by Robert G. Yetman, Jr.
Investor interest in gold and other precious metals is always higher during periods when people are particularly concerned about the stability of global economies…and, principally, that of the nation in which they reside; it has been that way since the advent of modern economies and the now long-established era of central banking systems. That said, the most devoted of “gold bugs” never see a bad time for having money set aside in the asset, and now, given the likelihood that more distressed economic conditions will persist in many developed nations for years to come, even those who have assumed a more traditional investment posture, historically, are giving serious consideration to making gold a standard portfolio asset, including investing in the metal through an Individual Retirement Account (IRA).
While it is no great challenge to invest in gold-representative securities products…like stocks of mining companies, and gold mutual funds and ETFs…in an IRA, what does it take to buy and hold the actual physical metal inside of an IRA? While gold-related stocks and funds can be transacted with ease within an IRA that is available through any securities brokerage, in order to purchase the metal for your IRA, there’s a little more to the process, including the fact that the administrative “overseer” of your IRA, the custodian, has to be more specialized than the IRA custodians with which you may be more familiar.
I’m referring here to something called a self-directed IRA. Self-directed IRAs are different from other IRAs in that the custodian provides for the account owner the ability to invest in a greater breadth of asset types than those normally available in a “regular” IRA. Ultimately, IRA administration is about recordkeeping, and self-directed IRA custodians have simply decided to go after a segment of the investment market that wants access to asset classes that, while allowed by the IRS, fall outside of what most custodians are set up to maintain.
Self-directed IRA custodians provide a tax-sheltered home for such diverse holdings as real property, a private business, tax liens, notes, and, of course, precious metals, subject to certain conditions. While theoretically, just about any store of value could be held as an asset inside of an IRA, there are some explicitly disallowed by the IRS; the list of prohibited investments for IRAs includes life insurance, alcoholic beverages, tangible personal property (furniture and clothing, for example), and just about anything typically thought of as a collectible – art, rugs, antiques, and the like.
You’ll even find metals on the list of proscribed investments, but there are exceptions, which is why you’re able to put money into physical gold at all through your IRA. Presently, you can invest in gold, silver, palladium, and platinum inside of an IRA, and the metals have to be configured as bars, rounds, or coins, depending on the metal. Beyond these general guidelines, the IRS has strict standards of fineness that must be met in order for the metal to qualify for purchase in an IRA. In the case of gold, bars must be pure to 24 karats, or 0.995+ fineness, and coins must also be pure to 24 karats (again, 0.995+ fineness), although there is an exception granted for the 22 karat American Gold Eagle.
Bars vs. Coins
While gold metal choices are in the physical form of either bars or coins, let’s talk about coins, specifically, for a bit, because some of those available for purchase do not meet IRS standards for purchase in an IRA.
We talked about metal purity a minute ago, and that’s what really makes the difference to the IRS. Gold coins that do not meet the requisite purity standards are those marketed principally for their numismatic value, as collectibles – remember, collectibles, per se, are off limits to IRAs. To the IRS, the overriding standard of what qualifies an approved metal for an IRA is its currency content. In other words, the IRS doesn’t care…and, by consequence, doesn’t think you should care…about how limited a run of a particular coin design might be; what matters is that the chunk of gold you’re buying, regardless of the actual physical shape or uniqueness of the “edition,” is basically all gold, and that for those for which there is some definable numismatic value, said value remains subordinate to the currency value.
If you have a particularly affinity for any of the IRA-acceptable coins, then that’s just fine, but if you don’t really have a preference as you begin the process of establishing a gold IRA, and all that matters to you is the currency value of your metal, then you’ll likely prefer bars, and the reason for that, very simply, is cost.
Even if you know practically nothing about the production processes associate with gold coins and bars, your intuition probably informs you that there’s more to creating coins than there is to creating bars, and you’d be right. Coin production can be expensive, and that cost is passed along down through the chain to you. By contrast, the pouring of bullion bars is a much simpler, more straightforward process, resulting in a lower cost. For example, 10-ounce gold bars can be purchased for about two percent above spot price, whereas I’ve seen new 2016 American Eagle gold coins go for a premium of anywhere from five to 15 percent, although a five to eight percent premium is more typical.
Let me say a few things about proof coins and fractional coins, which are both subject to strong marketing by the retail gold industry. Proof coins are any of the wide variety of “special edition” coins you commonly see marketed on TV and the Internet. Those interested purely in the collectible value of coins may value proof coins at a premium, but markets based on numismatic value, rather than currency value, are wildly unpredictable. While some proof coins meet the IRS’s standards of acceptability for inclusion in an IRA, the premium you’ll pay for the touted collectible value, in addition to the currency value, can be significant, and the unpredictability of collectibles markets means that the hoped-for benefit may not be there when you want to sell.
