UNDERSTANDING THE BASIC STRUCTURE OF AN INVESTMENT RETIREMENT ACCOUNT
Of late there has been a tendency to use some slightly exotic structured investment instruments, and often people are so taken in by the sound of the facility that they do not try to understand as to what the noise is all about. Here we are having a look at the basic structure of an Investment Retirement Account (IRA) and more specifically what is meant as the Gold IRA.
What is the Investment Retirement Account?
The best equivalent of the IRA would be the Exchange Traded Funds which essentially gets to invest in underlying instruments which would then be used as secure collateral. A feature of the ETF is that it is more of a professionally managed product that tries to do away with the actual handling of the underlying product, like gold or any one of the commodity.
What the IRA does is to use the actual physical stock of things like gold and other precious metal to get the most benefits from its value appreciation with time. But the most important feature which makes this form of instrument attractive is the tax-free status or at least with certain tax advantages. Thus the investor who gets to start a Gold IRA would only pay taxes on the profits of trade at the time of cashing the holding.
There is, of course, the gold ETFs that do provide for a value of traded gold but this is more of a derivative instrument and never is actual stocks of gold kept in the vaults. But the concept of trying to cash in on the increasing value of the gold is what drives the IRA product.
Limitations of a Gold IRA
Despite the best efforts to keep control and regulate the functioning of the capital markets, there is bound to be those individuals who are always looking to pull a fast one. This is no different with IRA holdings as well. Often there is no way of verifying if the stock of gold is indeed belonging to a particular individual. Thus the unscrupulous operator could show the same gold stock as belonging to one person and to another person at the same time.
Secondly, it is strictly against the regulatory norms to invest in any form of derivative instruments. This is in essence keeping with the very structure of the investment account but often misses out on some of the more powerful means of nullifying inflation and even taking advantage of the temporary price fluctuations.
Lastly, it must be noted that people investing in IRA instruments would be counting on price appreciations of the product over time. In the case of Gold IRA, there has never been an instance of the price falling over a long period of time say ten years or so. But it would be prudent to factor in possible changes in the future that could come about due to the nature of world markets and commerce of the times.