Given the unparalleled uncertainties of this brave, new age of ours, it should come as little surprise that investment hedges such as gold are soaring in value. At present, the price of gold is pushing $2,000 an ounce. Suffice to say, there is no better time than now to invest in the glittering precious metal. One of the simplest methods of diversifying your portfolio with gold is through a self-directed IRA (or Gold IRA). Unlike other types of retirement plans, Gold IRAs have few restrictions on what investments can be held within the account. However, the Internal Revenue Agency (IRS) does have stringent regulations governing Gold IRAs, including how the precious metal must be stored. In this article, amongst other things we will discuss whether Gold IRA home storage is legitimate, or a scam.
Gold IRA Basics
A Gold IRA or Precious Metals IRA is an excellent option as a retirement vehicle. Because there are so few limitations on what can actually be held within self-directed IRAs, they offer greater potential for growth than other retirement plans. However, it is imperative to understand that the IRS has imposed stringent regulations surrounding Gold IRAs.
Gold IRA Home Storage A Scam?
Concisely put in a single word – Yes!
As mentioned, the IRS has strict guidelines for how and where gold from a Gold IRA can be stored. It is illegal for an investor to have physical possession of the precious metals in these types of retirement vehicles. Therefore, abandon the idea of keeping the gold from your IRA in an old coffee can buried in the backyard, for instance.
The IRS explains its regulations on home storage of gold or other precious metals held within an IRA:
“Gold and other bullion are ‘collectibles’ under the IRA statutes, and the law discourages the holding of collectibles in IRAs. There is an exception for certain highly refined bullion provided it is in the physical possession of a bank or an IRS-approved nonbank trustee. This rule also applies to an indirect acquisition, such as having an IRA-owned Limited Liability Company (LLC) buy the bullion. IRA investments in other unconventional assets, such as closely held companies and real estate, run the risk of disqualifying the IRA because of the prohibited transaction rules against self-dealing.”
Be mindful that no reputable Gold IRA or Precious Metals IRA company will even entertain the notion of Gold IRA home storage, rather than an accredited IRS-approved depository.
Gold IRA Custodians
Firstly, it is essential to understand that under federal law, to open a Gold IRA (or any self-directed IRA for that matter) you must have a custodian. Custodians are usually companies that deal specifically with Precious Metals IRAs (including Gold IRAs). In essence, these companies operate as administrators over this type of retirement account – although, all self-directed IRAs are managed exclusively by the investor. Moreover, these entities must be IRS-approved custodians. One must always be cognizant of the possibility for a fraudulent firm posing as a legitimate Gold IRA company.
Prior to choosing a reputable, IRS-approved custodian, some components to take into consideration include:
- Company ratings
- Customer Service
- The quality of IRA-approved gold bullion and bars
Additionally, as per the IRS regulations, investors are not permitted to purchase any precious metals personally to be held in a Gold IRA. All transactions must be conducted by the custodian as directed by the investor. The particulars of transactions such as insurance, shipping etc. are likewise conducted by custodians.
In essence, a reputable Gold IRA company (or any Precious Metals IRA company) will often arrange the entirety of the Precious Metal IRA process. This process necessitates account set-up, an IRA rollover or custodian-to-custodian transfer, buying IRA-approved gold or other precious metals, and the storage of the precious metals in an IRS-approved depository. Typically, these companies make the process seamless for investors by having established relationships with IRA custodians, IRS-approved depositories, and dealers.
To once again reiterate, gold or any precious metals held within a Gold IRA or Precious Metals IRA must be stored in an accredited, IRS-approved depository. These storage facilities are designed specifically to safeguard precious metals, often held in self-directed IRAs. In addition, the IRS changed its policies and now permits storage outside of the United States in approved depositories around the world. In the US, examples of renowned depositories include Brinks Worldwide and Delaware Depository. An example of an IRS-approved storage vault abroad is HSBC located in London.
IRS-Approved Precious Metals In An IRA
The IRS likewise has strict rules pertaining to what types of precious metals are allowed in an IRA. Where the coins and bullion are minted and the levels of purity, are components to the IRS criteria. It is critical to note that only coins and bullion that meet the criteria can be held within any self-directed IRA. Coins that are IRS-approved in an IRA include the American Eagle, the Austrian Philharmonic, and the Canadian Maple Leaf.
As per the IRS fineness criteria, gold must be 0.995 pure (except the Gold American Eagle coin), silver must be 0.999 fine, and both platinum and palladium, the minimum fineness must be 0.9995 or higher.
