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:
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.
Because of advertising by precious metals dealers, more people are becoming aware that they can invest in precious metals with retirement funds. In fact, as an IRA investor, you can purchase some of the most popular metals, such gold, silver, and palladium.
Individual retirement accounts can even hold certain coins. The IRC has a list of coins and precious metals that you can purchase, because the IRC doesn’t consider them to be “collectibles.” You can find this list in IRC Section 408(m). Section (m) applies to both IRAs and 401(k) plans.
Related: Most Popular Alternative Investments
Investing in Precious Metals
Gold, palladium, and silver are always a good investment, especially when being held for retirement. With a Self-Directed IRA, investors can devote their funds to many different alternative assets that are not as affected by stock market fluctuations and other volatility.
Alternative assets are investments outside of traditional investments. Common examples of alternative investments include real estate, private equity, precious metals, such as gold, and venture capital investments. Whereas traditional investments include stocks, bonds and bank CDs. Alternative investments are more complex than traditional investments, which is why they appear to be better suited for “accredited” or “qualified” investors.
Learn More: Gold IRA Rollover
Is Gold a Good Investment?
Recently, there has been much discussion over the impact of alternative investments with the recent Stock Market downturn. The price of Gold and other precious metals have remained high over the past two years. As the future of gold appears more and more favorable, is now the time to buy?
IG Index contributor and author of the Brookville Capital Newsletter, Simon Popple reiterates what every investor should know: investing is all about timing.
“For the past few years there have been many other, more traditional investments that have been doing very well,” Popple explains. “But all these markets are either at or close to all-time highs, so people are being forced to look elsewhere.”
Gold is an inflation hedge and is a more attractive investment during times of inflation. As the cost of the U.S. dollar declines, the value of gold rises. With the current global financial market, the latent inflationary fears have rebounded and as a result, more individuals are turning to gold investments.
Certainty in an Uncertain World
“In the current market, you have a lot to worry about,” says Popple. “For many, physical gold provides a degree of certainty in an uncertain world.”
The importance of retirement portfolio diversification has increased with the devalue of currencies and the concerns of debt and inflation.
Self-Directed retirement plans, such as the Self-Directed IRA, are perfect retirement vehicles for retirement diversification. For example, retirement investors have the ability to purchase traditional assets, such as stocks and bonds – but they can also purchase alternative assets, like gold to mitigate risk of investments moving in the same direction.
“Bonds and the U.S. dollar used to be viewed as the go-to assets in weak markets,” says Popple. “But with many bonds offering little or negative yield, investing where you’re going to lose money does not make a huge amount of sense.”
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.
Related: Beginners Guide to Alternative Investments with Retirement Funds
Buying Silver with Retirement Funds
Silver prices have climbed higher in the last few weeks than they have been in years, lifted by factors such as soaring investor demand for precious metals. In this WSJ article, we learn that silver has climbed a whopping 68% since the middle of March. Almost all asset classes tanked at the start of this crisis. However, silver has made a remarkable improvement. Investors are encouraged by the steps governments and central banks have taken to strengthen an economy decimated by COVID-19.
In addition, silver prices have also benefited from the reopening of factories in the U.S., China and elsewhere. Silver has industrial applications, medical purposes, and use in consumer electronics, among other uses. From jewelry and table settings, to dentistry and more, there are common uses for silver throughout the world. Although many people flock to gold, silver should not be overlooked!
What Type of Precious Metals and Coins are IRS Approved?
Internal Revenue Code Section 408(m) lists the type of precious metals and coins that you can purchase with your IRA funds. These include:
- Any coin that is:
- Any coin issued under the laws of any state
- Any gold, silver, platinum or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market requires for metals which may be delivered in satisfaction of a regulated futures contract. This is the case if such bullion is in the physical possession of a trustee under subsection (a) of this section.
The IRS approves American Eagle and U.S. state mined coins of a certain finesse. The Technical and Miscellaneous Revenue Act of 1988 allows the purchase of state minted coins.
The Advantage of a Precious Metals IRA
Many IRA investors avoid precious metals investments due to lack of knowledge. But a precious metals IRA is a good way to increase your wealth as the value of the dollar decreases. All it takes to start investing in this asset is due diligence. Make sure you do your research on all investments.
The most popular precious metals are, as you may know, gold and silver. However, all precious metals are in great demand and that doesn’t appear to be changing. Take a look at additional benefits this alternative asset has to offer:
- Easily convert precious metals, like gold and silver, into cash.
