Do your homework and you’ll find that gold IRAs aren’t all that shiny.
As gold continues to flirt with record highs, it continues to attract a lot of attention. We find this a bit odd, given that it just means gold is stable and falling since its last high in August 2020, but you wouldn’t know that from the incessant marketing campaigns. One in particular is gaining momentum: the push for gilded IRAs. An article in Monday’s edition of The Wall Street Journal noted some considerations for those considering this option and highlighted the challenges of performing due diligence on providers, given the lack of required disclosure.(I) But we think there’s more. NOW, we have already written– and this will likely be the case again – that we don’t think gold’s combination of high volatility and low returns is suited to the goals of most long-term investors. But if you disagree and want to own one anyway, in our opinion, a gold IRA is the suboptimal way to do so.
When IRAs were born under the Employee Retirement Income Security Act (ERISA) in 1974, they could not hold precious metals. This changed in 1997, when Congress changed the rules to allow certain self-directed IRAs to hold physical gold (or other precious metals), provided they were stored in an IRS-approved repository and that gold coins or bars be classified as investments rather than collectibles. . This has proven to be a complex system for most people, with high compliance and storage costs. But where there is demand, there are business opportunities, and one-stop shops specializing in gold IRAs have proliferated over the past 15 years. They will typically open the account, sell and store the gold for clients, streamlining the process. With gold now near all-time highs and people touting it (wrongly, in our opinion) as a hedge against inflation or uncertainty, there’s a lot of buzz about gold IRAs right now. attention.
But look closely at this space and you will find fees. Many of them. When you own stocks and bonds in an IRA, if your account is self-directed, it’s entirely possible that your commissions will be free or close to it, depending on where your account is kept. If you work with an investment advisor, they may charge you a fee based on your assets under management. (Of course, brokers can charge a range of different fees based on transactions, so we recommend understanding them up front.) But Gold IRAs? They have a litany of what we would call operating or maintenance fees. There are account opening fees which, based on our internet research with major players, can run into the hundreds of dollars. Ditto for recurring annual service and storage fees.
And these are just operational aspects: you’ll probably also pay a lot for the gold itself. No, not because gold is currently trading at over $2,000 per troy ounce. Because the IRA gold company – which also sells the gold – sets the prices, normally including a markup, and possibly charges commissions for buying and selling it.(ii) Price is something these companies compete on, but oddly enough, few clearly disclose markups. We examined the account agreements of several high-profile gold IRA companies and found some revealing that they were driving up gold prices by 10%. (The same document shows it could be much higher on specialty products or other metals.) Another cited a range of 2% to 7%, but said premium coins could carry a $35 markup. %. A third company cited a range of 4% to 33%, which is, in fact, wide.
So, using the 10% markup for simplicity, if you spend $50,000 on physical gold, you are purchasing $45,454.55 worth of gold. $4,545.45 goes to the Gold IRA company. That’s light years away from the commissions and broker markup on an identically sized investment in stocks or liquid U.S. Treasury bonds. Echoing the Newspapers says that because the disclosure requirements are so thin, most of the providers we looked at didn’t disclose their markup, making it impossible for customers to know how much they’re paying. And, by extension, it is impossible to know how much gold would need to appreciate for their actual investment to be profitable.
We also see broader downsides to investing. An IRA is a tax shelter, allowing your investments to grow without being subject to capital gains or investment income taxes. This means that bond dividends and interest are tax-free (although traditional IRA withdrawals are subject to ordinary income tax). Gold does not pay dividends or interest. This does not generate income. It sits there in a vault, its price often languishing between booms. This reality doesn’t quite fit with the emotional marketing pitches we often encounter, which play on people’s real fears about currency collapse and the presumed importance of hard assets in a dystopian future. But in this case, what good is physical gold held by intermediaries and requiring mountains of paperwork to access?
This is perhaps the most confusing part of all of this. Gold IRAs are often touted as a hedge against a house of cards financial system, but they require a lot of trust and paperwork. Much more so than, say, owning a gold ETF that doesn’t require a special IRA, high fees, or being responsible for physical storage. Again, we don’t think investing in gold makes sense for most people, but if you must, wouldn’t it make more sense to go for the more liquid option, the least expensive and simplest? This is doubly true when you consider that gold’s long-term annualized returns are lower than those of long-term Treasuries. Anything that erodes an already low return seems like a suboptimal way to invest in an asset.
So please, if you are tempted by gilded IRAs, do your homework. Find the pros and cons. Grill the seller about markup and the full range of costs. And then think critically about why you want to buy and whether it will actually achieve what you’re looking for.