Is a Precious Metal IRA a Good Idea?

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The Federal Reserve has raised rates at its past several meetings. Now, rates are hovering at 4.25% to 4.5%, and talks are that more hikes are on the way. Rate increases are used to combat inflation and cool an overheating economy.

Currently, inflation is sitting at 6.5% (Officially.  If you believe the official numbers.), and investors, retirees, as well as working people are worrying. They speculate that additional rate increases could push the economy into a recession.  

Amid all this fear and uncertainty, precious metals have risen above the noise. These metals earned their reputation as a hedge against inflation and downturns. If there is a storm of economic turbulence, gold and silver tend to hold their value well.

Keep reading because in this article we'll tell you what a precious metals IRA is and if it's a smart move for investors.

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Gold, silver, platinum, and palladium are safe haven assets. Even though they experience some fluctuations in value, they are remarkably stable. Many investors purchase precious metals to diversify their portfolios.

Precious metals have a durable track record and retain value well in chaotic times. Plus, they can still grow in value when the rest of the economy slumps. 

Investing in a precious metals IRA is a great safeguard for your retirement. However, many consumers remain unaware of precious metals IRAs and what they are.

What is a Precious Metal IRA?

gold coins protected by a lock

You are probably familiar with traditional and Roth IRAs. These IRAs take money out of your paycheck and invests it in equities. The difference between them is when taxes are taken out of your check.

Roth IRAs take taxes out of your check up front, and you do not pay anything else at disbursement.  Traditional IRAs let you invest using pre-tax money, and you pay when you withdraw. 

For a precious metals IRA, you must be the one in control. Investors have to open a self-directed individual retirement account first. Once you establish a self-directed IRA, you can use it to invest in many asset classes. 

Precious metals, private equities, and real estate are all possibilities. Some accounts even allow investors to buy and hold cryptocurrencies.  A precious metals self directed IRA still gains the same benefits tax-wise as a normal IRA. 

Therefore, you do not need to work with a broker-dealer to get tax benefits on retirement. Since gold is a good store of value, it is popular among late-stage retirees. It will not drop in value and tank someone's portfolio the way other assets can.

Storing gold in an IRA can help you avoid excess taxes, grow wealth, and safeguard assets.

The Mechanics of a Precious Metals IRA

IRS requirements stipulate a regulated custodian must provide account oversight. For any self-directed IRA plan, these custodians are required. They protect the assets stored in your account, but they do not make decisions with them.

When you open a self-directed IRA, you must select a custodian first. Then, as the investor, you must decide which IRA account type to open. At this point, the custodian can usually give some advice based on your goals. 

Regardless of the account type chosen, there are some clear rules to funding it. Currently, annual contributions are limited to $6,000 if you are under the age of 50. For those over 50, they lifted the contribution limit to $7,000.

This limit refers to what you contribute out of your paycheck. Nonetheless, investors can also choose to fund their accounts using a rollover. Rollovers and transfers take funds from existing IRAs and 401(k)s to invest.

These funds can be withdrawn from the initial account, and you can invest them in a self-directed one.  After you put some cash in your self-directed account, it is time to issue an investment.

Instead of buying anything directly, like on the stock market, you can talk to the custodian. Let them know which alternative asset you would like to buy. They will execute the exchange and store the acquired valuables for you in their vaults. 

Anything you invest in the account is stuck unless there is a hardship. If you suffer from a federally recognized economic hardship, you can withdraw early. Otherwise, you must wait until you hit the age of 59 and 1/2 to start taking distributions.

If you wait until you are 72 before withdrawing, they require you to make distributions. The custodians can liquidate the account, or in-kind distributions can be made. 

Since you are the account holder, there is one more decision for you to make. You can tell the account's custodian whether you want them to handle recordkeeping. If you want to do it, you can access full bookkeeping control.

To do this, you must register an LLC and put the account in its name. With an LLC, you can streamline your IRA's funding and purchase assets rapidly. Furthermore, it is usually easier to monitor expenses from the LLC's perspective.

Should You Invest in a Precious Metals IRA?

The answer to this questions is always going to be: it depends on your personal situation.  Recommendations are that precious metals should comprise 5% to 10% of your retirement.

Anything more than that is a little overkill, and it may negatively affect your portfolio. Nevertheless, self-directed IRAs and precious metals offer plenty of benefits to investors. 

The original rules specified that IRAs could only hold onto the American Eagle coins. On the contrary, rules have changed, and now you can invest in much more. The IRS permits gold, silver, platinum, palladium bullion, and coins. 

One more huge benefit of investing in a non-traditional IRA is non-recourse loans. Investors can leverage the precious metals in their IRA to buy other assets. Non-recourse loans are secured by the IRA's collateral, which is the IRA itself.

As the account holder, your liability is limited. If the loan defaults, lenders can only go after the underlying assets. Since these loans pose more risk for the lenders, they have stricter qualifications.

Plus, the typical interest rate they carry will be higher than other loans.

Costs to be Aware of

Owning gold in an IRA entails certain additional expenses, and you should know about them. The seller's markup fee is what you pay extra to the seller. Gold's going rate is rarely the price you pay on the open market.

Depending on what type of gold you buy, the markup will vary. Particularly popular prints of coins may have higher markups than other bars. Further, each vendor may have different markups.

Retirement account set up fees are a one-time expense. A normal account set-up process will charge them to you at the end. Setting up a new IRA account is not free, so be prepared to pay for something. 

Custodian fees are usually charged as an annual cost of doing business. Since you would be opening a gold IRA, pay attention to how much they charge you. Often, they charge more for these account types than they do for other ones.

Storage facility fees are another expense that many investors forget about. When you buy the gold, it must be held in a qualified storage facility. For that, it will cost a little bit of money each month.

Cash-out costs refer to what you would lose if you closed out of the position. If you decide to close out of a gold IRA, the dealer will want to pay less than the spot price for the gold. 

How to Choose a Broker or a Custodian

Putting funds into a precious metals IRA requires that you establish a self-directed IRA. To do that, you must work closely with a custodian with IRS approval. The custodian is also called an account broker, and they are responsible for a lot.

If you want to buy gold, the broker is the one who completes the order. Then, after you have bought the gold, the broker is the company that holds onto it for you. Most custodians are banks, trust companies, and credit unions.

However, everyone needs to do their research when selecting one.  Transparency should be at the top of your priority list when you evaluate brokers. They may not be a good choice if they do not list their fees.

A sudden surprise could hit you down the road, and that would not be very nice.  Look at the company's track record and see how others have felt about them. The Better Business Bureau often has records of complaints made about the company.

Digging into what customers have said can be enlightening.  Flexibility is another factor to consider when comparing different brokers. If the company is unwilling to accommodate your vision, it may be worth looking elsewhere.

Sometimes, brokers get stuck in a one-size-fits-all approach, and that is untenable. Qualifications should be a top priority also, as they cannot operate without them. Make sure that any company you work with carries proper licenses and registration.

Conclusion: Is a Precious Metals IRA a Good Idea?

Diversifying your account can be helpful, particularly during downturns. If you plan on keeping your money invested for a long time, an IRA makes a lot of sense.

However, they do not seem worthwhile if you only want to invest for a few years. Since these accounts limit withdrawals, they can be bad in those situations.

Putting gold into an IRA is a great way to counteract inflation, though. Stocks can fall to zero, like Lehman Brothers in 2008, but gold is always valuable.

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