A gold IRA or precious metals IRA is an Individual Retirement Account in which physical gold or other approved precious metals are held in custody for the benefit of the IRA account owner. It functions the same as a regular IRA, only instead of holding paper assets, it holds physical bullion coins or bars. Precious metals IRAs are usually self-directed IRAs, a type of IRA where the custodian allows more diverse investments to be held in the account. Gold self-directed IRAs can include other types of retirement accounts such as, Roth IRAs, SEP IRA, SIMPLE IRA, HSA, Thrift Savings Plan (TSP), and 401(k)s.
The four precious metals allowed to be held in an individual retirement account are gold, silver, platinum and palladium, provided they are in the form of IRS-approved coin or bar products. Since gold is the most commonly purchased of the four, the overarching term “gold IRA” is used most often as industry slang to mean a retirement account containing any combination of precious metals. Other terms such as, “precious metals IRA”, “silver IRA”, “platinum IRA”, or “palladium IRA” are also frequently used.
Investors often use precious metals as a long-term hedge against inflation, to diversify their portfolio. Internal Revenue Code requirements state that the approved precious metals must be stored in a specific manner. Some Trustees have in-house facilities to custody the physical precious metals, others use a third party metals depository as a storage facility.
The IRS approves select precious metals and forms of bullion for IRAs. There are more advantages to holding gold coins as opposed to bars in a gold IRA in terms of liquidation. Gold bars are more difficult to sell due to their higher price and easier ability to be counterfeited, as well as being more difficult to deliver due to their heaviness and the amount of security required during transport. There are currently a variety of precious metals that meet the minimum purity requirements that are acceptable for inclusion into a gold IRA account. Some gold IRA companies argue inclusion of certain coins in a precious metals IRA; however, several of those companies have been investigated by the government for misleading customers and aggressively selling numismatic coins over gold bullion. Numismatic coins pay the gold company higher commissions, but bullion bars more directly reflect the spot price of the precious metal.
To comply with IRS requirements, all IRAs, including precious metals IRAs, must be in the possession of a trustee or custodian. Therefore, legally speaking, precious metals in an IRA are in the custody of the trustee or custodian, not the IRA owner. IRS Publication 590 specifies that for all IRAs, “The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.” Many trustees/custodians use civilian (private) depositories, which may be approved by various commodities exchanges, for storing IRA metals. Security features may include timed locks and automatic re-locking features, 24/7 monitoring, and motion, sound, and vibration detectors. They typically have large insurance policies, with some amounting to as much as $1 billion. There are two types of Gold IRA Storage permitted in depositories: non-segregated, where your assets are mixed with the assets of others; and segregated, where your assets are held separately from other people’s assets.
A Self-storage IRA is a type of Individual Retirement Account that gives owners the option to exercise a high degree of personal control over investments, the potential to reduce or eliminate administrative fees and, in certain cases, to determine the physical location in which assets are stored. Other terms used for these accounts include “checkbook IRA,” “LLC IRA” or “home storage IRA.” The self-storage IRA is a form of self-directed IRA. Storing Gold IRA products in the IRA owner’s home or in a safe deposit box to which the IRA owner maintains a right of access is not within the letter or spirit of the Internal Revenue Code (i.e., the tax-advantaged IRA assets should be held outside the possession and personal control of the IRA owner until retirement or early distribution). The Self-Storage IRA arrangement has not been approved or recognized by the Internal Revenue Service – formally or in a no-action letter issued by the IRS, Employee Plans Division. The Self-Storage IRA arrangement presents a material financial risk to the IRA owner as the Internal Revenue Service may deem the Self-Storage IRA arrangement a “distribution” from the IRA, and this will result in a tax liability (taxing the IRA assets as if the IRA assets were not tax-advantaged assets when they were first purchased) and imposition of a tax penalty upon the IRA owner.