How to Invest in Precious Metals with a Self-Directed IRA?

You may have questions about how to invest in precious metals in a self-directed IRA. Financial markets rise and fall over time. When stock markets get choppy, sell off, or trade sideways, many investors go to safe money investments, e.g. precious metals.

All precious metals markets, including silver, palladium, platinum, and gold, can demonstrate short-term volatility, but many advisors believe they're excellent choices for those seeking long-term growth and value.

If you are thinking about the long-term benefits of investing in precious metals in a self-directed retirement plan, you need a qualified custodian to hold your account.

Precious Metals and Qualified Self-Directed Retirement Accounts

Laws of the United States say that investors cannot take personal delivery of physical precious metals held in a traditional individual retirement account (IRA), Roth IRA account, or 401(k) account.

However, you can hold precious metals in a specifically designed self-directed IRA, Roth IRA, or 401(k) plan. You may then invest tax-deferred dollars for retirement in valuable precious metals, including gold, silver, platinum, palladium, etc.

which companies to avoid in 2023

How Do You Invest Retirement Plan Assets in Precious Metals

A self-directed precious metals IRA is a specific type of self-directed individual retirement account. Your self-directed IRA may allow you to direct retirement funds into a wide variety of nontraditional assets, e.g. real estate, precious metals like gold, silver, platinum, palladium, etc., or cryptocurrencies.

U.S. law and Internal Revenue Service Code restrict these investment options in conventional individual retirement accounts.

Although a self-directed precious metal IRA, Roth IRA, or 401(k) has virtually identical characteristics, i.e. identical contribution limits, these plans allow you to select gold and other precious metals in your tax-deferred plan for retirement.

This is an important distinction for investors who appreciate the historical long-term growth of precious metals over the long term.

According to some retirement planning experts, the addition of precious metals to your retirement fund (1) assists in preserving your capital in a variety of ways, (2) hedges your assets in the event of a recession or economic downturn, and (3) offers greater tax efficiency for potential short or long-term capital gains.

How Much of Your Retirement Funds Should Be Invested in Precious Metals

Once you decide to include gold and other precious metals in your self-directed retirement plan, keep diversification in mind.

Depending on your financial plan and ability to assume risk, many advisors recommend investing up to 10 percent of your retirement capital in gold and other precious metals.

If you're excited about investing in gold and other precious metals, you may ask, “Why is the recommended allocation so low?”

Remember, a well-constructed financial portfolio is diversified. This means the investor doesn't assume unnecessary risks by investing only in one asset or asset class.

For this reason, your financial advisor is unlikely to recommend investing your entire retirement portfolio in precious metals or any other asset class.

Although gold and metals have shown their ability to hold long-term value over the years, it's possible for precious metals to underperform in relation to other assets in some market conditions.

For instance, stocks have demonstrated outstanding long-term capital appreciation potential, especially when investors reinvest share dividends.

Precious metals have also shown the ability to preserve value over time, keep in mind that precious metals' values rise and fall with supply and demand and market conditions.

Historically, precious metals are perceived as “safe haven” investments in market downturns and inflationary cycles.

If you want to add physical gold and other precious metals in a self-directed IRA, Roth IRA, or 401(k), you have some options to consider.

Precious Metals Investments for Retirement

With a precious metals self-directed retirement account, you may invest in silver, palladium, gold, or silver. However, you're restricted as to specific standards established by the IRS as to which gold, palladium, silver, or platinum items you select:

  • Gold investments must be 99.5 percent pure
  • Platinum investments must be 99.95 percent pure
  • Silver investments must be 99.9 percent pure
  • Palladium must be 99.95 percent pure

Precious metals products that meet IRS criteria include PAMP/Suisse bars, Canada Maple Leaf coins, or Australia Koala bullion coins.

Although American Eagle coins and South African Krugerrand coins are just 22k gold (91.6 percent gold), they are allowed in your self-directed retirement account.

At present, U.S. law prohibits your investment in collectible and rare coins like a gold-plated quarter dollar, German marks, Swiss francs, or UK sovereigns in a self-directed IRA, Roth IRA, or 401(k) account.

Take Note of the Following for Your Self-Directed Precious Metals IRA

You must consider additional items if you want to buy and store physical precious metals assets in your self-directed IRA, 401(k), or Roth IRA account:

  • Your plan may be more expensive to maintain than other retirement plan options because you’re investing in physical assets like gold, silver, palladium, and platinum.
  • Your self-directed tax-deferred retirement account will involve more fees than a traditional IRA account, e.g. account setup costs, transaction fees, custodian charges, and physical storage fees.
  • You may not store gold or other precious metals purchased for your retirement plan at your home. IRS law forbids this. If you do so anyway, you’re at risk for costly penalties and fees.
  • Even if the IRS or U.S. laws allowed you to store privately store precious metals earmarked for your retirement, this is a risky practice. For instance, if you’re robbed, you might lose some of your financial resources for retirement.

