How (and Why) I Added Gold to my IRA.

Why invest in gold?

Photo by covilha

Gold is a well known hedge against inflation, uncertainty and a falling dollar. Since this pretty much sums up the environment we’ve been living in for the past decade, it’s easy to see why the value of gold has been on the rise. But that’s past performance and as we all know, past performance is no guarantee of future results. So is gold still a good investment?

I’m not going to pretend to know the answer to where gold is going in the future, but here are some things to consider. Quite frankly, they are no small part of why I was convinced to invest in gold in my IRA a few months back when the price dipped.

Budget busting entitlement programs.

Unfunded entitlement programs will force future income earners (you, your children and grandchildren) to keep less of their income after taxes, thereby shrinking available wealth.

U.S. funding for future promises lags by trillions:

“The government added $5.3 trillion in new financial obligations in 2010… that brings to a record $61.6 trillion the total of financial promises not paid for.”

The United States credit rating is in jeopardy.

Fitch may cut rating:

“Fitch said it would first place ratings on “watch negative” if lawmakers failed to enact an increase in the debt ceiling by August 2, when the Treasury will have run out of extraordinary measures to avoid a default.”

This could lead to the U. S. paying a higher interest rate on its debt, which means more tax revenue goes toward the interest payments of past over-spending, leaving less for current spending. The result, of course, is higher taxes, lower incomes and less wealth.

Inflation. Hyperinflation. Deflation.

Inflation and deflation have a big impact on the value of your wealth. After all, if you have $1,000 in the bank, but each dollar goes down in value (inflation) to .70 cents, then your $1,000 is now the same as $700 before inflation. Gold on the other hand, holds its value and can even rise in value during inflationary times which makes it the perfect place to store your wealth.

Some people think The Time to Prepare for Hyper-Inflation is BEFORE It EXPLODES , while others only see Hyperinflation Nonsense in Multiple Places

I happen to believe that an ounce of prevention can spare much pain and with gold trading in the $1,500 to $1,600 an ounce range it may seem like a costly ounce of prevention, but I’d still ratherbe prepared for stagflation or inflation or even deflation.

The trick isn’t so much in figuring out whether we’re going to experience inflation, hyperinflation, deflation or stagflation because any one of these situations will keep the demand for gold high, and keep the price high.

In the end, the one major risk to the price of gold is a sound fiscal policy in Washington D. C., a balanced budget and a robust economy.

I believe these factors are years away, and so is any big drop in the price of gold.

How to hold gold in an IRA or 401(k).

You basically have two choices when it comes to investing in gold in your IRA or 401(k):

1) Physical gold
2) Gold stock

I suppose you could add mining stocks and other precious metal related stocks, but that’s moving away from gold a bit too much, and I’m sure there are those who would say that even a gold index ETF is too far removed from gold. That’s a debate for another time..

Buying physical gold.

It’s possible to hold gold in IRAs (traditional and Roth), simplified employee pension (SEP) and simplified incentive match plans for employees (SIMPLE). Most IRA plans do not allow for this option though, so the first thing you’ll want to do is check with the custodian of your IRA and see if they allow holding physical gold in your account.

If your current IRA does not offer the option to buy gold coins and bullion, you’ll need to open a gold and silver IRA.

Why I chose paper.

My IRA does not offer gold coins and bullion, and I have chosen not to open a new gold and silver IRA. Instead, I invested in the PowerShares DB Precious Metals (DBP). Here’s why….

Fees

Gold and silver IRA’s have more fees than traditional IRA’s because of added regulatory overhead. The IRS stipulates that the gold must be stored at an approved depository. This depository is a separate entity from the IRA custodian, and the require a fee for storage.

The IRS also requires that Gold coins be 99.5% pure gold, and must be approved by the IRS and be legal tender to qualify.

This is all good, because you want some assurance you’re not dealing with some fly-by-night con-artist who’s going to sell you some gold plated junk.

But this does limit the field of qualified vendors. Here are some of the most popular qualified gold coin providers:

• American Gold Eagle
• Perth Mint Lunar series (from Australia)
• Kangaroo-Nuggets (from Australia)
• Canadian Gold Maple Leaf
• Austrian Philharmonics coins

The way this breaks down is that you end up paying for two services:

• The custodial service
• The depository service

The custodian (IRA administrator) usually charges a fixed annual fee or a percentage of the IRA’s value. The depository will also charge its own fee. Transaction fees may be applied to each contribution you make to your IRA.

