Gold IRA vs Bonds

Bonds and gold are both often described as "steady" holdings, but they work very differently. This page explains how, using regulator sources. It is part of our guide to Gold IRA vs Other Retirement Investments. It is general education. It does not say which is better, predict prices or tell you what to buy.

What is the basic difference between a bond and gold?

A bond is a promise. Investor.gov says: "A bond is a debt security, like an IOU." The issuer promises "to pay you a specified rate of interest during the life of the bond and to repay the principal" (Investor.gov bonds page).

Physical gold in an IRA is metal, not a promise. The IRS says an IRA may hold "gold, silver, platinum, or palladium bullion of a certain fineness" if "a bank or approved non-bank trustee keeps physical possession of it" (IRS collectibles page). Metal does not pay interest in the way a bond does. What you get back depends on the price when you sell.

How do income and payments compare?

Bonds are built to pay income. Investor.gov says: "Typically, bonds pay interest on a regular schedule, such as every six months." It adds: "If the bonds are held to maturity, bondholders get back the entire principal" (Investor.gov). Those promises are only as good as the issuer. Investor.gov describes Treasury securities as "backed by the full faith and credit of the U.S. government" (Treasury securities glossary). Company bonds do not have that backing.

Gold's return comes from its price. We did not find a government source on whether metal produces income, so we make no general claim about it. In our own comparisons, as on Gold IRA vs Stocks and Index Funds, we count gold's return as price change only. If you are looking at an IRA that holds metal, ask the custodian in writing what income, fees or charges apply.

How do interest rates affect each one?

Bond prices react to interest rates. An SEC bulletin states: "When market interest rates rise, prices of fixed-rate bonds fall." It also says: "bonds with longer maturities generally have higher interest rate risk than similar bonds with shorter maturities" (Investor.gov bulletin). FINRA says: "When interest rates rise, bond prices tend to fall, and vice versa" (FINRA bonds page).

In plain terms, if you hold a bond and new bonds start paying more, yours is worth less to a buyer. Investor.gov says: "To sell an older bond with a lower interest rate, you might have to sell it at a discount." If you hold the bond until it matures, the same page says bondholders get the entire principal back, so this risk matters most to people who sell early.

We did not open a government source on how interest rates affect gold prices, so we do not claim a link. Our guide to what drives gold prices covers the factors we have sourced.

How do they compare on inflation?

Inflation is a named risk for bonds. FINRA describes it as "the risk that the yield on a bond will not keep pace with purchasing power." Investor.gov says: "Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest."

Some Treasury securities are designed to adjust for inflation. This page does not explain how, because we could not open the Treasury's own pages to confirm the details. See Gold IRA vs Treasury Securities, TIPS and I Bonds.

For gold, we make no claim that it keeps pace with inflation. The CFTC cautions that "precious metals prices can fluctuate just like other investments" (CFTC advisory). How gold has done in past periods of inflation depends on the dates chosen and is not a promise about the future.

How do price swings and credit risk compare?

Bonds carry issuer risk; physical metal has no issuer. Investor.gov says: "The issuer may fail to timely make interest or principal payments and thus default on its bonds." FINRA calls credit risk "the risk that a bond issuer will fail to make interest payments or to pay back your principal when your bond matures."

Another bond risk is a call, which Investor.gov describes as "the possibility that a bond issuer retires a bond before its maturity date."

Gold has no issuer promising payment, but its price can move a lot. We did not calculate bond price swings for this page, so we do not compare the size of swings. For gold's own history, see Gold IRA price volatility.

What do they cost to hold in an IRA?

Gold. The CFTC explains: "A dealer will always sell metal above the spot price and buy it back below the spot price." It adds: "Each dealer sets its own spread, so it pays to shop around." The metal also needs a custodian and storage, which carry fees. See dealer premiums and markups and storage fees.

Bonds. Costs depend on how you hold them, for example through a fund (which charges an expense ratio) or as individual bonds (which have trading costs). We did not research current bond costs, so we give no figures.

How are they taxed inside an IRA?

The IRS describes IRA withdrawals by account type. In Publication 590-B: "Distributions from a traditional IRA are taxed as ordinary income," and "Distributions from a Roth IRA aren't taxed as long as you meet certain criteria" (IRS Publication 590-B). The publication adds that if you made nondeductible contributions, not all of a distribution is taxable. How these rules apply to your situation is a question for a tax professional.

What clearly differs is the rule on what a gold IRA may hold. An IRA's purchase of a collectible "is treated as an immediate distribution from such account in an amount equal to the cost to the plan of such collectible" (IRS). Bullion that meets the fineness and trustee conditions is an exception. See our collectibles rule guide.

What mistakes do people make with this comparison?

• Treating all bonds alike. A short-term Treasury and a long-term company bond carry different risks.
• Assuming a bond is safe because it pays interest. Prices can fall if you sell early, and issuers can default.
• Assuming gold is safe because it has no issuer. Its price can fall, and costs can be high.
• Judging either one by a single stretch of past results.
• Putting too much in one place. See allocation and concentration risk.

What related questions should you look at?

• Gold IRA vs Stocks and Index Funds for the stock side.
• Gold IRA vs Treasury Securities, TIPS and I Bonds for government securities.
• A fee-only planner with no ties to a dealer can help you weigh these against your own situation. This page cannot.