Fractional coins are so called because they consist of varying fractional amounts of an ounce. For example, in addition to a full ounce, American Eagles can be purchased in denominations of a half-ounce, one-quarter ounce, and one-tenth of an ounce. They’re fine, but the premiums over the spot price tend to be higher than they are with one-ounce coins.
Ultimately, if you’re serious about investing in gold with your IRA because what is most important to you is straight currency value, bars will likely remain your best bet, in a net sense, but note that I’m speaking generally here; there are plenty of coins that are IRA-eligible, and you may prefer those for a particular reason. For example, if you envision the possibility of a future existence where even basic transactions will take place in the form of precious metals, then coins may offer an additional benefit of practicality because of the inherently smaller denominations that naturally coincide with that physical form, and so paying a higher markup for those might make sense to you.
Getting It Done
The first step to opening your gold IRA is to familiarize yourself with the key entities (besides yourself) that must work together to facilitate your account opening. There are three:
- The self-directed IRA custodian. The job of the custodian is to act as the IRS-approved account “umbrella” under which your actual investment assets exist. The custodian does not sell you your gold, nor does the self-directed IRA custodian store your gold. This is an important distinction about which you should be clear, specifically because of the use of the word custodian. Custodian, in this context, does not refer to the physical location at which your goal is secured, but, rather, to the entity responsible for properly administering your IRA. In the end, the custodian is basically all paperwork; important paperwork, to be sure, but the point is that they will never see your physical gold on their end.
- The dealer. The gold dealer is the place from which you will actually purchase your gold. To clarify, they have nothing to do with the administration of your IRA, and will not be serving as the storage facility of your gold.
- The depository. The depository is the where your metal is vaulted. Again, while the depository will have custody of your physical gold, it will not be the custodian of your IRA. I know I keep hammering away at that, but it can be a point of confusion for a lot of investors.
As far as the process of opening a bona fide gold IRA is concerned, it’s relatively straightforward, but with the three entities involved, and each playing an essential role in and of themselves, it’s easy to be unclear about what to do first.
To really break things down, the process will be conducted in two steps. The first is to perform your due diligence, to research and decide on just what firms will be serving as your dealer, depository, and IRA custodian. The second step will be to engage in the transactions in the proper order, which is easy; plus, no company of substance that is acting either as a dealer or custodian will do anything to put you in a compromised position with the IRS.
Choosing a Dealer
When it comes to choosing a dealer, you’ll want to take some time to ensure you’ll be transacting with one that has an excellent reputation.
The most important consideration for you, outside of the basic business reliability of the dealer, is the price you will be paying for your gold. As long as you’re paying no more than a couple of percentage points above spot for your bars, and somewhere in the range of five to eight percent for your coins, you should be fine, as far as price is concerned.
At the Consumer Affairs website, you’ll find an article with a pretty fair list of gold dealers, some of the names of which you may recognize, but do not see this as the final word in lists of gold dealers.
In the end, gold is a commodity…maybe the ultimate commodity…so outside of price, as well as the reputation/reliability of the dealer, there’s not going to be a lot for you to consider.
One thing: your new IRA custodian may prove to be of some assistance with the selection of a dealer. There’s going to be a fair chance that the custodian will have a list of gold dealers with which they’re familiar, and that can be a good resource for you to evaluate, as well.
Choosing a Depository
The depository you select will be the actual home of your gold, so you’ll want to be sure you’re happy with it…and part of that will have to do with the options you choose that pertain to the precise manner in which your physical property is maintained in the vault.
There are two particularly important storage-related terms with which you want to be familiar when discussing depositories – allocation and segregation. Allocation refers to the way depositor gold is stored as a matter of accounting; segregation refers to the way in the gold is physically stored.
Both are significant, but allocation, in the sum total of things, is going to be a little more meaningful to you. Confusing the matter is that sometimes the terms are used interchangeably, even by gold professionals, but they do not refer to the same thing, exactly.
Gold that is allocated exists, from an accounting standpoint, specifically, solely, and separately…in the name of the owner; gold that is unallocated is pooled…again, as a function of accounting…with the assets of other, unallocated gold depositors. Additionally, unallocated gold is reflected on the balance sheet of the depository, meaning it is a part of the depository’s own assets and liabilities, and can even be loaned out by the depository.
In other words, think of unallocated gold in the same way you know your money on deposit at the bank to be situated. In that case, while you have an account in your name, and, under normal conditions, the bank will hand you a check out of “your account” when you show up to make a withdrawal, the money is pooled with all other depositors’ money, from the standpoint of practical application, and the bank can, and does, loan it out. Additionally, if the bank runs into trouble, your money may be at risk.
