Most people who have built up any kind of financial assets and savings have, at one point or another, come across the term IRA, or individual retirement account. This tool represents the modern ability, and legal tax shelter, for average consumers to save extra funds for retirement not associated with an employment retirement account. As allowed by the U.S. federal government and the Internal Revenue Service, IRAs come in two forms: traditional and Roth.
Up until recently, both types of IRAs generally allowed savers to invest their retirement funds into bank-type investments such as cash savings or CDs, as well as public market investments such as treasuries, stocks and mutual funds. The idea of allowing IRA funds to hold precious metals or property was originally not allowed. The reason for the restrictions had to do with the tax laws that apply. With public investing and bank investing, everything is recorded on paper in terms of transactions. This makes it easy for the IRS to see where retirement funds are placed, how much gain has been generated, what has been paid out and eventually what has been distributed from the IRA that may be taxable. Remember; while Roth IRA accounts use post-tax funds and are generally tax-free, traditional IRAs involve tax-deferred funds, which still need to be charged for income tax when finally distributed to the holder. It’s a bit hard to do all this paperwork when the item being invested in may be an actual coin or bar of metal.
However, because of the popularity of precious metal investing as well as the ability to now hold precious metal investment positions on paper while an administrator actually retains the metal itself, IRA investing in gold, palladium, platinum and silver are all quite possible today. This in turn provides an additional option for investors to hedge their portfolios. Below are a few ways the process works:
Exchange-Traded Funds
The easiest method for precious metal investing via an IRA involves exchange-traded funds. If an IRA account is administered with access to the regular stock market, then the accountholder can pretty much take positions similar to owning public company stock. Exchange-traded funds, or ETFs, are similar to mutual funds in operation. The accountholder uses cash to purchase shares of ownership in the ETF similar to buying stock. The ETF administrator takes the cash, acknowledge a share ownership of the portfolio the ETF represents, and pays dividends accordingly where they apply. The ETF is then either actively or passively managed to track specific behavior in the public market. In the case of precious metal ETFs, the funds are passively managed to track and move along with the general spot price of a given precious metal. So, for gold, a major ETF would be SPDRs Gold Shares ETF (ticker symbol: GLD) which approximately tracks the 1/10 spot price of an ounce of gold.
It’s important to understand, however, that with ETFs the IRA accountholder doesn’t actually own any metal. Instead, he gets a paper position and the actual gold or metal is held by a third party that uses the fund cash to retain a gold position in the market. This sort of situation makes some investors balk, but in reality the process is heavily regulated by the Securities Exchange Commission and has not had issues. Thousands of ETFs are now available in the public trading markets, including a number specific to metals.
Metal-Specific IRAs
Unlike ETFs and regular IRA accounts, precious metal IRAs are a separate account entirely. They generally don’t mix with other funds and assets such as stocks or mutual funds. Because the requirements an administrator must meet to operate in IRA plan under federal tax law, the separate approach is far easier to manage for all involved. As a result, a metal-specific IRA often exists within the business operation of an established precious metal dealer versus a generic financial institution or brokerage.
To set up a precious metal IRA, the accountholder needs to set up a self-directed IRA with a participating custodian and metal dealer. The IRA already has to exist with a given IRA trust company. Certain dealers work with certain IRA trust companies, which can include brokerages and banks. The accountholder has to confirm the relationships ahead of time or be willing to work with a new IRA account and administrator set up specifically for precious metal trading. Then, the metal dealer is designated by the accountholder as an asset representative. Once all the paperwork is complete and confirmed as valid, the IRA account is established and the accountholder can work with the metal dealer to purchase gold, silver or other precious metals. The assets are then held by the IRA custodian until resold again.
Other 401K or IRA balances can be rolled into a precious metal IRA, but they have to be in cash form to transfer the funds correctly. In other words, if a person has an ETF gold position in a 401K, he can’t transfer it to the precious metal IRA. The ETF shares will need to be liquidated and the cash transferred to the IRA trust account first. Then a purchase can be made in the equivalent amount of gold. Due to delays, pricing can change between liquidating and re-purchasing.
In most cases, the type of precious metal to be purchased will be in the form of government-issued bullion coins. This makes the asset valuation easy for both tax purposes as well as for the administrator since it’s the government that created the asset quality in the first place. Where allowable, the precious metal available will typically include gold, silver, platinum and palladium. Metal bars are allowed under certain circumstances but the metal items need to either be from recognized issuers, the government, or from the metal dealer itself.
The unique aspect of a precious metal IRA is that it allows holding of the actual metal itself in the form of coins or bars. Granted, there are custodian and storage fees to consider, but the accountholder can then either sell the metals when needed and receive cash, or he can have the coins distributed out of the IRA, pay necessary taxes, and keep them physically until it’s time to sell the metal at current market prices. All other types of IRAs require assets to be cashed out first before any kind of distribution can occur to an accountholder.
Caveats
For IRA accountholders it’s important to note that while precious metal IRAs are separate accounts from regular IRAs, the total deposit made in the same calendar year to all IRAs owned has to be maintained. So, for an average individual, the maximum deposits that can be made to an IRA in a year is capped at $5,000 annually. After age 50 a catch-up provision is allowed, adding a bit more per year. Should the individual deposit in any of his IRAs, including the precious metal account, more than the annual cap, he will have to withdraw the funds or face a tax penalty at the end of the year. This reality is just standard federal tax law that applies to everyone to make sure only a certain amount of taxable funds get to enjoy legal tax shelters for retirement. Otherwise, the IRS would see millions of dollars put IRAs outside of their tax collection reach.
Additionally, a precious metal IRA shouldn’t be considered as the totality of one’s retirement savings. Like any investment asset, precious metals can rise and fall in value. Too much of a retirement portfolio placed in metals can be disastrous if the markets take a downturn when the retirement funds are needed the most in later age. For example, gold took a painful downturn in value in the 1970s, falling from $200 an ounce to $150. Then it climbed and fell again in the 1980s from a high of $850 an ounce to a low of approximately $350. So value can be lost in precious metals just like any other asset.
Finally, as people get closer to their retirement point their investment planning should take into consideration the smaller window left in time to recover from a market downturn. A 25-year-old, for example, can make some bad market calls and still recover his portfolio over the next 30 years. A 55-year-old only has 10 or 20 years to work with and recover losses. So a diversified portfolio that doesn’t have too much in one asset and places a healthy percentage of savings in protected, easy-to-liquidate banking assets like CDs and Treasuries is a good idea to always follow, even when also buying precious metals with an IRA.
Conclusion
Investing in precious metals is possible today, thanks to a number of means available. However, consumers should always do their homework first and find out how an IRA or investment works first before committing funds. A lot of qualified information exists and can be easily obtained for free on the matter, so there’s really no excuse not to do one’s homework. Monex Precious Metals can help with its own information resources that are available online as well.
Sources:
http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs
http://www.kiplinger.com/article/retirement/T032-C000-S001-avoid-the-pitfalls-of-self-directed-iras.html
http://www.kitco.com/ira_rsp/ira.html
http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png