Gold IRA vs Stock IRA: Differences, Similarities, IRA Options

Author: Focus on the User | 6 min read

Gold IRAs and Stock IRAs represent distinct investment strategies, each catering to different financial goals and risk tolerances. Gold IRAs involve investing in physical gold, such as coins and bars, providing a hedge against inflation and market volatility. Historically, these IRAs have seen average annual returns of 6-8%. On the other hand, Stock IRAs invest in equities and related securities, offering a higher potential for growth with average annual returns around 10%. However, they are also subject to significant market volatility.

The primary differences between these two types of IRAs lie in the asset type, risk profile, liquidity, and investment goals. Gold IRAs focus on tangible assets (physical gold), which typically carry a lower risk profile compared to stocks. They are less liquid than their stock counterparts, as selling physical gold can take more time than selling stocks. The main goal of a Gold IRA is wealth preservation, whereas a Stock IRA aims for capital growth.

1. Gold IRAs Invest in Physical Gold While Stock IRAs Invest In Paper Assets

Gold IRAs center around investing in physical gold, such as American Eagle coins, Canadian Maple Leafs, or gold bars, adhering to the IRS-required purity standard of 99.5%. This investment in tangible assets starkly contrasts with Stock IRAs, which invest in various paper assets like individual stocks, ETFs tracking indexes like the S&P 500, or mutual funds across diverse sectors. The key distinction lies in the asset's nature: physical and tangible for gold, intangible for stocks. This difference impacts their respective risk profiles, storage requirements, and liquidity aspects - physical security for gold, and digital for stocks.

2. Stock IRAs Are Subject to Stock Market Volatility

Stock IRAs experience significant volatility in line with market trends, often reflected by benchmark indexes such as the Dow Jones Industrial Average or NASDAQ. This volatility can result in large swings in value, as evidenced by historical market crashes, such as the 50% drop in S&P 500 values during the 2008 Financial Crisis. Stock volatility is influenced by various factors, including corporate quarterly earnings reports, where a miss against forecasts can lead to substantial drops in stock prices.

3. Gold IRAs Hedge Against Market Volatility

Gold prices have historically shown an inverse correlation with stock market performance, often increasing in value during market downturns. For example, gold prices rose by 25% during the 2008 crisis. This hedging capability stems from gold's limited supply, with a global mining output averaging around 3,300 tonnes per year, and its recognition as a 'crisis commodity.' In uncertain economic times, gold often outperforms stocks, as evidenced by its average annual return of approximately 10% over the past 20 years, compared to the S&P 500's 7%.

4. Stock IRAs Provide Higher Growth Potential

Historically, Stock IRAs have outperformed Gold IRAs in the long term. The S&P 500, for instance, has averaged an annual return of about 10% over the past century. Sectors like technology have seen even higher annual returns, with companies like Apple or Amazon exemplifying this trend. The growth in stocks is closely tied to economic factors such as GDP growth, which averages 2-3% annually in the US, and corporate earnings that often match or exceed this growth rate.

5. Stock IRAs Are More Easily Liquid

Stock IRAs offer high liquidity, enabling the selling of stocks within seconds during market hours at the prevailing market price, with settlement usually within two business days. Major stocks can have enormous daily trading volumes; for example, Apple Inc. often sees around 100 million shares traded daily. This liquidity allows for rapid adjustments in portfolios or withdrawals, with transaction costs typically being a small fraction of the trade value, often under 0.5%.

6. Gold IRAs Requires Storage Fees

Storage fees for Gold IRAs can vary, typically ranging from 0.5% to 1% of the gold's value annually, depending on the provider. In addition to storage fees, gold IRAs also incur insurance fees to protect the stored gold, averaging around 0.1% of its value per year. This contrasts with Stock IRAs, where the predominant costs are generally limited to account management fees, often less than 1% annually.

7. Gold IRAs Are Known as a Diversification Tool

Gold's low correlation with stocks and bonds, often indicated by a correlation coefficient below 0.3, makes it an effective tool for diversification. Incorporating gold into a portfolio, even in a small percentage like 5-10%, can significantly reduce overall volatility. For example, a portfolio split between 60% stocks and 40% bonds might see its standard deviation reduced from 15% to 13% by including gold. This benefit is especially noticeable during market downturns, where gold’s price often remains stable or increases, offsetting losses in other asset classes.

Find Out How to Invest Gold in Your IRA

Similarities in Gold IRAs and Stock IRAs

Both Gold and Stock IRAs offer tax-deferred growth, allowing capital gains, dividends, and interest income to grow without immediate tax implications. The Internal Revenue Service (IRS) governs both types of IRAs under similar rules. For example, early withdrawal penalties are typically 10% for both. Each requires a custodian to manage the account, with custodian fees averaging between $50 to $150 annually. Additionally, both IRA types are subject to the same annual reporting requirements to the IRS.

Both Offer Similar Tax Benefits

Contributions to both types of IRAs may be tax-deductible, depending on income levels. For instance, in 2023, for single filers, the phase-out for deductions starts at a modified adjusted gross income of $68,000. Tax-deferred growth in both IRAs means that no capital gains tax is levied until withdrawal. For Roth IRA versions, qualified distributions are tax-free, though contributions are made with after-tax dollars. Income limits for Roth contributions begin phasing out at $129,000 for singles in 2023.

Same Annual Contribution Limits Set By IRS

The IRS sets annual contribution limits for both IRA types. In 2023, the limit is $6,000 for individuals under 50 and $7,000 for those 50 and older. These limits are adjusted periodically and apply to the total contributions across all IRA accounts. Exceeding these limits results in a 6% tax penalty on the excess contribution annually until corrected.

