While you can invest in physical gold through an IRA, ETFs provide greater convenience and efficiency as their shares/ETFs don’t incur annual tax costs like physical gold investments do.
Gold ETFs may incur certain additional trading fees that don’t exist when investing directly in physical bullion, and profits made from selling these assets may be taxed as collectables rather than investment income.
What is a Gold ETF?
Gold is an attractive diversifier because its value holds steady over time and during economic or stock market upheavals. Though investing directly in physical gold may be costly and storage challenges arise, investors can gain exposure via exchange-traded funds (ETFs).
ETFs (Exchange Traded Funds) are pooled investments that pool together assets and trade like stocks on the stock exchange. Investors buy and sell shares of ETFs just like stocks; but with lower fees and greater flexibility thanks to tracking particular indexes or sectors, ETFs offer investors much lower fee investments with greater purchasing and selling power throughout the day.
SPDR Gold Shares is the go-to gold ETF, holding physical bullion in order to provide direct exposure to the price of precious metals. While its expense ratio may be higher than other options without physical gold ownership, it remains relatively cost effective due to shipping and insurance expenses associated with bullion ownership.
Another alternative is iShares Gold Trust, which charges lower annual expenses than GLD but doesn’t hold physical gold in vaults. Finally, SGOL charges lower expense fees yet has an allocation system tying each share to specific physical gold pieces held within secure vaults.
How do Gold ETFs Work?
Gold Exchange Traded Funds (ETFs) track the price of physical gold bullion and trade on an exchange, much like stocks. Each share represents a fraction of its underlying assets, and investors purchase or sell shares through brokers. Gold ETFs offer lower upfront costs than purchasing physical gold, as well as diversifying investors’ portfolios with multiple assets in one investment vehicle.
ETF’s are audited and insured for safety and security, providing reduced storage and insurance expenses compared with keeping physical gold at home, as well as eliminating shipping and insurance fees when selling it.
Some ETFs use derivative contracts and debt to track commodity prices rather than holding physical assets, which can lower expenses but increases counterparty risk. Leveraged ETFs amplify market movements of their underlying assets but may carry greater risks than regular ETFs.
When choosing a Gold ETF, take note of its underlying assets, expense ratios and performance history before making your selection. Check if the fund relies on synthetic backing such as gold miner stocks; is not using futures or options contracts to gain leverage or inverse exposure; and doesn’t constitute a closed-ended trust – this information can be found both on its Fund Facts page and through SEC’s EDGAR database.
Are Gold ETFs Tax-Advantaged?
Gold ETFs may qualify for tax advantages when held within a tax-advantaged account such as a traditional or Roth IRA, however if you purchase physical precious metals through an IRA custodian you’ll incur additional costs such as storage and insurance fees that could diminish any gains that might otherwise accrue from precious metals investing.
Physical precious metals are considered collectibles for tax purposes, meaning any profits you make from selling them could be subject to a maximum capital gains rate of 28% instead of the typical long-term capital gains rate of 20% – making these investments less appealing to investors seeking passive income like dividends.
Due to this reason, many investors now opt for investing in gold via traditional or Roth IRA rather than purchasing physical precious metals directly. This can help save costs while still reaping all the safety and diversification advantages that gold investing brings. Before purchasing gold for your IRA though, it is crucial that you gain a deep understanding of your options so as to make an informed decision suitable for both your goals and budget. Request your free Gold IRA kit today to gain more knowledge!
