There is a lot of advertising and advice in financial media on holding physical bullion in IRA accounts. Somehow I struggle to understand benefits of Gold IRAs. Any way I look at it I just don’t see how a Gold IRA is better than just holding a gold closed end fund in a regular IRA account.
Let’s do some analysis of what you get when you set up a physical gold IRA account. Typical physical bullion IRA account offer looks like this:
- Open an IRA account with an IRA custodian which specializes in this type of accounts. When you open the account the custodian will charge you fees for initial set up. The fee might be over a hundred dollars; plus there will be monthly or yearly fees for maintaining the account.
- Then you transfer money to the custodian with instructions to buy gold bullion from a bullion dealer of your choice and have it stored at a secure storage company of your choice (or the IRA custodian might advice you which companies to use). So you will have to pay premium for purchasing the bullion and then your precious metals will be stored at a storage company like Brink’s where you will have to pay storage fees too!
- When sometime in the future you decide to close your Gold IRA account you will have a choice of either selling the bullion to a dealer (with discount of course) or have it delivered to you (with fees of course).
Generally with typical gold IRA set up you will have an IRA account which will hold a title to bullion stored with a secure storage company. And it will cost you hundreds if not thousands of dollars to set up and will have ongoing IRA account and metal storage fees.
Now let’s compare Gold IRA with Gold closed end fund strategy:
- Open a free IRA account with any online discount broker. It is free and there are no monthly or yearly fees unless you are using premium services.
- Buy shares of a gold close end fund like CEF, PHYS, and PSLV etc. The transaction cost will be just usual trading fee $6-7.
The result will be the same as with Gold IRA: you are holding shares of physical bullion fund which has physical bullion stored in a secure location. As a CEF shareholder you (or your IRA account) will have a title to the bullion held by the closed end fund. Total fees for the whole investment are negligible. To be fair closed end funds do charge management fees but they are very minor – usually less than ½ percent of assets value per annum. Total fees will be nowhere even close to what a Gold IRA will cost you.
Let’s compare some other features of Gold IRAs and closed end funds:
Safety of the bullion: With Gold IRA your bullion will be stored at a secure storage company in the US or sometimes abroad. Canadian based closed end funds hold their bullion at various Canadian banks’ secure vaults. All bullion is allocated and is audited on a regular basis. Thus I don’t see how Gold IRA might be safer than a closed end fund.
Central Fund of Canada (CEF) and Sprott management (PHYS and PSLV) are very reputable companies and there can be absolutely no doubts that they actually have the physical bullion with unencumbered title and the bullion is stored in secured vaults.
Government confiscation: Some people might argue that it will be harder for the government to confiscate bullion stored with secure storage company. I strongly doubt it – IRA companies have records of who has what and where and if the government decides to confiscate or force you to sell them your bullion they will be able to do it easily. I don’t think there is any chance of outright physical confiscation – more likely the government might try to tax you out of any gains. In this case holding closed end funds might even be advantageous as the government might have various reason not to tax closed end fund’s shareholders as heavily as outright “gold bugs” with Gold IRAs.
One other argument I have heard is that some Gold IRAs let you hold your bullion abroad – somewhere in Switzerland or Singapore. Supposedly the government won’t be able to confiscate your bullion from there. I am very skeptical about this argument. The government doesn’t need to confiscate your gold – they can just tax you. Plus there is no guarantee against actions of foreign governments or catastrophic events like civil unrest or wars in which case your bullion might get pilfered. Central fund of Canada (CEF) and Sprott funds (PHYS and PSLV) hold their bullion in Canada so this already gives you some diversification from holding your bullion in the US.
Conclusion: Holding gold closed end funds in IRA account is very similar to setting up a physical Gold IRA account. With closed end funds you can save hundreds if not thousands of dollars in fees and buying closed end funds are a lot less hassle and paperwork compared to setting up a Gold IRA.
I am in no way an expert in physical Gold IRA accounts so there might be some nuances which I have not considered. If you have a comment or questions leave your reply below this article and we will discuss.
To find out about other advantages of physical bullion closed end funds read: Physical Bullion Closed End Funds – How to Buy Gold at Discount