Simplicity

I’m a big fan of keeping things as simple as possible, and to be honest I don’t really need another retirement account to keep track of.

I’m very happy with my Fidelity account. I can invest in Mutual funds with no transaction costs, and no load. I can invest in ETF’s like DBP for $7 a trade. It’s all good. I don’t need the hassle of another, specialized IRA for gold.

Liquidity and yield

Physical gold is great for holding value, and in times of uncertainty, appreciating in value. But gold pays no dividends. When times are stable or prosperous and relatively peaceful (think mid to late 1990′s) gold doesn’t do much. In fact, you’re lucky if you don’t lose value in that kind of environment.

Buying gold in a tax deferred account doesn’t get you the same tax advantage that holding interest generating assets does.

The big reason I chose paper is that it’s far more liquid than physical gold.

Gold bugs will tell you that the real deal is far better than paper, because if the excrement really hits the fan, your paper is worthless while physical gold still holds value.

I am of the opinion that in those kinds of scenarios, where the entire monetary system of the western world collapses, bullets will be the new currency, not a shiny metal with no real industrial use.

Why I chose PowerShares DB Precious Metals

I wanted an ETF or mutual fund because it would be easier (and quicker) to sell than physical gold if the price of gold starts to drop. I can also hold those shares in my existing IRA, which means less fees, and more flexibility.

In the end, I chose the PowerShares DB Precious metals ETF over the SPDR Gold Shares (GLD) ETF because I wanted more diversification. I was watching the price of silver rocket ever higher at a rate greater than gold, and wasn’t prepared to make a call on one or the other. I also wanted to get some exposure to other metals which are precious but have industrial uses, like platinum. So, DBP was a basket of indexes that track multiple precious metals, which should give a smoother ride than focuses purely on gold (or silver).

Related Posts:

• Rosland Capital – U. S. Gold Eagle Coins in Your IRA.
• To Buy or to Sell Gold?
• How to Survive (and Possibly Thrive during) Stagflation.
• Conversion to Roth IRA Still Possible for 2011.
• Are You on Track to Retire Comfortably?

Spring Cleaning My Finances and Looking Ahead.

“The open palm of desire
Wants everything
It wants everything
It wants soil as soft as summer
And the strength to push like spring”

-P. Simon, Further to Fly

Spring is here (FINALLY)!

It’s been a long, cold, lonely winter here in the northeast, but the buds are present and the tulips are pushing through. That means it’s spring cleaning time – time to get our (financial) houses in order!

Here’s how I’m cleaning out the financial cobwebs in my life this spring, and using that desire to push like spring into a summer realignment of my retirement planning.

Consolidating bank accounts

Life’s been a bit crazy for me these past 7 years. Here’s what happened to me that had an effect on my finances:

• I moved to a town 2 hours away and changed jobs
• I became a homeowner for the first time
• I had a child
• I had another child
• I moved to another new town (20 minutes away) and bought a new house, to make room for an expanding family
• I had another child (that makes 3!)
• I changed jobs again

That’s pretty much it, but I think that’s enough.

All of the above changes have left me in a situation of having abandoned bank accounts strewn to the four winds. As of just last week, I had 5 bank accounts at four different banks! That’s not counting any high yield, online savings accounts at ING and HSBC either. That’s just local banks and credit unions.

Remarkably, most had little money in them and no fees associated with keeping them open, even though they were dormant. When I cleaned out the two accounts at one bank that had been dormant for more than 2 years, I had just under $50 between the two of them. I probably did them a favor by saving them the money to mail me bank statements every month stating that nothing had changed from the previous month!

Of course, all of these accounts make my book keeping a hassle too. I had piles of useless papers to be keep, or discarded securely and so many accounts in Quicken that my eyes glazed over every time I started to reconcile my banking activity. Not the thing you want to happen when maintaining your finances.

