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What is the point of opening an IRA at a young age, when you can use that money to buy assets that have intrinsic value such as Silver or Gold? Especially opening an IRA in such an unstable American economy, when you cannot foresee what the next decade or next year can potentially bring.

Is it even possible to withdraw money from an IRA before retirement, without penalties? I want to understand why allowing your money to soak in an IRA is a good place for it until you retire.

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  • If you feel strongly about commodities, you could buy silver or gold in your IRA. (Or at least securities that invest in those metals and so provide the same risk/return.) "Gold vs IRA" seems like a non-issue.
    – bstpierre
    Mar 3, 2011 at 2:45

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IRAs have huge tax-advantages. You'll pay taxes when you liquidate gold and silver. While volatile, "the stock market has never produced a loss during any rolling 15-year period (1926-2009)" [PDF]. This is perhaps the most convincing article for retirement accounts over at I Will Teach You To Be Rich.

An IRA is just a container for your money and you may invest the money however you like (cash, stocks, funds, etc). A typical investment is the purchase of stocks, bonds, and/or funds containing either or both. Stocks may pay dividends and bonds pay yields. Transactions of these things trigger capital gains (or losses). This happens if you sell or if the fund manager sells pieces of the fund to buy something in its place (i.e. transactions happen without your decision and high turnover can result in huge capital gains). In a taxable account you will pay taxes on dividends and capital gains. In an IRA you don't ever pay taxes on dividends and capital gains. Over the life of the IRA (30+ years) this can be a huge ton of savings.

A traditional IRA is funded with pre-tax money and you only pay tax on the withdrawal. Therefore you get more money upfront to invest and more money compounds into greater amounts faster. A Roth IRA you fund with after-tax dollars, but your withdrawals are tax free. Traditional versus Roth comparison calculator. Here are a bunch more IRA and 401k calculators. Take a look at the IRA tax savings for various amounts compared to the same money in a taxable account.

Compounding over time will make you rich and there's your reason for starting young. Increases in the value of gold and silver will never touch compounded gains.

So tax savings are a huge reason to stash your money in an IRA. You trade liquidity (having to wait until age 59.5) for a heck of a lot more money. Though isn't it nice to be assured that you will have money when you retire? If you aren't going to earn it then, you'll have to earn it now. If you are going to earn it now, you may as well put it in a place that earns you even more.

A traditional IRA has penalties for withdrawing before retirement age. With a Roth you can withdraw the principal at anytime without penalty as long as the account has been open 5 years. A traditional IRA requires you take out a certain amount once you reach retirement. A Roth doesn't, which means you can leave money in the account to grow even more. A Roth can be passed on to a spouse after death, and after the spouse's death onto another beneficiary. more on IRA Required Minimum Distributions.

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    @JCotton, your numbers and statements are misleading. $10K at 8% for 30 years gives $109,357, but you still have to pay tax on it when you withdraw. If you were to pay the same 25% tax rate, all you get out of the IRA is $82,018, which is exactly the same as you would have gotten without the IRA. "Compounding over time will make you rich" is true, but has nothing to do with whether you pay the taxes up front or at the end, since both are identical. The only way an IRA helps you is if your tax rate is lower when you withdraw than when you put the money in.
    – Saeed
    Mar 3, 2011 at 2:19
  • @Saeed - what about the argument that paying taxes on the earnings over those 30 years will reduce your returns?
    – bstpierre
    Mar 3, 2011 at 2:41
  • @bstpierre, assuming you're follow a strategy of investing for the long term and not generating a lot of churn, you don't actually pay taxes on earnings along the way. However, you are correct that if you have a lot of churn in your investments (depending on the type of investment) you could end up paying capital gains taxes along the way and reduce your working capital. Still, the numbers and statements provided in this answer are incorrect.
    – Saeed
    Mar 3, 2011 at 2:51
  • Saeed is correct. The advantage is that you are expected to be in the lower tax brackets when you start withdrawing money.
    – Vitalik
    Mar 3, 2011 at 4:35
  • @Saeed thanks for that. The numbers were definitely lacking and wrong as they were. I didn't really mention tax brackets either. I just removed the number attempt for a clearer, shorter post. Running numbers is worth while but there should be more for comparison. That's what the calculator links are for anyway.
    – JCotton
    Mar 3, 2011 at 6:52
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Regarding investing in gold vs. stocks, I don't think I could say it better than Warren Buffett:

You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

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Even Gold lost 1/2 of it's value between 1980 and 2000. You would not have fared well if you retired during that period heavily invested in Gold.

http://www.usagold.com/reference/prices/history.html

You said yourself that one can not foresee what the future will bring. At least IRA's force you to into dollar cost averaging, whereas if your money was outside of a retirement account, you might be tempted to speculate.