How to Open a Self-Directed Precious Metals Retirement Account

To open a self-directed precious metals gold IRA requires some extra attention when compared to opening a Roth IRA or traditional individual retirement account.

Identify a Qualified Custodian for Your Self-Directed IRA

Choose a qualified plan custodian.You must select a custodian for the self-directed precious metals IRA before you can own gold or other precious metals in a tax-sheltered retirement account.

Select your custodian

Qualified IRA custodians for your self-directed IRA are required by law when investors want to add alternative investments, e.g. precious metals or real estate, to their retirement plan.

Elect a precious metals dealer

Because your retirement account is self-directed, you must instruct the retirement plan custodian to settle purchases and sales of gold, palladium, silver, or platinum. Research precious metals dealers.

Your self-directed retirement account custodian may work with specific precious metals dealers, like Equity Trust does with Augusta Precious Metals. You’re obliged to confirm the quality of your precious metals dealer.

However, because your account is self-directed, it is your responsibility to research these dealers. Consider dealers like Goldco or Advantage Gold that belong to precious metals trade groups, e.g. the American Numismatic Association (ANA), the Professional Numismatics Guild (PNG), or the Industry Council for Tangible Assets (ICTA).

Affiliations with these organizations can help you select the right precious metals dealer for your tax-deferred retirement plan.

Buy precious metals for your self-directed retirement account

Work with the selected dealer to purchase the products you decided to buy. Many U.S. investors choose highly liquid American Eagle bullion coins.

Confirm a precious metals depository

Purchase of gold and other precious metals in your self-directed IRA, 401(k), or Roth IRA requires storage in an IRS-approved depository. You must never attempt to store precious metals assets held for retirement yourself.

Your self-directed retirement plan custodian may suggest a depository, but you may also select any depository that meets IRS Code requirements.

Finalize your transaction

After identifying your self-directed account custodian, precious metals dealer, and storage depository, complete the trade.

The plan custodian settles the payments associated with the transaction. The precious metals dealer then ships your gold or precious metals to the chosen depository.

Is It Possible to Withdraw Money or Assets from a Self-Directed Gold IRA?

Whether you’re a seasoned investor or new to directing your tax-deferred retirement plan, know it’s important to leave your assets in place. No one knows when precious metals prices will rise or fall.

If you must take a withdrawal from your self-directed precious metals IRA, 401(k), or Roth IRA, you’ve got two options:

An In-Kind distribution:

Request that the precious metals in your self-directed retirement plan ship to you. In other words, your gold or precious metals won’t be tax-sheltered. You will be subject to penalties and fines if you’re younger than age 59-1/2.

Depository purchase:

Ask the depository to buy the precious metals in your account. This will convert the hard assets to U.S. dollars (USDs) and book the monetary value of the investment.

Regardless of which option you choose, call the custodian to initiate the transaction. Realize, however, that your self-directed precious metals IRA, Roth IRA, or 401(k) is subject to the same legal rules as traditional retirement plans.

Precious metals assets in your self-directed retirement plan may appreciate in value free from the impact of current taxes. As long as they’re held in a qualified self-directed precious metals retirement account, you pay no taxes on gains.

When you request a withdrawal from your retirement account, you are then subject to taxes and/or penalties. The taxes or penalties owed will depend on your age and account type.

Required Minimum Distributions (RMDs)

You must take the required minimum distributions (RMDs) by your 72nd birthday. RMDs may become more complex because you must take them in synchronized intervals that match the precious metals assets in your self-directed precious metals IRA.

Gold and other precious metals may retail at thousands of USDs per ounce. This fact may result in withdrawing more of the assets’ value than if you were directly withdrawing USDs from your account.

If you request in-kind distributions, you must also sell the assets or have funds available to pay the tax owed on the precious metals products shipped to you.

Should You Open a Self-Directed Gold IRA?

A tax-deferred precious metals IRA may be a financially prudent option for you.

Depending on your current market perspectives, hard assets like gold and other precious metals have shown their ability to keep pace with inflation and to maintain long-term purchasing power.

However, opening a self-directed precious metals IRA may cost more than other options. In addition, you must have the ability to assume more risk.

A self-directed precious metals IRA, Roth IRA, or 401(k) may make financial sense if you want to diversify a strong portfolio of other financial assets.

Setting aside up to 10 percent of your capital for retirement in physical gold, palladium, silver, or platinum will diversify your portfolio and possibly lower your exposure to market volatility.

Other Ways to Diversify Your Retirement Funds

Note that it is also possible to gain exposure to precious metals without owning physical assets like bullion and coins. It is possible to invest in exchange-traded funds (ETFs) and mutual funds that invest in precious metals indices or prices.