In fact, I made a sort of informal pledge to myself at the beginning of the year to simplify and streamline my financial life as much as possible. It’s already paying off. I no longer feel overwhelmed by the number of accounts and financial detritus cluttering my Quicken records. As a result, I am up to date on my banking for the first time in over a year! Go, Me!

Refinancing

Another effect of all this moving around over the past 7 years is that while I got a decent interest rate on my mortgage in 2008, rates had gone even lower since then.

Rates got so low that I initiated a refinance back in January with a local credit union, which meant yet another bank account (see above), but it was worth it.

It took about two months of processing, but I went from 6% to 4.5% – saving over $200 a month!

I was initially reluctant to refinance, but the rates just became stupid low, and it’s a bi-weekly payment schedule with no pre-payment penalties so it just made sense. Besides, it wasn’t a cash-out refinance, so I wasn’t setting the clock back on owning the home free-and-clear.

Looking ahead

“…And the strength to push like spring”

Rollover to an IRA

That covers what I’ve done so far this year, but the final result of that list of financial changes is due to the job changing: I have a dormant 401(k) plan.

I’ve written about this before. The simple problem is that for the first time in my professional life, I work at a company that offers a terrible 401(k) plan and no company match. I love the job, and it’s in a very secure sector, so it was still the right move to make. But while all this dust was settling on the new job and baby activity, I had put my retirement contributions on hold until I figured out what I wanted to do with it all.

Well, I finally figured it out, and now I need to implement it. No more dawdling, dammit!

In the next few weeks, I will be rolling over my 401(k) to a simple IRA and start implementing my rollover plan detailed here.

Next steps.

After that, I figure it’s a good time to create a new budget to account for the savings from the refinance and the new contributions to my IRA as well as the hidden costs of living in this new house with another child. But more on that another day.

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• How to Save for Retirement When Your 401(k) Plan Sucks.
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• New Debit Card Fees Got You Angry? Switch to a Local Bank.
• How to Find the Best Place To Put Your Savings.

How to Save for Retirement When Your 401(k) Plan Sucks.

I switched jobs last year and along with a better position and bigger salary came a host of benefit changes. One of these changes was my 401(k) plan.

Regular readers know that I’ve been a steady contributor to my 401(k) at every job I’ve had since I started work professionally about 12 years ago.

Consistent contributions (even through employer match cut-backs and the recent Great Recession) an good plans have allowed me to watch my savings cross the 6-figure mark at the end of last year. But I realize now how lucky I have been to have had such good options in my 401(k) plans to date.

I realize this because I’ve hit a problem with my current plan, and I bet I’m not alone.

The problem

The problem is this: The investment options in my current employer 401k plan stink.

The plan is administered through a well known insurance company with a catchy jingle and fees that top the range of what is considered average for the funds.

I’m a big believer in low fees. Research has shown that most portfolios have a greater chance of outperforming their peers and the benchmarks averages when they invest in lower cost mutual funds or ETFs. It’s just common sense that when all other things are equal, the fund that charges less with leave you with more money in the end.

Of course, some funds out perform their peers and have higher fees. That’s OK too, but the key is that you’re getting a demonstrated track record of out performance for that extra cost.

My problem is that few of the funds in my 401(k) out perform their peers, but still have higher fees.

So, I have a few options and if you’re in the same situation, you do too!

Retirement plan options

The 3 basic retirement plans available to me in my career are:

• Traditional IRA
• Roth IRA
• Employer’s (lousy) 401(k) plan

Each one has benefits and drawbacks, but the Traditional IRA and Roth IRA are slightly different beasts given that the Roth contributions are after tax, while the tradition are pre tax.

I don’t want to roll over my 401(k) to a Roth, because I don’t want to pay the taxes on the conversion. I’m considering opening up a Roth in addition to pre-tax retirement plans in the future, but the Roth is not being considered by me at this time.

That leaves the Traditional IRA and the crappy 401(k).

Rolling over my 401(k) to a traditional IRA seemed liked a no brainer – I would be able to invest in a wider range of funds, stocks and bonds – but then I realized this startling discrepancy:

The contribution limit for a traditional IRA is only $5,000!

By contrast, the limit on a company sponsored 401(k) plan is a whopping $16,500!

