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The catch is that you have to have a custodian do all the buying and selling for you. Also, remember that you are not allowed to store the gold in your home.
The custodian will put it into a depository for you, which can be any secure facility designed for the purpose and approved by the IRS.
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How Does a Precious Metals IRA Work?
First, you set up a self-directed IRA. It's a separate category from regular IRAs, and you're allowed to put not only precious metals into it but also real estate and even cryptocurrency if that's your thing.
When setting up the IRA, remember that you're not allowed to deposit any precious metals that you already own. All items that you put into this kind of self-directed IRA must be newly bought. Remember, too, that the deposit limits are the same as for regular IRAs.
The idea is to provide stability to your portfolio in uncertain economic times. Precious metals have held their relative value since antiquity whereas stocks and other volatile assets have risen and fallen great amounts throughout history.
These precious metals are not a "get-rich-quick" scheme. They are for the long term, which is one reason you're not able to do most things with them in the account until you're more than 59.5 years old. Based on how you set up the account, too, there will be certain tax advantages, which will allow you to plan effectively for your future.
Once you have your account set up and your custodian in place, you can begin buying and storing the physical precious metals you want. Usually, unless you're a savvy veteran, the custodian will make recommendations on what to buy and how to proceed based on where you want to be at retirement.
Your account will be what's known as a segregated account. That means that your precious metals, despite possibly being on the same shelf or in the same vault at the secure depository, will remain wholly yours. You also won't own any part of any other investor's precious metals.
There is no such thing as a "precious metals mutual fund" that includes actual metal. Your custodian should also ensure that you comply with all IRS guidelines and all applicable federal, state, and local laws.
IRS Standards for IRA Precious Metals
The precious metals you buy for your self-directed IRA must meet certain purity standards: gold 99.5%, silver 99.9%, platinum 99.95%, and palladium 99.95%. This is to make sure that the value of the metal in question is as close to the theoretical "absolutely pure" paradigm as possible.
That prevents cheating on either side of the equation. When gold, for example, is trading at roughly $2,000 a Troy ounce, a difference of just 1% is significant. A Troy ounce has 480 grains, so at $2,000 a Troy ounce, that's $4.17 a grain.
If you're not yet 59.5 years old, then you're allowed to deposit $6,000 annually. That's 3 Troy ounces, which is 1,440 grains. That comes out to a difference of $60 if the gold is only 98.5% pure. In the case of one investor, that may not look like much, but if you line up thousands of investors, then you will begin to see the snowballing effect.
In addition to the actual bars of metal, certain coins meet these stringent requirements. They include Canadian Maple Leaf coins and Australian Koala bullion. This is one reason why rare collectible coins are not allowed.
The other is that the value of collectible coins, contrary to popular opinion, is not "always growing," and if the coins go down precipitously in value, then they won't even be worth much of anything because their precious-metal content is far below the IRS's standards.
How Much?
Despite the stability of the value of precious metals, it's not a good idea to, as they say, "put all of your eggs in one basket." Healthy portfolios should diversify your holdings. That's why the current recommendation in the industry is that you have somewhere between 5% and 10% of your portfolio in precious metals.
Low risk doesn't mean no risk. Even these metals have risks, so you should invest in other items as part of an overall strategy. Also, one of the chief disadvantages of investing in precious metals is that they generate no income the way short-term investments can.
There are no dividends to reinvest, for example. The more precious metals you have in your portfolio, the harder it will be to grow your retirement fund.
Do you remember the adage, "Stocks go up, gold goes down, and stocks go down while gold goes up?" It's true. That means that although the drop is seldom catastrophic when it comes to precious metals, it does drop.
If that comes at an inopportune time for you, then you might lose more than you bargained for. Bonds or T-bills are even steadier than precious metals most of the time as long as you choose high-quality items and don't fool around with junk-status items.
