Paper Gold vs. Physical Gold in an IRA?

Adding gold to your Individual Retirement Account (IRA) has become an increasingly popular way to diversify from volatile paper assets like stocks and bonds. But investors have two main options when it comes to owning gold in an IRA – paper gold through ETFs and mining stocks, or physical coins and bullion. In this comprehensive guide, we’ll compare the pros and cons of paper gold vs. physical gold so you can decide which best fits your retirement investing goals.

What is Paper Gold?

Paper gold refers to shares of gold exchange-traded funds (ETFs), gold mining stocks, gold mutual funds, and other securities that represent fractional ownership in gold bullion. The most popular paper gold vehicle is the SPDR Gold Shares ETF which tracks the price of gold.

Owning paper gold provides indirect exposure to gold prices. You don’t own the physical metal itself, just shares of an entity that owns and stores bars of gold in vaults on behalf of shareholders. Paper gold trades on stock exchanges just like regular equities that you can buy and sell daily at live market prices.

Benefits of Paper Gold in an IRA

Here are some potential benefits of owning paper gold rather than physical metal in a retirement account:

  • Liquidity – Paper gold offers greater liquidity and ease of trading compared to physical coins and bars. You can buy or sell shares instantly during exchange trading hours.
  • Lower Premiums – Paper gold trades at near the live gold spot price with minimal markup over intrinsic metal values. Physical coins carry higher premiums reflecting manufacturing, shipping, and retail costs.
  • Storage and Insurance Avoided – Storing physical gold requires payment of annual storage and insurance fees which paper gold avoids. The ETF or mining company handles storage.
  • Reporting Simplicity – Paper gold positions appear on standard brokerage statements. You avoid the detailed reporting of each individual coin you must get with physical metal.
  • IRA Compliance – No concerns about IRS maintenance rules for physical precious metals like handling, shipping, and depository storage of your gold which the ETF trustee handles.
  • Diversity of Offerings – Paper provides more ways to invest in gold from ETFs tracking the price to gold miners with profit potential, whereas physical metal is limited to bullion.

Drawbacks of Paper Gold

Despite the conveniences, there are some notable limitations of keeping your gold exposure strictly in paper assets rather than physical coins and bars:

  • No Tangible Ownership – You own shares, not the gold itself. The paper provides no ability to take possession of metal.
  • Reliance on Trustee – Owning interests through an ETF or stock means you must trust a third party to manage the gold properly on your behalf. The risk is counterparty failure.
  • Lack of Physical Supply Constraints – Paper gold can be created in unlimited quantities. Physical gold is constrained in supply once mined from the earth giving it a stronger scarcity value.
  • Susceptible to Systemic Risks – Paper gold still carries exposure to financial system risks that physical metal does not. There is no guarantee shares will be liquid or pricing accurate in a crisis.
  • No Protection from Confiscation – In 1933, President Roosevelt issued an executive order requiring Americans to surrender most physical gold to the government. Paper gold would offer no protection against potential future gold confiscation.

Benefits of Physical Gold in an IRA

Now let’s explore the advantages unique to holding physical gold coins, bars, and rounds inside your IRA:

  • Tangible Asset – Physical gold provides a tangible asset you control outright. This appeals to investors who prefer owning a real hard asset over paper claims.
  • Scarcity and Intrinsic Value – Limited physical supply supports long-term value better than paper products. Gold’s intrinsic qualities like luster give it inherent appeal outside financial markets.
  • No Reliance on Issuers – You don’t have to trust an institution to manage your metal properly or worry about its solvency. The gold itself is the asset.
  • Resistance to Financial Crises – Physical metal held personally typically retains value better in times of systemic failures, bank holidays, stock market crashes, or other liquidity events when paper assets can gap down in price.
  • Privacy and Confidentiality – Gold kept in secure storage provides complete privacy. Paper gold ownership is disclosed to the SEC and IRS.
  • Hedge Against Confiscation – The government has historically targeted paper gold holdings and gold substitutes during confiscation while exempting certain forms of physical coins and jewelry.
  • Long-Term Store of Value – Physical metal has maintained its purchasing power over centuries. Paper assets have a limited history with a higher risk of devaluation over time.