With all the talk of financial reform in Washington D.C. over the past two years, and all the discussion about ending the 401(k) plan in favor of another social security style plan, I wish Congress would just make the contribution limit of the IRA as large as the 401(k)!

The total solution

Well, this left me with the choice of saving less in my IRA but paying less fees, or paying higher fees and potentially saving more by using my 401(k).

After much pondering, and poking around the Internet (to no avail), my solution is this…

I will rollover my old 401(k) to a new IRA. I will make the maximum contributions per year ($5,000) to that plan and any remainder I will contribute to the least offensive options in my 401(k).

For example, I’m used to contributing about $7,000 a year to retirement. I will be splitting up that amount like so:

• $5,000 to funds in my IRA
• $2,000 to funds in my 401(k)

I call this the “total solution” because it reminds me to consider the total holding in these two accounts as my portfolio – I have 1 unified portfolio instead of 2 portfolios.

The trick is determining which holding to keep in my 401(k) considering that an future increase in contributions will need to go into those funds. I’m tempted to hold my bond allocations in my 401(k). That way I will automatically increase my bond exposure over time as my contributions increase and I get closer to retirement age.

It’s not an ideal solution by far, but it’s the best I could come up with and I couldn’t find a better one. If you have any suggestions, I would gladly welcome them!

Related Posts:

• Are You on Track to Retire Comfortably?
• Conversion to Roth IRA Still Possible for 2011.
• Generation Y slacking on Savings?
• Spring Cleaning My Finances and Looking Ahead.
• Don’t Sabotage Your Retirement (Like Kris)!

Conversion to Roth IRA Still Possible for 2011.

While 2010 is already wrapped up, there are still financial considerations you need to make about the previous year in the near future when it comes to Roth IRAs. In 2010, the conversion rules have changed regarding converted Traditional IRA accounts and Roth IRAs. The government made it effective in 2010 that account holders could spread the income tax payments owed on the conversion over the following two years – 2011 and 2012.

This rule change would allow you to keep half of the income tax amount you owe still in the account, earning compound interest until the tax deadline for the following year. It is currently too late to take advantage of that tax incentive if you have not already made the conversion. But there is still good news for those wanting to convert to a Roth IRA in 2011.

Making the Change

In the past, there were strict limitations on who could make the conversion from a Traditional IRA account to a Roth IRA based on income. For now those laws have changed and are beneficial to anyone. Since you can still convert tax deductible investments as permitted by the government, making the switch in 2011 is a good investment strategy.

To make the conversion, you will have to pay the taxes you will owe later now but once the funds are converted, you will not have to pay income taxes on the amount you save ever again. For those who can afford to pay the income tax due out of there own funds rather than their investment funds, the conversion will be that much more beneficial.

When You Shouldn’t Switch

There are certain circumstances that may not prove to be beneficial to convert to a Roth IRA. First, if you know for sure that the rate of your income taxes will be lower in your retirement years than where they stand today, making the conversion does not really benefit you financially.

Secondly, if you don’t have the cash necessary to pay the income taxes you will owe from making the conversion, it is not wise to use your investment funds as a payment source as you will be required to pay a penalty on those funds as well as the tax.

Retirement Power

The most beneficial aspect of converting from a Traditional IRA account to a Roth IRA in 2011 is the investment power you are using towards your retirement years. Retiring with tax-free funds available later in life is a strategic move anyone can accomplish. For those who do not qualify for a Roth IRA account because of the income limitations, consider opening a Traditional IRA account and converting to a Roth IRA in the future.

Choosing your investments wisely for an easier, more comfortable retirement is part of your overall good financial health. If you have not taking the steps to plan for a financially healthy retirement, it is never too late to start investing, though it is always best to being when you are young. Not all financial strategies meet the needs of every future retiree but it is worth your time and money to explore what works for you. The Roth IRA account definitely has many advantages and it may be the ideal starting point for your retirement investment planning.

Related Posts:

• Don’t Sabotage Your Retirement (Like Kris)!
• How to Save for Retirement When Your 401(k) Plan Sucks.
• How To Start Saving For Retirement At 40.
• Rosland Capital – U. S. Gold Eagle Coins in Your IRA.
• Are You on Track to Retire Comfortably?