Both physical gold investment and purchasing precious metals in a gold IRA can protect an investor against inflation and market volatility.

Gold as a Hedge Against Inflation

Inflation is an economic phenomenon that refers to the decrease in the purchasing power of money. There are several tools the government can use to combat this crisis, which means that this phase may be temporary.

In such situations, physical gold investment and setting up a gold IRA can help protect one’s retirement savings.

Personal Preference: Ownership and Accessibility

Another major difference between a gold IRA and a physical gold investment is ownership and accessibility. It’s a huge factor that can help determine which financial asset is right for you.

Direct Ownership of Physical Gold

Some investors may want direct ownership of their financial assets, and if you’re one of those individuals, you should consider a physical gold investment.

Unlike a gold IRA, investing directly into physical precious metals outside of a specialized individual retirement account ensures full control of the financial asset. Since there is no third party or custodian, you can do whatever you want with your investment without any restrictions.

Indirect Ownership through a Gold IRA

While a gold IRA provides ownership of the precious metals, investors must adhere to certain restrictions or regulations. It’s a good option for those who prefer tax benefits rather than control over their financial assets.

Steps to Purchase Physical Gold or Open a Gold IRA

The process for acquiring gold in an IRA involves purchasing physical gold through a trustworthy precious metals dealer. However, if you’re looking to enjoy tax benefits, it’s best to begin setting up your gold IRA account.

Procedure to Open a Gold IRA

While there are several things that investors must do if they wish to set up gold IRAs, we will narrow it down to two main steps, which are as follows:

Choosing a Gold IRA Provider

Choosing a reputable gold IRA provider can make the entire investment process easier. The precious metal dealer handles the transactions while offering additional services to the account holder.

A gold IRA provider may also work with a custodian or provide assistance in setting up an IRA account.

Rollover Process for a Gold IRA

There are two ways to fund a gold IRA from the money in an existing individual retirement account, and these are as follows:

• Investors can request the current custodian to transition your 401k into gold IRA, which would transfer some or all of the individual’s retirement savings into the new gold IRA.

• Alternatively, account holders can withdraw funds from their existing IRA and deposit them in their precious metals retirement account within 60 days. Failure to roll the money over within the mentioned time frame may result in taxes and penalties.

Procedure to Purchase Physical Gold

Here are the two important steps in purchasing physical gold, and these are as follows:

Selecting a Reputable Gold Dealer

Not all gold dealers offer a fair price for the precious metals, which is why it’s important to do your research to find a reputable company.

Here are a few things you should consider when choosing a precious metals dealer for your physical gold investment:

• The dealer’s reputation;

• Years of experience in the industry;

• Any professional accreditation and membership; and

• A buyback policy.

Understanding Gold Purity and Pricing

Before purchasing physical gold, it’s essential to know more about gold purity, check out the spot price, and understand the factors that influence the price of precious metals. This type of information can help you get a fair price when negotiating with the dealer.

Frequently Asked Questions

What Is the Difference Between a Gold IRA and Physical Gold?

A gold IRA is a specialized individual retirement account that allows you to invest in gold and other precious metals. However, the gold IRA only lets investors store their financial assets in a safe IRS-approved depository.

On the other hand, those looking for a bit more control and access to their financial assets may prefer investing in physical gold. There are no storage requirements by the IRS on these types of investments, which means that you can store the precious metals in your own home.

What Are the Pros and Cons of Investing in a Gold IRA vs Physical Gold?

When it comes to gold IRA vs physical gold, it’s important to assess the pros and cons of the financial assets to determine a suitable investment for you.

The following are a couple of pros of investing in a gold IRA:

• It helps investors diversify their retirement portfolio.

• Setting up a gold IRA has certain tax advantages.

• Gold serves as a hedge against inflation and economic crisis, making it a means of wealth preservation.

• Investors can receive guidance from experienced custodians.

While there are several benefits of investing in a gold IRA, setting up one can have certain drawbacks, including the following:

• A gold IRA has a complex fee structure and higher premiums, which can affect one’s returns.

• Investing in a gold IRA means that you’re choosing an illiquid financial asset, as compared to other forms of investment like stocks, bonds, and exchange-traded funds, among others.

• The custodian has a lot more control over the financial assets than the account holder.

Those looking to invest in precious metals may want to consider investing in physical gold, as it has several benefits, such as greater liquidity, more flexibility, and no counterparty risk. Best of all, you have control and access to the gold.

On the other hand, investing in physical gold comes with certain drawbacks, such as additional storage and insurance costs, lower returns, and a complex process for executing transactions.

Can I Hold Physical Gold in an IRA?

Investors can only buy physical gold in specialized individual retirement accounts like gold or precious metals IRA.

While account holders are owners of the financial asset, they cannot hold physical gold in an IRA in their possession, as IRS guidelines require investors to reach out to an approved depository.

How Can I Add Physical Gold to My Existing IRA?

If your existing individual retirement account is a traditional or Roth IRA, you cannot add physical gold to it. You would need to set up a gold or precious metals IRA, which you can do by following the steps below:

• Choose a reputable custodian.

• Fund the account.

• Select a precious metals dealer. In some cases, the gold IRA company may also be a custodian, providing IRS-eligible products and depositories under a single roof.

• Purchase IRS-eligible gold.

• Arrange storage if your custodian or gold IRA company does not provide one.

• Track and monitor your precious metals to ensure that their performance aligns with your investment goals.

How Can I Purchase Physical Gold or Open a Gold IRA?

You can reach out to a precious metals dealer to buy physical gold or contact a reputable gold IRA company to set up a specialized individual retirement account.

Conclusion

Although gold offers a lot of stability, it has a lower potential for returns, and the fees charged by IRA providers and custodians can eat into whatever little profit the investor makes. Many experts recommend allocating up to 5% of one’s retirement savings to gold.

That said, there are other options besides a specialized IRA and physical precious metal investments that investors should consider exploring. These include gold mutual funds and exchange-traded funds. It’s best to do your own research and talk to an expert advisor to help create an investment strategy that aligns with your financial goals.