- During inflation, precious metals can act as a hedge.
- Because it’s an alternative asset, precious metals help to diversify your retirement account portfolio.
- Precious metals, such as gold and silver, are accepted all over the world. There are a few investments that are accepted across the globe.
While purchasing precious metals in a retirement account has multiple benefits, it is important that you work the right Self-Directed Custodian. Many Self-Directed IRA Custodians allow precious metals to be held in retirement accounts. However, many also charge account valuation fees that can quickly eliminate your profits. Unlike other IRA Custodians, IRA Financial charges a flat annual account fee.
Rules for Holding Precious Metals in an IRA
There are certain IRC rules to be aware of before purchasing, holding and selling precious metals. Some of the rules are as follows:
- 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).
- An IRA holder can hold coins in a safe deposit box. It has to be at a U.S. bank and in the name of the Self-Directed IRA LLC, but it is permittable.
- The LLC manager (in the name of the LLC) can purchase coins. However, if you have a Solo 401(k), the trustee will have to purchase the coins for the benefit of the plan. The coins should be held in a depository, as this is the safest approach.
Learn More: Types of Self-Directed IRAs
Holding Precious Metals in a Self-Directed IRA
A number of IRA investors are not aware that they can use their retirement funds to invest in precious metals. This is because traditional financial institutions don’t tell their clients about alternative asset investments. They want IRA holders to invest in their products, such as stocks, bonds and mutual funds. In other words, traditional investments.
However, you can purchase, hold and sell precious metals with a Self-Directed Precious Metals IRA. Additionally, you can make withdrawals of bullion to physically possess this asset.
You can use an IRA to invest in precious metals in a few simple steps. You must first establish a Self-Directed individual retirement account.
1. Establish Your Self-Directed IRA or Solo 401(k)
Take control over your investment decisions with a Self-Directed IRA. If you’re self-employed or a small business owner with no full-time employees, you can establish a precious metals IRA with a Solo 401(k) plan. With IRA Financial, we will assign you with a retirement tax professional to establish your account at a new FDIC and IRS approved custodian.
Choose a self-directed IRA custodian, such as IRA Financial Trust for a cost-effective, easy solution.
2. Fund Your Self-Directed IRA
Now it’s time to fund your SDIRA. Your new custodian will request the transfer of IRA assets from your current IRA custodian. If done correctly, the transfer will be tax-free and penalty-free. Typical, retirement funds move from one account to another by way of a transfer or rollover.
3. Invest in Precious Metals
With the funds now in your newly established Self-Directed IRA, you are the manager of the IRA LLC and you’re ready to all IRS approved precious metals tax and penalty-free.
Related: Am I eligible for a Solo 401(k)?
The Final Verdict on Precious Metals in an IRA
IRA Financial Group suggests that all clients seeking to purchase IRS approved coins or precious metals/bullion with their retirement account hold them in the physical possession of a trustee, such as a depository.
For Self-Directed IRA LLC or self-directed Solo 401(k) plan clients seeking to hold IRS approved coins and precious metals at a bank safe deposit box, we believe that this position has some risk. There is not enough IRS guidance on this matter.
In the case of a Self-Directed IRA, if the bank where the safe deposit box is not the trustee of the IRA that purchased the metals or coins, you can make the argument that the metals or coins don’t satisfy the physical possession definition in IRC section 408 since the bank cannot serve as the IRA trustee.
The Final Verdict on the Solo 401(k) Rules
Whereas, in the case of a Solo 401(k) plan, the arguments has less strength. This is because an individual(s) associating with the adopting employer will likely serve as the plan trustee and not the bank holding the plan’s assets. As a result, there is no trustee relationship between the bank and the plan, but it still satisfies the definition of a trustee under IRC 408.
Additionally, IRC Section 408(m)(3)(B) uses the term “a” trustee” and not the “the” trustee” offering some support for the position that the metals/bullion can be held at any trustee and not just the trustee of the IRA holding the metals. This makes sense since a depository is technically a trustee pursuant to IRC 408(a). However, it may not be the actual trustee of the IRA that owns the coins or bullion/precious metals.
Nevertheless, the safest approach to holding IRS approved coins or bullion/precious metals is at a trustee. One thing that is clear, you should never hold IRS approved coins or precious metals/bullion personally.
Work with a Professional
The rules surrounding the ownership and possession of IRS precious metals or coins are complex. Therefore, it is crucial that you work with a firm, such as IRA Financial Group, to help you navigate the IRS rules.