In today’s modern world, untapped veins of silver and gold are no longer sought out by the masses as a get-rich-quick venture. You don’t have to get down and dirty to get your hands on these precious metals, and a different kind of strategy is in play when you purchase them. Precious metals are utilized as an alternative asset that can add another layer of diversification in your investment portfolio. You can invest in this alternative asset with your self-directed IRA, but of course, there are a few things to consider before you start looking for the nearest precious metal dealer.
Precious metals are inversely correlated to traditional asset classes, such as the stock market and bonds, and even other alternative assets including real estate. Precious metals are considered a relatively stable asset during turbulent economic times because there will always be inherent value. Throughout human history they have been coveted stores of wealth, and that is unlikely to change in the near future. Precious metals also cannot be reprinted by governments until they no longer hold value. That is why precious metals are often used to store value or as a hedge against inflation when investors are uncertain about the future of the economy or market, or they become averse to risk.
When you invest in precious metals, the physical coins and/or bullions are the collateral to your investment. When you invest in stocks or bonds, you are not invested in a tangible asset. You are relying on a business to retain its value and not go bankrupt, leaving you vulnerable to lose every dollar you have invested. Precious metals are one of the few financial assets not simultaneously some other entity’s liability. Precious metals are also almost impossible to destroy and do not require continual maintenance, aside from the depository fees (see Storage), that many other tangible assets are subject to.
As with any investment you hold within your IRA, your earnings are tax deferred or tax free depending on the type of IRA account. If you invest with cash outside of a self-directed IRA, any potential earnings are subject to capital gains tax equal to your marginal tax rate if the metal is held for over one year before being sold.
When you purchase precious metals from a dealer, whether online or in-person, the transaction will involve a broker fee. Compared to when you invest in stocks and bonds, these fees tend to be much higher. Premiums can depend on the dealer and can be subject to market fluctuations.
Per IRS regulations, precious metals must be held in a storage facility such as a bank or an IRS-approved non-bank trustee, or depository, when investing with your self-directed IRA. You will incur an annual fee for this service.
Your return depends solely on the price of your precious metal at the time you decide to sell. You do not receive monthly income or quarterly dividends.
Interested in taking a more in depth look into investing in precious metals with your self-directed IRA? You can start by looking at Preferred Trust Company’s website for regulations & requirements as well as resources for dealers and depositories that other investors have been successful doing business with.