These investments may offer some exposure to so-called alternative physical assets with less expense. These assets typically trade in the public markets and may be subject to market risk.

Either way, owning precious metals, ETFs, and mutual funds adds some additional sparkle to your financial future—without becoming the entire investment strategy.

Research and Education Are Essential to the Success of Your Self-Directed IRA

Even if you already invest in precious metals, the process of selecting a self-directed, tax-advantaged investment account, e.g. a self-directed 401(k), self-directed IRA, or self-directed Roth IRA, requires some initial research and education.

You must know how other investors have fared in going through the experience. You should research plan custodians and depositories. Ask questions and read reviews.

You must familiarize yourself with the laws surrounding self-directed retirement plans as well.

Investing in precious metals involves investing in an asset class that goes beyond traditional financial markets. The process of holding physical metals in a self-directed retirement account, e.g. gold, silver, platinum, or palladium, allows you to take advantage of the tax-deferred appreciation of these assets.

History shows that owning precious metals is one of the ways to hold an asset class that isn’t correlated to the broad financial markets, e.g. stocks, commodities, forex, etc.

A self-directed retirement plan allows you to do even more. You direct your plan funds, interface with precious metals dealers also called gold IRA companies, and select a storage depository.

Some sophisticated investors may choose to move all of their retirement funds into alternative assets while others want to move only a portion for diversification purposes. Regardless of your choice, it’s your decision!

The Impact of Tax-Deferred Investing

Let’s say you buy ABC stock at $20/share today. Eighteen months from now, ABC trades at $100/share. You enter a sell order and capture $80/share in long-term capital gains.

In a tax-deferred self-directed precious metals retirement account, you pay no current taxes on the gain. Your profit can be reinvested to work even harder for you without any taxes owed now.

Imagine the possibilities. If gold trades at about $1,800/ounce now and inflationary or flight to quality investors drive the price of gold to $2,400/ounce, it’s up to you to book the profit by selling your gold or not. Either way, no taxes are due.

If you establish a self-directed precious metals Roth IRA, the account is funded with after-tax dollars. As a result, when you eventually withdraw assets or funds in the future in retirement, your proceeds are tax-free.

Your ability to leverage compounding and reinvestment in the absence of current taxes in your self-directed IRA or 401(k) is one of Uncle Sam’s greatest gifts to investors.

Learn more about how to open a self-directed precious metals retirement plan before investing.

Establish a Self-Directed Precious Metals Retirement Account

A self-directed precious metals retirement plan involves establishing relationships with the qualified plan custodian and precious metals dealer. Your custodian is the intermediary between you, the dealer, and the custodian.

An experienced custodian facilitates your wishes. You direct the custodian to take action on your behalf.

Here’s a recap of the three-step process:

  • Open and fund a self-directed precious metals account, e.g. a self-directed IRA.
  • Put money into the account, transfer assets, transfer or rollover assets from another plan. Doing so will not create any tax impact or penalties.
  • Direct the custodian to buy or sell precious metals. This action is legally indistinguishable from buying or selling other financial assets in a self-directed retirement plan.

After you direct the custodian to make a transaction, they act as your facilitator. Your assets are held by the custodian. You remain in full control of your account. No other parties have the discretion or authority to make decisions regarding your capital, assets, or cash in the relationship.

You have sole authority to manage your investment. Your account portal provides transparency and lines of sight. You log into the account in real-time, see asset descriptions in real-time, and manage your account in real-time.

Note that IRS Code determines which metals can be held in your self-directed plan. You must familiarize yourself with the precious metals’ purity and fineness specifications.

What Happens After You Direct the Custodian to Make a Transaction?

After you direct the custodian to make a transaction, cash or assets are sent from your self-directed retirement account to the precious metals dealer.

The precious metals dealer then delivers your assets to the qualified depository you selected.

Importantly, you cannot store the precious metals purchased in your self-directed retirement plan in your own home. This is considered engaging in a prohibited transaction. Your precious metals must be held at a qualified depository.

Some precious metals dealers have a preferred depository to store the metals. In some cases, the custodian may have digital inter-connectivity and linkage, so it’s easier to generate and transmit information about purchases, sales, and reconciliations.

Check with your metals dealer about any depositories they recommend. You may also select resources with your custodian. Regardless, the updates regarding your assets’ value should be sent to the custodian and available to you at all times.

Keep in mind that it’s best to keep funds dedicated to retirement invested at all times. If you plan to open a self-directed and tax-deferred precious metals investment account, avoid the temptation to withdraw money or assets before retirement:

  • Before age 59-1/2, you pay 10 percent penalties on early distributions
  • After age 59-1/2, you may take qualified retirement distributions

Consult a financial advisor to learn more about how to open a self-directed precious metals IRA, Roth IRA, or 401(k) now.