-Ralph Winters

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    They don't force you into dollar cost averaging. I have a couple of Traditional IRAs I rolled over from old jobs and they are just sitting there. +1 though
    – MrChrister
    Mar 2, 2011 at 20:35
  • Gold and silver have value, but they just sit there. A factory can create value. Even companies that don't own the factory themselves can create value. (And if you can't see how, try buying a lump of silicon and turning it into an iPad yourself.)
    – user296
    Mar 2, 2011 at 21:07
  • Yes...I said an asset that has an intrinsic value. Gold will always be Gold and Silver will always be Silver. If the economy collapses, is better to own $100,000 of Apple or $100,000 in physical Gold?
    – Michael
    Mar 3, 2011 at 1:07
  • Words mean things. Intrinsic value does not mean that gold by virtue of being gold will have a consistent value. It does mean that gold inherently has a higher relative value than iron. From 1982-2000, gold prices averaged around $400/oz. An alternate hypothetical question would be: If the economy doesn't collapse, is it better to own $100,000 of Proctor and Gamble or $25,000 of physical gold? Mar 3, 2011 at 13:38
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You bring up a valid concern. IRAs are good retirement instruments as long as the rules don't change. History has shown that governments can change the rules regarding retirement accounts.

As long as you have some of your retirement assets outside of an IRA I think IRAs are good ways to save for retirement.

It's not possible to withdraw the money before retirement without penalty.

Also, you will be penalized if you do not withdraw enough when you do retire.

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Yes, it's possible to withdraw money without penalty but you have to do it in a special way. For example you have to withdraw the same amount every year until you retire: Tapping Your IRA Penalty-Free

as for unstable economy - you can trade many instruments in your IRA. you can do bonds, mutual funds, stocks, ETFs or just keep it in cash. Some do well in bad economy.

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As I stated in my comment on @JCotton's answer, the only way you benefit by putting your money in an IRA or other tax-deferred vehicle is if you expect to have a lower tax rate when you withdraw than when you put the money in. If you look at @JCotton's numbers and remember to pay taxes when you withdraw the money in 30 years, you will see that both situations - paying taxes now or 30 years from now - give you the exact same dollar amount if the tax rates are the same at both points in time. So if you put money in an IRA, you're betting on the fact that the government will not substantially raise interest rates by then, and/or that you will be in a lower tax bracket.

To me, the only valid reasons to invest in an IRA or 401K are the following:

  • You don't trust yourself to not spend all of that money, so locking it away in a retirement account is a good move.
  • Your retirement accounts are sometimes shielded from creditors if you ever have to file bankruptcy.
  • You can often get employer matching when investing in a 401K. If that is the case, you should absolutely put in at least the amount that the employer will match and get that free money.
  • You use an investment strategy that generates a lot of turnover in your positions, and doing that in an IRA shields you from having to pay capital gains taxes on money that is still actively invested.

However, you should also consider the major downside that the money is locked away and, at best, inconvenient to access when you need it. At worst, you have to pay taxes and penalties if you ever withdraw that money. If you are a financially responsible person, I think you're generally better off keeping your money outside of an IRA or 401K, with the exception of making sure to get all of your employer's matching contributions.

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  • If you invest the same amount of money (in both cases, after-tax money) in a taxable account versus a Roth IRA, the Roth wins because you don't pay taxes at withdrawal. I agree with meeting the 401k employer match, then max out Roth contributions, then go with a taxable account. Also, you never pay taxes on the dividends and capital gains inside a retirement account.
    – JCotton
    Mar 3, 2011 at 7:02
  • The option of Traditional and Roth IRAs makes the first part of your answer incorrect. Mar 3, 2011 at 13:21
  • Your argument has merit, but you are leaving out some points and perhaps overstating the case. (1) Capital gains aren't the only tax you pay along the way -- don't forget interest and dividends. (2) You are unlikely to completely avoid capital gains -- assume rebalancing/allocation adjustments over time. (3) If you're at the edge of a bracket, money put in a 401k can be used to avoid a higher marginal rate (e.g. avoid paying 28% on those contributions ). It's a tradeoff between a bit more in the account versus extra liquidity before retirement.
    – bstpierre
    Mar 3, 2011 at 14:16
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Your are mixing multiple questions with assertions which may or may not be true. So I'll take a stab at this, comment if it doesn't make sense to you.

To answer the question in the title, you invest in an IRA because you want to save money to allow you to retire. The government provides you with tax incentives that make an IRA an excellent vehicle to do this. The rules regarding IRA tax treatment provide disincentives, through tax penalties, for withdrawing money before retirement. This topic is covered dozens of times, so search around for more detail.

Regarding your desire to invest in items with high "intrinsic" value, I would argue that gold and silver are not good vehicles for doing this. Intrinsic value doesn't mean what you want it to mean in this context -- gold and silver are commodities, whose prices fluctuate dramatically.

If you want to grow money for retirement over a long period, of time, you should be invested in diversified collection of investments, and precious metals should be a relatively small part of your portfolio.

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