It has been almost 50 years since the establishment of IRAs. Yet most retirement account holders are still not aware that they can buy real estate, precious metals, and other alternative assets with an IRA (individual retirement account).
By using a self-directed IRA, an IRA holder can make traditional as well as alternative asset investments. Such investments include:
- Real estate
- Tax liens
- Precious metals
- Private businesses
In fact, the Internal Revenue Code only describes two assets you cannot invest in: collectibles and the prohibited transactions under IRS 4975. Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions, but in general, the self-directed IRA can make just about any investment.
Precious Metals – Investments You Can and Cannot Make
According to Internal Revenue Code Section 408, an IRA can invest in:
- One, one-half, one-quarter, or one-tenth ounce U.S. gold coins
- One-ounce silver coins minted by the Treasury Department
- Certain platinum coins and certain gold, silver, palladium, and platinum bullion of a minimum fineness of 0.999
Internal Revenue Code Section 408(m) lists the types of precious metals and coins that participants can invest in using IRA funds.
One, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs). To be eligible as IRA investments, other gold coins must be at least 99.5% pure and be legal tender coins.
- One-ounce silver coins minted by the Treasury Department
- Any coin issued under the laws of any state
- A platinum coin described in 31 USCS 5112(k)
- Gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a)
The Technical and Miscellaneous Revenue Act of 1988 allowed IRA owners to invest their IRA assets in certain platinum coins as well as certain gold, silver, platinum, or palladium bullion. The stipulate was that the precious metals must be held in the physical possession of the financial organization or depository.
With respect to state minted coins, the coins must be held in the possession of a third-party other than the IRA holder. The Technical and Miscellaneous Revenue Act of 1988 does not state that the third-party holding the state minted coins must be a bank, but it cannot be the IRA holder in possession of the coins.
Palladium Emerging as a Hot Investment
Unlike gold and silver, palladium has been relatively ignored by self-directed IRA investors over the years. However, over the last year or so investors are starting to look more positively at palladium as an appropriate investment for their retirement account.
On March 19, 2019, palladium rose to an all-time high as the supply outlook tightened further, while gold dipped ahead of an interest rate decision in the United States.
Spot palladium hit a record $1,608 an ounce earlier before easing back to trade 0.29 percent lower at $1,591.85. Because of the tight supply in the palladium market, along with Russia’s threat of potentially cutting supply, the Palladium market has heated up over the last several months. However, the main reason the price of palladium has increased over the years is because its primary use is as an emissions reducing catalyst in automobiles and gasoline engines.
Common Uses of Palladium
In general, about 80 percent of palladium ends up in the exhaust systems in cars, where it helps turn toxic pollutants into less-harmful carbon dioxide and water vapor. It is also used in electronics, dentistry and jewelry. The metal is mined primarily in Russia and South Africa.
How to Hold Palladium in a Retirement Account
Internal Revenue Code Section 408(m) identifies what types of coins and precious metals (bullion) a Self-Directed IRA can purchase. Section 408(m) also states that bullion must be held in the physical possession of a trustee described under subsection (a).
The IRS approves of the following bullion:
One can define bullion as:
- Gold bars
- Silver bars
- Other precious metals bars
Bullion also refers to a metal piece shaped in the form of a coin or a bar and plated with a precious metal. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value, such as money. Examples include gold-plated bars and coins.
According to Internal Revenue Code Section 408(a), a trustee can be
- A bank (as defined in subsection (n))
- Person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
Internal Revenue Code Section 408(n) defines a bank as any bank or an insured credit union (within the meaning of paragraph (6) or (7) of section 101 of the Federal Credit Union Act).
Section 581 defines a bank as a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State.
The Meaning of “Physical Possession”
According to IRC Section 408(m), gold, silver or palladium bullion must be held in the physical possession of a U.S. Trustee. This is otherwise known as a U.S. bank or financial institution.
The safest approach to holding IRS approved bullion is with an approved depository. However, many retirement investors have interest in potentially holding metals in a safe deposit box at a U.S. bank. Such metals include gold, silver and palladium bullion. It will be in the name of the Self-Directed IRA LLC, and not in the possession of the IRA holder, because they are being held in the safe deposit box of the bank. However, an argument can be made that the safe deposit box is in control of the IRA holder, since he or she has the keys for the box.
However, the Internal Revenue Code under Section 408 clearly states “physical possession” and not “constructive control”. From a legal standpoint, possession is not defined to represent control. This means that one can be in possession of an item but not in control or ownership of that item. Hence, many tax practitioners take the position that holding precious metals in a safe deposit box in the name of the Self-Directed IRA LLC satisfies the “physical possession” requirement under Internal Revenue Code Section 408(m).
The IRS does not offer any clear guidance on this issue, but what is clear, unlike IRS approved coins, is that precious metals should not be stored in the home or possession of the IRA holder or any person that does not satisfy the definition of a trustee pursuant to the Internal Revenue Code.