Self-directed individual retirement accounts (IRAs) let you invest in almost anything out there that can be invested in. You’re not limited to standard investments such as stocks or bonds. You can invest in a wide variety of alternative assets that typically fall outside what most financial institutions are able to handle, including precious metals.
As more and more retirees face rising health care costs and inflation, it’s important to consider what role precious metals may play in protecting your nest egg.
Whether you’re new to self-directed IRAs or not, this guide will walk you through how to invest in precious metals through a self-directed IRA.
What is a self-directed IRA?
A self-directed IRA is nearly identical to a typical individual retirement account, except for one big difference: You have more investment options while still getting a tax break. Investors who choose a self-directed IRA can invest in assets beyond the traditional stocks, bonds and funds, including:
These assets are held in either a traditional or Roth IRA, or both. There’s no limit to how many IRAs you can have, though you may be limited by the type of asset. For example, a gold IRA can hold other precious metals but not stocks. Your annual contribution is capped across accounts, regardless of which IRA you choose or how many accounts you have. There are two main types of IRAs, plus SEP IRAs for people who are self-employed.
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Traditional IRA: You invest pre-tax dollars in a traditional IRA, meaning that you may be able to avoid paying taxes on any contributions. Your investments grow tax-deferred until retirement when you pay taxes on the withdrawals at ordinary income rates.
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Roth IRA: You invest post-tax dollars in a Roth IRA, meaning that you pay taxes on any contributions before they go into the account. When you withdraw the money in retirement, you won’t owe any taxes on it.
There are some drawbacks to using a self-directed IRA, though. You’ll need to manage your investments yourself and find a custodian who specializes in these types of structures and offers alternative investments. The top IRA brokers don’t typically offer access to these types of assets.
Bankrate insight
You can have both a Roth IRA and a traditional IRA. As long as you meet the government’s qualifications, you can put both of these investing vehicles to work and enjoy a balance of tax breaks between now and years into the future.
How to invest in precious metals through a self-directed IRA
If you’re looking to add precious metals to your portfolio or want to diversify your retirement holdings, here are three steps to follow.
1. Open a self-directed IRA
If you don’t already have a self-directed IRA, start by researching self-directed IRA companies. Look for a custodian that supports the types of investments you want to buy. In this case, you can hold gold, silver, platinum and palladium in your IRA per IRS regulations.
You also want to ensure your potential custodian can meet the IRS’ standards for purity and storage. You can’t buy a gold necklace and stash it in your dresser. Precious metals in an IRA have to be 99.5 percent pure or higher depending on the metal and cannot be stored in your house.
Keep an eye out for setup and annual fees. Because precious metals require storage, the fees tend to be higher for a silver or gold IRA than for an IRA that holds standard assets.
Once you’ve found the right IRA custodian for you, set up your account and pay any upfront costs.
2. Fund the account
Now that you have a self-directed IRA, you need money to invest. You can make contributions by connecting your bank account, rolling over funds from another IRA or setting up a payroll deduction if that’s available to you.
3. Buy precious metals
Select what kind of precious metals you want to own and make your purchase. The best move is to pick a custodian that both sells and stores precious metals for IRAs or has a partnership with a depository.
Do precious metals make sense in your portfolio?
A financial advisor can work with you to create a balanced portfolio that meets your short- and long-term goals — and Bankrate’s AdvisorMatch can help you connect with a CFP® professional.
Pros and cons of investing in precious metals with a self-directed IRA
A self-directed IRA gives you broader discretion when it comes to investing. You could use your self-directed IRA to invest in a horse or a house. Precious metals are just one option for a self-directed IRA and, like many investments, precious metals IRAs come with some pros and cons.
Pros
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Store of value: Gold and silver have proven track records as stores of value, especially in tough economic times. Precious metals may not compound like stock market returns but they do maintain purchasing power over time and can act as a hedge against inflation.
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Diversification: Adding precious metals to your portfolio can provide diversification benefits. Stocks can be volatile; adding metals to the mix can potentially smooth out returns over time.
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Tax-advantaged growth: You get a tax break either now or later when you invest in precious metals through an IRA.
Cons
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Higher fees: Holding precious metals in an IRA carries higher fees because the physical asset must be stored in a depository that meets federal regulations. Those fees can eat into earnings over time.
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Less liquidity: You can easily trade in and out of stocks and other assets that are traded electronically. A physical asset, such as precious metals, isn’t as easily sold.
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Limitations: Investing in precious metals through an IRA limits you to purity levels approved by the IRS and you can’t hold other assets in a precious metals IRA.
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No income: A precious metals IRA doesn’t create income like stocks and bonds do. “Precious metals don’t pay interest or dividends, so the only way you’re going to profit is if the price goes up,” says Greg McBride, Bankrate’s chief financial analyst. “And without any interest or dividends, you’re not getting paid to wait until that happens.”
Alternatives to investing in precious metals with a self-directed IRA
A self-directed IRA is just one way to invest in precious metals and the only option to hold the physical asset in an IRA. However, you can add precious metals to your portfolio in other ways, both within and outside of an IRA.
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ETFs and mutual funds: Exchange-traded funds and mutual funds are some of the standard assets that make up IRAs. You can hold precious metal ETFs or mutual funds in a standard IRA without setting up a self-directed IRA. ETFs provide investors with lower transaction costs and they’re more liquid than holding the actual metal in a vault or safe, according to McBride.
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Stocks: Also standard IRA fare? Stocks, which offer a different type of exposure. “Another avenue to a precious metals allocation that investors comfortable with more risk might take would be to hold stocks of the companies that mine those precious metals,” McBride says.
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Brokerage account: You won’t get the tax breaks of an IRA, but you can invest in a range of precious metal stocks, ETFs and mutual funds through a brokerage account.
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Buying precious metals: Outside of an IRA, you can invest in any type of precious metals and purities that you want and store them however you like.
Bottom line
Self-directed individual retirement accounts let you invest in a broader field of assets, including precious metals. A precious metals IRA may be a good option if you’re looking to diversify your investments by holding a physical asset and still want a tax break. The high fees and management required for a self-directed IRA aren’t for everyone though, so be sure to weigh your options carefully.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.