Is a Gold IRA Right for You?

Gold IRAs function exactly like regular IRAs, except instead of investing in stocks and bonds, you're purchasing gold coins and bullion. Silver, platinum, and other precious metals can be included as well.

While the notion of buying gold, a trustworthy investment, sounds safe, it doesn't mean that a gold IRA is the best vehicle for your retirement savings. Here are a few things you should know before you go for the gold.

Why choose a gold IRA?

Many people see a gold IRA as a supplement to their other retirement funds, in part because the value of gold tends to move in the opposite direction of paper assets, like stocks and bonds. So when stocks and mutual funds are losing value, gold is usually gaining it, and vice versa. The idea here is that if your other investments take a hit, your gold will increase in value to help compensate, hedging your losses.

While the value of gold fluctuates like anything else, it has remained a valuable commodity for thousands of years, and it will likely remain valuable for many decades to come. But there are a few drawbacks to opening a gold IRA that should give a would-be investor pause.

The drawbacks of a gold IRA

When you open a gold IRA, you will have to pay a one-time account setup fee, along with annual custodian fees. There may also be additional fees for transactions and withdrawals. These are typical of any IRA, but they may be higher for a gold IRA because these accounts are rare and fewer companies offer them.

In addition, because gold is a physical commodity, it has to actually be stored somewhere. IRS standards say that unless you have an LLC, the gold must be kept by the IRA custodian, not the account owner. The company charges you for the storage fees and insurance to protect your gold, in case the facility is robbed. This charge is unique to gold IRAs and may be a flat fee or a percentage of your assets.

Perhaps one of the biggest reasons to be wary of investing in a gold IRA is the unpredictability in the price of the metal. The cost of gold shot up to more than $1,000 per ounce during the Great Recession, but before that, its value had remained relatively constant between $300 and $500 per ounce since 1980. When you consider that the inflation rate during that same period rose nearly 152%, the investment doesn't look as appealing. If you invested $500 in something that kept pace with inflation back in 1980, it would have been worth $1,258 just before the Great Recession hit in 2007. But if you'd invested in gold over that same time span, your $500 investment would barely have appreciated at all. That means you effectively lost $758. If you'd instead held on to that gold and sold it when it hit $1,895 an ounce in 2011, you'd have made $1,395.

If you do plan on opening a gold IRA, don't put too much of your money into it, especially if you're nearing retirement age. Most experts recommend only having 10% or less of your retirement portfolio in gold to minimize the risk of losing your investment.

How to open a gold IRA

The first step is to open a self-directed IRA with a custodian offering gold IRAs. Then, you put money into the account, just as you would with a normal IRA. You can deposit funds from a savings account or roll over an old 401(k) or IRA into your gold IRA.

From there, it's up to you to decide which metal dealer you want to work with. Your custodian may have partners it can recommend to you, or you can find one on your own. Alternatively, if you find a metal dealer that you like, they may be able to recommend a custodian for you. It's worth noting that the metal must meet certain IRS fineness standards -- 0.995 or higher and produced by a government mint or other accredited institution -- in order to be included in a gold IRA, so be sure the products you're looking at are up to snuff.

Before opening a gold IRA, you need to get your hands on a copy of the company's fees, so you know exactly how much you'll be paying. If there's anything you don't understand, ask the metal dealer and the custodian questions. Make sure the custodian you choose is licensed and has insurance to protect your gold in case it's stolen.

When you're ready to begin drawing on your gold IRA, you will simply reverse the process and liquidate your gold into cash. It's important to keep in mind that gold IRAs are still subject to the early withdrawal penalties that traditional and Roth IRAs are. You will also have to pay taxes when you sell off the gold, unless you have a Roth gold IRA.

Alternatives to opening a gold IRA

If you want to invest in gold but don't want to deal with the extra hurdles associated with a gold IRA, you should consider investing indirectly instead. You could buy shares of an exchange-traded fund (ETF) that tracks the value of gold. You could also purchase stock in a gold mining company instead. This way, you still get some of the same benefits without the extra hassle and expense of opening a gold IRA.

Many people choose to invest in gold because they know it's always going to be considered valuable. But that value can fluctuate wildly over time, or worse, it could stay the same. This makes it a bit of a risky investment. If you are considering a gold IRA, make sure you understand exactly what you're signing up for and limit your exposure so that you aren't hurt too badly if the value of gold takes a hit.

5 Simple Tips to Skyrocket Your Credit Score Over 800!Increasing your credit score above 800 will put you in rare company. So rare that only 1 in 9 Americans can claim they're members of this elite club. But contrary to popular belief, racking up a high credit score is a lot easier than you may have imagined following 5 simple, disciplined strategies. You'll find a full rundown of each inside our FREE credit score guide. It's time to put your financial future first and secure a lifetime of savings by increasing your credit score. Simply click here to claim a copy 5 Simple Tips to Skyrocket Your Credit Score over 800.

The Motley Fool has a disclosure policy.