Precious Metals Investing
Gold has always been one of the primary “safe-haven” assets. Precious metals such as gold and silver have been viewed as a safe store of value for thousands of years. These metals are viewed to have intrinsic, real value, and are not subject to the same devaluing forces that many paper-backed fiat currencies may be. Many IRA investors choose to hold a portion of their portfolio in metals, either as a hedge against inflation or as a speculative play in times where metals prices may be fluctuating.
Ways to Hold Metals in an IRA
Since 1997, IRA and 401(k) style plans have been permitted to invest in specific types of precious metal coins and bullion, but it had not always been easy to do so. Most mainstream brokerages do not offer the specialty services necessary to hold physical assets such as gold, and have only therefore offered various paper derivatives such as shares of metals funds. This is not the real thing.
Self-Directed IRA custodians have offered services for IRA plans to directly invest in physical precious metals for many years, but this approach can be cumbersome and expensive. The IRA custodian must arrange for storage of metals at a registered depository, which may be thousands of miles from where you live. All purchase and sales events come with transactions fees, perhaps fees based on the asset value, and then there are storage fees. Executing a transaction can also take 2-5 days to execute. This means you are basically saying “I’d like to buy X dollars of gold at whatever the price may be in 3 days”. While an improvement over paper holdings, the custodial model is not optimal.
The Checkbook Control Advantage
As is the case with many non-traditional asset classes, checkbook control provides several distinct advantages when it comes to using your IRA for precious metals investing:
- Deal directly with a metals dealer of your choosing. There is no need to work with a small list of high priced brokers.
- Initiate purchase or sales transactions immediately using your checkbook and eliminate the 2-5 day processing delay typical of most self-directed custodians.
- Arrange for your own secure storage locally.
IRS Rules for Holding Gold in your IRA
Prior to 1997 and the Taxpayer Relief Act – which also marked the creation of the Roth IRA – it was not possible to hold precious metals in a retirement plan. Such assets were considered collectibles, which are one of the few things an IRA or 401(k) may not hold.
With the passage of the Taxpayer Relief Act of 1997, the tax code was changed to allow for certain distinctly valued metals assets to be held in IRA plans. Chapter 26, Section 408 of the Internal Revenue Code defines IRA plans, and subsection 408(m)(3) was added per the 1997 act to define this new capability. The language excepting certain metals from the collectibles prohibition follows:
(3) Exception for certain coins and bullion For purposes of this subsection, the term “collectible” shall not include—
(A) any coin which is—
(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112(a) of title 31, United States Code,
(ii) a silver coin described in section 5112(e) of title 31, United States Code,
(iii) a platinum coin described in section 5112(k) of title 31, United States Code, or
(iv) a coin issued under the laws of any State, or
(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7)  requires for metals which may be delivered in satisfaction of a regulated futures contract,
if such bullion is in the physical possession of a trustee described under subsection (a) of this section.
Note the explicit distinction between the two classes of metals included; coins and bullion. The section heading mentions both coins and bullion separately, and each is described in a separate subparagraph.
The technical references in subparagraph A equate to US minted Eagles in Gold, Silver and Platinum. These specific coins may be held by an IRA-owned LLC or Solo 401(k), and are the only metals investments one should make with such a plan.
Subsequent to the subparagraph B description of allowable bullion items, the clarifying statement “if such bullion is in the physical possession of a trustee described under subsection (a) of this section.” appears. By placement and specific use of the word bullion, this limitation is interpreted to apply only to bullion items.
There are certain foreign minted coins that meet the purity and futures contract market criteria to be allowable as IRA holdings, but these coins are considered bullion in this context, and therefore must be held in the possession of an IRA trustee.
If you wish to hold un-minted bullion or foreign coins, you must use the services of a 3rd party custodian and registered depository storage.
Storage of Coins
When acting as the IRA LLC manager or 401(k) trustee, it is your responsibility to act in the best interest of the plan, and to keep all plan activities clearly segregated from any personal or close family finances. With this in mind, it is strongly recommended that any IRA-owned coins be held in documented, secure storage fully segregated from any personal holdings. A safe-deposit box at a local bank, with the box being held in the name of the IRA-owned LLC or 401(k) trust is the best way to go.
If you have an interest in diversifying your tax-sheltered retirement savings to include precious metals, please feel free to contact us.
As with any investment, there is risk associated with investing in precious metals. Before investing you should ensure you have the financial ability and experience to gauge and understand the risks.
Safeguard Advisors, LLC is not an investment advisor or provider, and does not recommend any specific investment. We provide properly structured self-directed retirement plan platforms that provide you as the investor with full control over investment decisions. The information above is educational in nature, and is not intended to be, nor should it be construed as providing tax, legal or investment advice.