With the upcoming presidential election, many people are worried about how the outcome will affect the economy. As is common with any period of volatility, this uncertainty has caused more people to consider investing in precious metals, such as gold, silver, or palladium.
Precious metal individual retirement accounts (IRAs) allow investors to invest in these metals in an IRA), but they have unique risks you should weigh against their benefits before opening an account.
What is a precious metal IRA?
With a traditional or Roth IRA, you’re limited in the type of securities you can invest in with your account. Typically, you can invest in securities, such as stocks and bonds, but you can’t invest in other assets, such as real estate or precious metals.
Self-directed IRAs are a workaround solution that allow investors to invest in a broader range of assets, including art, real estate or commodities. Precious metal IRAs are a specific type of self-directed IRA that permits investing in Bitcoins, and certain types of precious metals, such as gold, silver, platinum, and palladium.
Unlike investing in equities, where you don’t own a physical asset, you own the coins or bullions held in a precious metals IRA.
“[A precious metals IRA] helps to protect wealth and preserve your buying power,” said Alex Ebkarian, chief operating officer (COO) and co-founder of Allegiance Gold, a precious metals dealer.
How do precious metal IRAs work?
To open a precious metals IRA, you must complete a few extra steps. You’ll need a self-directed IRA custodian — a trust company approved by the IRS to handle alternative assets and precious metals — and a precious metals dealer to broker the transactions.
You usually have to pay a fee to open the precious metals IRA. Once the account is open, you can choose what metals to invest your money in within the IRA. There are restrictions on the types of precious metals that can be in a self-directed IRA. According to the current rules, metals must meet the following requirements:
- Gold must be 99.95% pure
- Silver must be 99.95% pure
- Platinum and palladium must be 99.95% pure
Acceptable products include American Eagle bullions, Australian Koala bullion coins, and Canadian Maple Leaf coins. Other popular coins, including other collectible or rare coins, are not eligible.
You cannot store your precious metals at home. Under IRS rules, you must store your precious metals with an approved depository, and you’ll have to pay storage fees.
Precious metal IRAs have the same contribution limits and required minimum distributions as a traditional IRA, and the limits apply to all of your IRAs combined. For example, the current contribution limit of $7,000 per year is the combined maximum you can contribute to all of your IRAs, including your Roth, traditional, or precious metals IRA.
Risks of investing in precious metal IRAs
The strong performance of gold and silver can be appealing, but there are several risks to investing in precious metals. Risks and drawbacks to keep in mind include the following.
High fees
Precious metal IRAs typically have more fees than traditional or Roth IRAs.
“You could go to your favorite brokerage site right now and open a traditional or Roth IRA for free,” said Drew Feutz, a certified financial planner (CFP) with Migration Wealth Management. “But with a precious metals IRA or self-directed IRA, there’s setup fees, significant transaction fees, custodial fees, and you’re also going to have to pay a different entity to store the physical assets.”
When we researched major precious metal IRA providers, we found the following typical rates:
Lacks the returns of equities
Gold prices have increased 34% over the past 10 years. While that sounds impressive, that price change pales in comparison to the stock market’s growth. Broad-based index funds have returns ranging from 200% to 450% for the same period, so lucking your money into precious metals could cost you money in lost returns.
Volatility
Precious metals, such as gold and silver, have long been seen as a hedge against inflation but they can be volatile. They aren’t regulated products, and they’re considered speculative investments. As evidenced by the performance of platinum, the price can drop dramatically.
Plus, they may not be as liquid as other assets.
“Metals like gold and silver are liquid most of the time, but during a market selloff, it may be difficult to find a buyer at a moment’s notice,” cautioned Ebkarian.
The takeaway
Precious metal IRAs can be appealing if you’re concerned about the stability of the economy; you can invest in precious metals while taking advantage of an IRA’s tax benefits, but there are costly fees and risks to consider. In general, experts recommend keeping your exposure to no more than 15% of your portfolio.
Rather than investing in a precious metals IRA, other options include gold or precious metal exchange-traded funds (ETFs); these funds invest in precious metals or related companies, such as mining firms.
“I think it’s much easier and probably cheaper to buy an ETF backed by physical metals,” said Feutz. “You get the same kind of exposure without the cost of storing it and all the transaction and custodial fees.”
For those who want exposure to precious metals, they can be useful alternatives.
About the contributors
Kat Tretina is a personal finance expert who covers insurance, investing, and student loans. Kat holds certifications in student loan and financial education counseling. She has written about life and disability insurance, health insurance, pet insurance, loans and credit cards for a variety of publications, including Buy Side from The Wall Street Journal, Forbes, and Money.
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