Both Have Rollover Options

Both Gold and Stock IRAs allow for rollovers from 401(k)s or other IRAs. Indirect rollovers must be completed within 60 days to avoid taxation. Direct rollovers are tax-free, but failing to meet the rollover requirements can lead to taxable distributions and potential penalties. The IRS permits one rollover per 12-month period across all IRAs, with a 20% withholding tax applied on indirect rollovers. The process to a gold rollover in your IRA are similar to stocks.

Both Gold IRAs and Stock IRAs are subject to RMDs

Required Minimum Distributions (RMDs) for both IRA types begin at age 72. The minimum withdrawal amount is calculated using IRS life expectancy tables. For example, at age 72, the distribution period is 27.4 years, which determines the minimum withdrawal amount. Failing to take RMDs results in a hefty penalty, amounting to 50% of the amount that should have been withdrawn.

Benefits to Diversify Between Both Gold and Stocks

Diversifying investment portfolios by including both gold and stocks can significantly reduce risk. For instance, a portfolio with a 60/40 stock/gold allocation might have experienced about 20% less volatility from 2000 to 2020. Gold, acting as a hedge against inflation and currency devaluation, saw a massive increase in price during periods like the 1970s inflationary era. On the other hand, stocks offer substantial growth potential, with the S&P 500 averaging around 10-11% annual return from 1926 to 2018, outpacing both inflation and gold returns in the same period.

How Does Gold Compare to Stocks Specifically?

The relationship between gold and stocks is often inverse; gold tends to perform well when stocks decline. For example, during the 2000 dot-com crash, gold gained 5.9% while stocks fell by 9%. Stock returns are closely tied to corporate profitability and economic growth, whereas gold is influenced more by supply-demand dynamics, currency values, and investor sentiment. Over a 20-year period, gold has had an average annual return of about 6-8%, compared to 8-10% for stocks, albeit with significantly different risk profiles.

Historical Performance of Gold to Stock Market

From 2000 to 2020, gold prices soared from around $280 per ounce to over $1,800, an increase of over 540%. In contrast, the S&P 500 grew from 1,469 points to 3,756 points, an increase of about 156%. Notably, gold's price increased by 25% during the 2008 market crash, while the stock market value halved, highlighting gold's role as a hedge against market downturns.Different Investor Profile Strategies For Both IRAs

Conservative

Conservative investors might prefer Gold IRAs, focusing on stable assets like widely recognized gold coins, which have had an average annual return of around 5% over the past 20 years. In Stock IRAs, they might lean towards dividend-paying stocks, such as those in the S&P 500 Dividend Aristocrats, offering average yields of 2-3% annually. Such portfolios often have a higher bond allocation, around 40-60%, offering returns of 3-5% per year.

Aggressive

Aggressive investors in Stock IRAs may favor high-growth tech stocks, which have seen substantial returns, while keeping a minimal allocation in Gold IRAs, possibly opting for gold mining stocks over physical gold. Their investment strategy might include using leverage or investing in high-volatility sectors, accepting the potential for significant fluctuations in portfolio value.

Nearing Retirement

Investors nearing retirement typically shift towards a more balanced mix, with 30-50% in stocks focused on lower-volatility sectors and increasing their Gold IRA allocation to 10-20% for stability. They might also increase their bond holdings to 30-50%, focusing on short to intermediate-term bonds to reduce interest rate risk.

Risks to Both Stocks IRAs and Gold IRAs

Stock IRAs can face significant losses in market downturns, as seen when the S&P 500 lost about 34% in the 2020 market crash. Conversely, Gold IRAs might see price declines when interest rates rise or during periods of low inflation. For instance, gold prices dropped about 28% in 2013 following a decade-long bull run. Both types of IRAs are also subject to geopolitical risks, regulatory changes, and economic cycles, affecting their performance in different ways.

Gold IRAs vs Savings Accounts

Gold IRAs offer potentially higher returns compared to savings accounts but come with greater risks. Gold prices have shown wide fluctuations, with annual returns varying significantly, from -28% to +30% in some years. Savings accounts, on the other hand, provide more stability but typically offer lower interest rates, around 0.45% in 2023. While this rate is often below inflation, leading to a real loss of purchasing power, savings accounts do have the advantage of FDIC insurance up to $250,000, providing a level of security not present in Gold IRAs.

Comparing Real Estate Investments to Gold IRAs

Real estate investments can potentially offer annual returns of 8-12% through a combination of rental income and property appreciation. In contrast, Gold IRAs have seen an average annual return of 6-8% over the past 20 years, without the additional income stream that real estate provides. However, real estate requires active management and is less liquid compared to gold, with transactions typically taking much longer to complete.

Impact of Inflation on Both Gold or Stocks

Gold often benefits from inflationary periods. For example, during the 1970s when inflation averaged 7.25%, gold prices surged by over 1,300%. Stocks, while they may suffer in the short term during inflation, tend to outpace inflation over the long term. Historically, the S&P 500 has outperformed the inflation rate by about 7% annually. The performance of these assets during inflationary periods can vary significantly, depending on the duration of inflation and its underlying causes.

Central Bank Impacts on Gold and Stocks

Central bank policies, such as changes in interest rates, can have immediate effects on both gold and stock markets. A rate cut typically boosts stock markets but can also increase gold prices, as gold is a non-interest-bearing asset. Actions like quantitative easing, exemplified by the $700 billion program announced by the Fed in March 2020, can lead to rallies in both the stock market and gold prices. These policies often increase market volatility, with gold frequently viewed as a safer investment during times of monetary policy uncertainty.

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