When most people think of Individual Retirement Accounts (IRAs), they think only about paper assets like stocks, bonds, and mutual funds. Because the IRS prohibits you from putting collectibles (like certain gold coins) in your IRA, many people believe that that prohibits all gold from your IRA. However, the IRS does allow retirement savers to add precious metals like gold and silver to IRAs if done properly. There are a number of regulations and requirements to heed, but the process can add security to your retirement savings and may be worth the effort.
The Advantage of Precious Metals IRAs
The money you set aside for retirement today may end up sitting in your IRA for thirty or forty years. There’s no guarantee that the money will not lose value during that time. As a matter of fact it is almost certain to depreciate in value due to inflation. No one can predict the future. The economy could grow in the coming decades, but it could also slip into another recession. You need to take the annual inflation rate into consideration.
Suppose:
- Inflation rises only by the FED’s target of only 2% per year for the next 30 years (a very low estimate)
- You put $1000 under the mattress today.
Then:
- In February 2047 (30 years from now) your $1000 will only have the equivalent purchasing power of $552 in 2017 dollars.
- In February 2057 (40 years from now) your $1000 will only have the equivalent purchasing power of $453 in 2017 dollars.
That of course assumes you don’t earn any interest. If the interest rate is less than the inflation rate (as it is now) you will still lose value (just not quite as much) the only way you can come out ahead is if the interest rate is higher than the inflation rate (although you still have to pay taxes on the paper gain).
Precious metals like gold and silver are considered a natural hedge against inflation and economic uncertainty. Gold and silver tend to hold their purchasing power over the long term although they do fluctuate widely over the short term. They also tend to be valued inversely proportional to paper currency. Meaning, when the dollar goes down, compared to other currencies, the value of gold and silver would go up. Gold and silver are also a highly sought after protection against rising inflation. Therefore, those concerned about the effects of inflation might consider opting for a gold silver IRA to hedge against the effects of inflation. A well balanced portfolio of paper assets (stocks and Bonds) and precious metals are less vulnerable to economic downturns and political turmoil than a portfolio of paper assets only.
How to Get a Gold or Silver IRA
To add precious metals to an IRA, you must have a self-directed IRA. Unlike with conventional arrangements, self-directed IRAs allow the account holder to choose the type of investments in the account, including precious metals. There are several rules to follow when opting for a self-directed IRA. The first is appointing a qualified custodian (you can not be your own custodian).
Under IRS regulation, each self-directed IRA must have a trustee or a custodian fully qualified to manage the account. Usually, a bank, a credit union, trust company, or a precious metals brokerage firm certified by a state or federal agency gets approved as the custodian. The investor can direct the custodian to include precious metals in the IRA account. The custodian will be responsible for physically holding the gold or silver (you can’t take possession of the precious metals yourself). Also, rare or collectible coins are not allowed in IRAs.
It’s important to note that gold or silver stocks or mutual funds and similar assets are subject to market forces just like other stocks and so they may at times act like stocks at at other times like precious metals. So some people prefer holding the physical metals in their IRA to provide additional protection against other market forces.
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