Choosing the Right Type of Physical Gold

If you favor holding physical metal in your IRA, it’s important to stick with IRS-approved products:

  • Gold American Eagle Coins – U.S. Mint bullion coins exempt from confiscation
  • Gold Canadian Maple Leafs – Royal Canadian Mint gold coins with .9999 purity
  • Gold Bars and Rounds – Credible manufacturers like PAMP Suisse and Sunshine Minting
  • Minimum Fineness of .995 – Gold coins or bars must have purity of at least .995 or greater to qualify for IRAs

Bricks, jewelry, and collector coins don’t satisfy IRS requirements. Gold derivatives like ETFs that have counterparty risks, mining stocks, futures, and pooled accounts also don’t qualify as physical gold for IRA purposes.

Choosing the Right Gold Allocation

Most advisors recommend keeping a small portion of your total portfolio, anywhere from 5% to 20%, allocated to physical precious metals and other alternative assets. Higher allocations of up to 50% may be appropriate for conservative investors approaching retirement. Those with long time horizons can take more risk solely in paper assets. Young savers may want to start with 10% in physical gold IRAs, and older pre-retirees 20% or more for stability.

Storing Physical Gold IRAs with a Depository

The IRS requires physical gold IRAs to be stored at an approved depository, not at your house. Precious metals IRA custodians have relationships with secure vaults and can facilitate storage on your behalf. Expect to pay annual storage fees of around 0.5% – 1% of your gold’s value. Top depositories use features like alloyed steel walls, biometric iris scanners, motion detectors, reinforced doors, and 24/7 camera surveillance to protect your assets.

Is Paper or Physical Gold Right for You?

No single approach is inherently better – paper and physical gold both have their own pros and cons. Paper gold provides efficient access to gold prices in convenient IRA-eligible securities, while physical metal effectively diversifies portfolios from financial assets. Given the risks of central bank currency debasement, it may be wise to hold a core position in physical coins and bars alongside some paper gold exposure for balance. Just be sure to work with reputable dealers, custodians, and storage facilities to maintain IRS compliance

Paper Gold vs Physical Gold IRA FAQs

What is paper gold?

Paper gold refers to securities like gold ETFs, mining stocks, and mutual funds that represent fractional ownership in gold stored by a custodian or trustee. You own shares, not the physical metal.

What are examples of paper gold?

Popular paper gold includes SPDR Gold Shares ETF (GLD), gold mining stocks like Newmont and Barrick Gold, and gold mutual funds from companies like Fidelity and Vanguard.

What are the benefits of paper gold IRAs?

Pros include liquidity, lower premiums over spot price, avoiding physical storage fees, simpler reporting, and diversified offerings beyond direct metal exposure.

What are the risks of owning paper gold?

Cons include no tangible asset ownership, reliance on trustees, unlimited supply, financial system risks, and vulnerability to potential government confiscation.

What types of physical gold can I hold in an IRA?

IRS-approved physical gold includes coins (American Gold Eagles, Canadian Maple Leafs), bars, and rounds with a minimum of .995 fineness from accredited mints and refineries.

Where is physical gold stored for IRAs?

Physical gold for IRAs must be stored at IRS-approved depositories, not at your home. Reputable precious metals IRA custodians coordinate storage.

What percentage of my IRA should I allocate to gold?

Most advisors recommend 5-20% of total IRA assets in gold, with higher allocations for conservative investors nearing retirement.

Gold IRA Investment Resources

  • Physical Gold vs. Paper Gold – Advantage Gold
  • Gold IRAs – Investopedia
  • Precious Metals IRA Storage – New Direction IRA
  • Beginner’s Guide to Gold IRAs – Motley Fool
  • Gold IRA Investment Options – FINRA
  • Tips for Allocating IRA Assets – Consumer Reports
  • Gold IRA Rollover Rules – IRS.gov

Discuss adding physical gold and other precious metals to your IRA for stability and diversification. Contact a full-service Gold IRA company today to learn more and get all your questions answered!