Points to Ponder
These investments must be kept in a secure facility; you aren't allowed to keep them in your home. In fact, if you take any of the metals in your IRA home before turning 59.5 years old, your penalty could be 10% of your total amount invested.
The metals will also be taxed just as if you had prematurely withdrawn liquid cash from your regular IRA. You also have to pay for the privilege of having your precious metals stored in whichever secure depository you use. If the company with whom you invest doesn't provide a custodian, then you have to hire one yourself.
That makes investing in precious metals more expensive than other forms of investment. Generally, there is no way to avoid the extra fees for setup, transactions, and storage because of the laws and internal IRS regulations about precious metals.
The Proper Steps
1. Pick the Custodian
Your custodian could be an employee of the company with whom you wish to do business. It could also be someone at your bank or anyone else who is approved by the IRS to be a custodian.
Your custodian could also be the institution itself, such as a trusted company or the actual bank where you have accounts. Remember, because your account must be self-directed, you get to tell the custodian what to do as long as it's within the law.
2. Pick a Dealer
Most of the time, you'll already have a dealer lined up because the dealer will work with the custodian to get your account set up. The idea is simply to have the custodian buy the precious metals you want from that dealer.
It's also a good idea to pick a dealer that doesn't just comply with the law but also has the endorsement, recommendation, or both from an organization like the American Numismatic Association or the Industry Council for Tangible Assets.
Any custodian, whether it's a single person or a financial institution, should have relationships with organizations of that kind and caliber already. When picking your custodian and dealer, check out peer reviews for both. Client reviews are great, but peer reviews let you know how the industry itself views such people and companies.
3. Pick What You Want to Buy
It's really not that complicated to choose what metals or coins you want because there aren't that many from which to choose. Your custodian will work with you to determine which items best fit your long-term goals.
4. Pick the Depository
Look at different choices of depository, weigh the fees against the return, and direct your custodian to have your precious metals and/or coins sent there. Remember, the depository must conform to IRS guidelines and federal, state, and local laws to be suitable. It bears repeating, too, that you're not allowed to take your stuff home with you.
5. Settle Up
Pay the fees, buy the metals, and have the custodian tell the dealer where you ship them.
What if You Need Money Right Now?
If you're not yet 59.5 years old, then withdrawals should only be considered in dire situations. In fact, there are several situations where you can withdraw without penalty, such as the death or incapacitation of your custodian if it's a single person.
Sudden medical emergencies and unforeseen job loss also count. For any other reason, there will be penalties involved. There are typically two kinds of withdrawals.
An in-kind distribution is where you have the precious metals shipped to you. The other is a depository purchase. That's where you get the dealer to sell your precious metals on your behalf and send you whatever cash is left over after paying fees, taxes, and early-withdrawal penalties.
Remember, your custodian has to do the deals for you even in these emergencies.Once you turn 72, however, it's completely different. After that, you must make periodic withdrawals. The minimum withdrawal limits vary by situation.
When you have a precious-metals IRA, some of the items in it cost thousands of dollars per Troy ounce. That means that if your minimum withdrawal is something like $500, you might have to get more than that because a Troy ounce costs many times that amount.
Even once you're 72, too, you still can't have the gold at home, so if you do take an in-kind distribution, you'll have to sell what you get pretty quickly to be able to have the cash on hand to pay the requisite penalties and taxes.
How Do I Know if Such an Account is Right for Me?
Make sure both that you can afford to pay the fees and also that you're OK with not having access to the funds for quite a while. You should also already have a strong portfolio and want to use the precious metals to diversify.
You also have the option of buying "paper metals," which are shares in companies that deal with precious metals, exchange-traded funds, or other similar products. They don't have the backing of real metal, but they often don't have high fees or possible penalties.
You also don't have to create a special account to hold them, and you have the option of using such investments for income through "buying low and selling high."
Some of these accounts don't have a, "You must make minimum withdrawals after you turn 72," policy, so they offer more flexibility than precious-metals IRAs. It pays to discuss your options with a professional before investing in any event.
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