Diversification is the cornerstone of a solid investment portfolio. Until the mid 1990’s, when stocks started producing extraordinary profits, most investment advisors recommended a balanced portfolio with a mixture of stocks, bonds, and precious metals. Stocks provided the opportunity for growth, bonds produced income and precious metals protected against inflation and financial chaos because gold and silver prices have typically enjoyed an inverse pricing relationship, when compared to stock prices over the long run.
The Internal Revenue Code (Code) treats an investment in any precious metal or coin as the acquisition of a collectible item. Therefore, under the Code, if an IRA entered into a transaction to purchase such collectibles, the transaction would be characterized as a taxable distribution, followed by the investment in the precious metals or coins. However, there is an exception contained in the Code.
IRAs may invest in certain gold, silver and platinum coins and bullion that meet certain fineness standards, but keep in mind that the IRA trustee or custodian must hold title to the investments of the IRA, and the IRA must be a self-directed IRA. In the case of precious metals and coins, the custodian would literally need to store the investment. Therefore, an added issue of practicality exists with these types of accounts. Be aware that there are IRA custodians who are willing to set up self-directed IRAs for those who want them and facilitate the physical transfer and storage of precious metal assets. However, these types of custodians are few in number and it is extremely important to exercise proper due diligence in choosing the trustee. Not to worry, there are other ways!
An IRA can purchase shares of an exchange traded fund that tracks the value of a particular precious metal. In such a case, the physical ownership and storage issue is avoided. There are also several mutual funds that invest in precious metals and an IRA may also purchase common stock shares in publicly traded mining companies.
As mentioned above, diversification is extremely important to any investment portfolio and an IRA is no different. Before embarking on any investment, including those discussed here, make sure the proposed investment is in keeping with your overall investment goals. With any investment, due diligence is always recommended and it is important to review any fund’s prospectus’ tax section, if as an investor there are doubts about a fund’s ownership of a particular precious metal.