Diversification is the best strategy to reduce risk in your portfolio. By spreading your investments among different types of investments and sectors, you can minimize the impact of market volatility caused by external events on your return over the long-term. Another form of diversification is to invest in different asset classes such as stocks, bonds, commodities, and precious metals. Asset classes provide another layer of diversification because they respond differently to events. For example, bonds typically fall in value as stocks rise and it is this inverse relationship that diversifies the overall risk in your investment portfolio.
One of the best reasons for investing in gold is to provide diversification and as a hedge against inflation.
What is a Gold IRA?
A Gold IRA is a type of IRA that allows investors to own certain precious metals like gold, silver, platinum, and palladium and was created by Congress with the Tax Payer Relief Act of 1997. It functions just like a regular IRA except that instead of holding stocks and bonds, the account holds physical gold bars and bullion coins. There are certain IRS requirements for this type of IRA:
- Gold bars and physical bullion coins must be of a certain purity – In order to qualify for an IRA investment, the gold coins and gold bars must be of .995 purity or higher.
- Only IRA approved Gold Assets are allowed – Gold coins and bars must be on the list of approved IRS Gold Investments
- Physical Gold must be held by an IRA Trustee – Investors typically go thru a dealer/broker to purchase the gold for their IRA, and the trustee then guides the investor through the process of setting up the account and arranging for storage at a depository.
- Gold must be stored in an IRS approved depository – Physical gold must be stored in an IRS approved bank or trustee depository. The IRS specifically prohibits indirect ownership via an IRA-owned LLC buying the gold bullion on behalf of the investor.
Gold tends to hold it's value over the long-term however, it's volatility makes it less than ideal for those that are retired or close to retirement age.
How Does a Gold IRA Work?
Hire a Trustee & Broker/Dealer
The first step in the process is to hire a trustee to administer the IRA for you. The trustee will setup the IRA, help you find a broker/dealer to purchase the physical gold or other precious metals, and arrange for storage in-house or with a depository. Most trustees have relationships with broker/dealers and will be able to make a referral however, it is up to you to select a reputable dealer so it would be wise to do your homework and ask for any licenses, registrations, insurance, and bonds.
Research Fee Structures
One question you will want to ask is what the fee structure is for administering the IRA and storage. Some trustees have higher fees the first year to cover the setup expenses and other trustees waive first year setup fees. Trustees will charge fees in exchange for administering your IRA and they can be in the form of a fixed yearly fee or a scaled fee which changes as the value of your account grows. The other fees you will pay are for storing your physical gold. There are a variety of fee structures for storage so it goes without saying that you need to clearly understand the fee structure for administration and storage before deciding which trustee to go with.
What are the Buyback Terms?
Finally, you will want to get the trustees buyback terms in writing. Ideally, the custodian will buy back the clients investment at the then spot price however, many trustees have different buyback policies so again you will want to get this in writing.