Additionally, as per the aforementioned IRS explanation on home storage of gold held in an IRA, the agency does not allow collectible coins or numismatics within this type of retirement vehicle. Any reputable Gold IRA or Precious Metal IRA company will never suggest or permit “collectibles” as an investment option.
Expert Advice On Holding Alternative Assets In A Self-Directed IRA
“Rather than having all of their eggs in the stock market, many investors choose alternative assets as a way to diversify their retirement portfolio. Unknown to most investors, assets such as real estate, notes, private placements, private stock and precious metals can all be held in an IRA. The trick is finding a custodian that is willing to hold these investments.
The IRA industry is dominated by stock brokerages and banks. While they can do a satisfactory job, they also limit your investment choices to the investment offerings they sell. To invest in alternatives, you need a self-directed retirement plan custodian.
These custodians are growing in popularity. Fifteen years ago, of the approximately $3 Trillion in IRA accounts, roughly 1% was invested in alternatives. Currently, of the $8.8 Trillion in IRA accounts, 3% is invested in alternatives. The majority of IRA investments (74%) are invested in mutual funds. (source: Investment Company Institute IRA Owners Survey; Holden and Schrass (2018))
What are the downsides to investing in alternatives?
1) Individuals who invest in alternatives have to be tactical with a laser-like focus. It requires you to research the investment opportunity and vet it. These are self-directed investments and are not typically chosen by investment managers.
2) Time-constraints can be an issue for some people, especially for those working a regular 40-50 hour/week job. Some alternative assets have management obligations. Real estate, for example, has maintenance, which is often arranged for but cannot be performed by the IRA holder because IRS regulations prohibit this.
3) There are rules and regulations that typically don’t apply to traditional investments. For instance, there are certain people that your IRA cannot transact with (disqualified parties). The IRS also forbids any personal benefit from the IRA owned asset. The asset must benefit the IRA and not the individual. It is important to know the rules because it is the IRA owner’s responsibility (not the custodians) to not engage in a prohibited transaction, which could jeopardize the tax-status of your plan and be subject to penalties.
4) Valuations are required to be submitted annually to the custodian for proper IRS reporting. The custodian of your IRA is required to file form 5498 to the IRS annually on your behalf. The custodian often has very little knowledge about the investments in your account, and as such, requires that you submit a valuation with substantiating documentation at the end of each year.
5) The risk of fraud is as prevalent in self-directed IRAs as the rest of the world of investing, and self-directed investors must conduct their own due diligence on any opportunity they seek to fund. Private investment offerings are not subject to the same reporting requirements that public offerings are. Therefore, a few bad apples can sometimes give the industry a black eye.
6) The SEC even created an investor alert for individuals considering self-directed retirement plans.
Given all that, why would anyone want to invest in alternatives?
1) Diversity of your portfolio. The stock market often goes through both upward and downward cycles. Putting some of your money in alternatives is often a strategy to minimize the effect of having all your eggs in one basket.
2) Alternatives give individuals the ability to invest in what they know and understand. A real estate investor or agent, for example, often knows far less about the stock market than they do their own area’s real estate market.
3) Angel investors can use their retirement funds to buy something that they believe in and have some personal knowledge of. Many bank start-ups, for example, are funded through the use of self-directed IRAs.
4) Speaking of banks, do you like the idea of your IRA acting like a bank? Through a self-directed IRA, you can loan money on an unsecured or secured basis. Your IRA can actually hold a mortgage and receive principal and interest payments. How well you secure yourself is up to you, but if you secure yourself well enough, there can be little to no risk on your investment. Many investors require larger down payments and will loan at higher interest rates because their borrowers may not have the assets or credit to get loans from traditional bank lenders.
The bottom line is that to invest in alternatives within your IRA, you need to be willing to be hands-on because self-directed IRAs can take more effort and knowledge. However, this is your retirement. Only you know your retirement goals and only you know how involved you want to be in your investments. Only you can decide whether you want to control your future goals.”
Brandon Hall, Chief Operating Officer, Midland Trust Company
Although the Internal Revenue Agency has strict regulations pertaining to self-directed IRAs including storage, these retirement vehicles are an excellent means of diversifying one’s portfolio. Gold and other precious metal can provide a hedge against economic turmoil and inflation, as the purchasing power of glittering precious metal has remained consistent for millennia. For investors interested in including precious metals in an IRA, have a look at our top Precious Metals IRA company reviews and top 10 Gold IRA companies for more information about the space with useful comparisons. Remember, always do your due diligence and consult a financial professional prior to making investment decisions.