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A dollar today won’t have the same buying power in 10, 20 or 30 years. We can thank inflation for that.
Over time, the cost of goods and services tends to rise naturally, eroding the value of a dollar at what’s usually a gradual pace. In fact, the Federal Reserve, which is tasked with overseeing monetary policy, specifically targets a 2% annual inflation rate in the long run because it commonly lends to long-term economic stability.
In recent years though, consumers have experienced more rampant inflation. And during periods of economic expansion when consumer demand exceeds the supply of goods and services, inflation can surge.
That’s why it’s important to set your retirement savings up to outpace inflation. If that’s a priority of yours, you may want to consider a gold IRA.
What is a gold IRA?
A gold IRA is an individual retirement account that allows you to invest in physical gold. To open a gold IRA, you’ll need to find a custodian or broker that allows this and is able to store your gold securely. You’re not allowed to store gold at home that’s earmarked for an IRA. Your gold must also meet purity standards set by the IRS.
Why a gold IRA is good for inflation
Whenever the demand for a given commodity exceeds its supply, its price tends to rise. Since the supply of gold is inherently limited, its value tends to hold steady during periods of economic turbulence and rise over the long haul.
Gold is also globally recognized as a commodity of value, and unlike government-issued currency (like the U.S. dollar), it can’t be devalued by overprinting — the idea behind the now defunct gold standard. However, to serve as a true inflation hedge, gold is an asset that should be held for many years, since its price can fluctuate on a short-term basis.
Pros of a gold IRA
- Tax benefits. A gold IRA gives you the same benefits as a traditional or Roth IRA. With a traditional IRA, contributions are made on a pre-tax basis and gains are tax-deferred. With a Roth IRA, contributions are made on an after-tax basis, but both investment gains and withdrawals are tax-free.
- Diversification. It’s common to invest for retirement by holding stocks, ETFs and bonds. A gold IRA gives you access to a completely different asset class and offers protection against market turbulence.
Cons of a gold IRA
- Higher maintenance fees. A gold IRA requires a custodian to physically store your investment. Because of this, you could face higher fees than what’s typical for an IRA that eat away at your returns.
- Limited liquidity. It can be harder to sell gold than to sell assets like stocks and bonds. Liquidating a gold IRA when you need cash in retirement could mean having to sell your gold at a lower price, especially if you have to take a required minimum distribution.
- No income generation. An IRA that’s invested heavily in stocks can generate dividend income. A gold IRA can gain value over time as the price of gold goes up, but gold itself doesn’t pay dividends and you can’t hold other assets in a gold IRA.
Alternatives to a gold IRA
Investing in gold may offer some protection against inflation. But if a gold IRA doesn’t sound like a great fit for you, there are a few options if you still want to invest in gold.
- Tax advantage: You could open a traditional or Roth IRA and invest in gold stocks, such as Barrick Gold Corporation (GOLD), or gold ETFs, like SPDR Gold Shares ETF (GLD) and iShares Gold Trust (IAU). Gold stocks and ETFs are more liquid than actual gold, and they allow you to benefit from gold price gains without having to invest in physical assets.
- No tax advantage: If you’re not looking for a tax break, you can purchase gold directly and store it as you like or use a brokerage account to buy gold stocks or ETFs.
Bottom line
As with any asset, a gold IRA isn’t for everyone and shouldn’t be your only investment. Gold also isn’t the only possible inflation hedge. Stocks or buying a house may be a better fit for you than gold. But if gold is for you, a gold IRA can provide diversification plus a tax break.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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