Guest Contributor Tracy Stein – CEO/President of Prime Pinnacle Investments

Congress created individual retirement accounts to give earners a tax-advantaged way to save for their retirements. The rules encourage account-holders to keep their money in their IRAs until at least age 59 1/2 by penalizing (with exceptions) withdrawals taken earlier than that. In a traditional IRA, you deduct your annual contributions (up to $6,500 if you’re 50 or older, $5,500 for younger individuals) and pay ordinary taxes only on the money you withdraw. A Roth IRA doesn’t provide a tax-deduction on contributions, but let’s you withdraw money tax-free if you follow the rules.

Subsequently, Congress passed a special type of individual retirement account known as Self-Directed IRA (SDIRA).  These accounts give individuals the opportunity to designate specific investments such as Real Estate, Notes, Precious Metals, Private Company Stock, and etc. Below is an in-depth review of Precious Metals held within a Self-Directed IRA.

Precious Metals in a Self-Directed IRA

Many people know about IRAs, but fewer realize that your IRA can buy precious metals, namely gold, silver, platinum, and palladium bullion, in the form of coins and bars. You can learn more on the uDirect IRA Services website HERE.  To qualify, the precious metal must meet certain criteria:

  • Gold: Coins but have 0.9999 fineness, with the exception of the Gold American Eagle, which is 0.9167 fine. Gold bars must be of 0.995 fineness and must be hallmarked by the NYMEX or COMEX futures exchanges.
  • Silver: Coins and bars must be of 0.999 fineness
  • Platinum, palladium: Coins and bar must be of 0.9995 fineness, sourced from an assayer/refiner approved by the NYMEX or COMEX futures exchanges.

These standards prohibit IRAs from holding some well-known coins, such as the South African Krugerrand and U.S. silver coins pre-1965, which are not fine enough.

Though there are many coins that pass IRA muster, the U.S. Eagle and the Canadian Maple Leaf are popular and easy to obtain. By design, coins in a Self-Directed IRA should be of bullion, not numismatic, quality.

Opening a Precious Metals IRA

You must open a self-directed IRA if you want to hold precious metals within it. A self-directed IRA is one in which you select the custodian or trustee to administer the account and hold the kinds of assets you choose. In this case, the custodian must be someone willing to buy, hold and sell precious metals on the IRA’s behalf. This usually means that the custodian will be a precious metals broker/dealer.

Once you’ve identified a precious metals IRA custodian, you’ll fill out a short application form, name a beneficiary, and make a cash contribution to the IRA. Money deposited in the IRA can be used to buy precious metals. You cannot contribute precious metals directly into your IRA, but you can transfer in another retirement account that holds precious metals.

When you want to buy precious metals coins or bars for your IRA, you contact the custodian broker/dealer and agree on the types and amounts of metals you wish to buy. The custodian will give you a price quote, and with your permission will deduct the money from the IRA to pay for the metal purchase.

The IRS, which oversees IRA rules, states that IRA-holders can’t take physical possession of their precious metal holdings – they must be safely kept by the custodian in a designated depositary. A bit of controversy has arisen in recent years about exceptions to this provision, in which some proponents claim that there are ways for IRA holders to take physical possession of their precious metal holdings. We suggest you seek a legal opinion before attempting this, because the IRS has never explicitly approved it. If your custodian holds your IRA’s precious metals, it will provide you with purchase receipts and tell you exactly where the bullion is deposited. You can expect to pay annual fees for storage and insurance.  As stated earlier, you may be charged a 10 percent penalty for withdrawals from your IRA before age 59 ½ unless you meet one of a handful of exceptions. IRA assets can gain value without triggering taxes. In a traditional IRA, you add the value of the withdrawals to your annual taxable earnings, which are taxed at your ordinary (not capital gains) rate. If you are retired when you take withdrawals, chances are you’ll be in a lower bracket, which reduces your tax liability. In a traditional IRA, you must be begin taking IRA distribution at age 70 ½. Roth IRAs withdrawals are tax-free (assuming you observe the holding-period and age rules) and are not mandatory at any age.

Reasons to Hold Precious Metals

Precious metals and other alternative assets diversify your overall investment risk because their prices might zig while stocks or bonds zag. In other words, precious metal prices are not closely correlated with those of other financial assets. This can help you get through periods of economic distress or panic, since it is often the case that stocks tumble and precious metals appreciate during such periods.

Another reason to hold precious metals is that they are thought to provide some insurance against the damage caused by inflation, as commodity prices generally rise during inflationary periods. For preppers and survivalists, gold is a negotiable medium of exchange even if paper money loses its value because of some catastrophic event.

On the down side, precious metals don’t pay dividends or interest, and they cost money to insure and store. Also, you purchase precious metals at the retail price but sell them at the wholesale price, which means prices must rise enough to cover the buy/sell spread.

Some folks buy precious-metal or mining-company exchange-traded funds instead of, or in addition to, the physical metals. Bear in mind that ETFs are imperfect substitutes for the physical metals, because their prices may not move in unison with those of the metals, especially in times of economic turmoil.

If you ever want to take possession of the bullion in your IRA, simply instruct your custodian to ship it to you or to a depositary of your choice. The spot (current) price of the bullion will be used to figure the taxable value of the withdrawal.

Owning precious metals in your Self-Directed IRA is a credible way to diversify your investments while receiving important tax-breaks, a win-win proposition.

Authored by Tracy Stein – CEO/President of Prime Pinnacle Investments

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