While allocated gold is, by implied definition, held off balance sheet, I would ask any depository you’re considering to confirm that both of those conditions will exist on behalf of your deposit – that it will be allocated and held off balance sheet.
Next is the matter of segregation, which refers not to the way your gold is stored from an accounting standpoint, but how it is physically stored. Segregated deposits are kept separate from those of other customers, while non-segregated deposits are vaulted together.
Segregation is not quite as important as allocation, but it will be the preferred method of physical deposit for many gold buyers. I say “not quite as important” because it is still possible for gold to be both fully allocated and non-segregated. The reason someone might opt for non-segregation is, simply, cost. Because gold is not being separately vaulted from everyone else’s, the storage costs are lower. Think of it as you would the difference in cost between a private and semi-private hospital room.
Practically speaking, and bottom-lining it, if you show up at the depository to collect your gold that has been held fully allocated and fully segregated, you will receive back the exact same metal(s) that were originally deposited, while unallocated and unsegregated account holders will usually receive the same kind of metal that was originally put on deposit, but not the very same metal, itself. Furthermore, as explained a minute ago, unallocated metals are subject to the depository’s risk in the way that allocated metals are not.
If your metal happens to be allocated but physically stored as unsegregated, you may not receive back your exact same deposited metal on withdrawal, but you will not bear the depository’s financial risk while it is vaulted. This is why I said earlier that the matter of allocation is going to be a little more important to your financial security, overall, than that of segregation.
As far as segregation goes, for many, as long as they are getting back the same kind of metal they put on deposit, that’s good enough. For example, anyone’s $1 bill spends the same as the $1 bill you have in your pocket, and so most people would not care if they traded $1 bills with their neighbor. However, some gold investors do not feel quite the same way about the metals they purchase.
Bottom line, for the safest, most secure configuration of your gold deposit, you want it to be fully allocated, off balance sheet, and segregated.
All of this said, the manner in which your gold is stored, from accounting and physical standpoints, is by no means the only consideration when it comes to making depository choices. The biggest and best depositories, which are the only places to which you should entrust your gold, are all going to have state of the art storage facilities (including vaults constructed to standards that meet or exceed those established by the Bank Protection Act, as well as those of Underwriters Laboratories), outstanding security, plenty of all-risk insurance coverage, and all of the features you would want in a depository.
Although depositories with well-known names like HSBC Bank USA, JP Morgan Chase Bank NA, and Brink’s are approved to handle a gold IRA, others, like CNT Depository in Bridgewater, Mass., and Delaware Depository in Wilmington, Del. are popular with IRA investors and custodians, as well. In the minds of some gold buyers, one particular advantage offered by CNT and Delaware is that each is physically located a fair distance away from any of the major U.S. cities that, unfortunately, are more likely to be terrorist targets, or that may be more significantly affected by a natural or man-made disaster. Additionally, it is worth noting that Delaware Depository is the largest depository in the United States outside of New York City.
(Please note that none of the depositories named in this article is indicated here as a recommendation, but, rather, merely as examples of IRS-approved depositories that are generally well-known throughout the precious metals community.)
One other thing – you may find that some self-directed IRA custodians, about which we’ll be talking more in just a minute, will either require, or strongly suggest, that you use a depository with which they have been working exclusively. If you, through your own independent research, determine that you are fine with that depository, great…but bear in mind that there are custodians that allow you to choose whatever depository you want to use. While I mention this in terms of this discussion on depositories, it also has bearing, obviously, on your selection of a custodian, as well.
Choosing a Self-Directed IRA Custodian
You’ll want to do some legwork here, and much of it in the form of fee comparisons. I don’t wish to suggest that you “commoditize” the IRA custodians, and look only at fee structure, but when investors sour on a custodian, it’s typically because they feel they’re paying too much for the administration of their accounts. Here is a comprehensive list at the website of IAG Wealth Management (a firm that has nothing to do with this article, and with which I have zero connection) of self-directed custodians, one the firm itself decrees as “available for public use.” However, I would do additional Internet searches on the basis of “best self-directed IRA custodians,” that sort of thing, and massage all of the information you find to begin narrowing down a custodian selection.
Something else: The quality of the customer service you receive from a self-directed IRA custodian is essential. Although I mentioned that people who leave one custodian for another do so because they decide that they don’t like what they’re presently paying in fees, some do leave because they’re unhappy with the customer service provided by their present custodian. When I was active in the securities industry, I would sometimes have run-ins…or would hear from clients who had unfortunate experiences…with the customer service departments of select self-directed IRA custodians.
Here’s what I’m getting at, on the subject of service: As you’re initiating dialogues with various custodians, pay attention to the speed and quality of the responses to your various queries. Overseeing non-traditional IRA assets, while something that should be natural to anyone in the business of doing that very thing, is still something that falls far enough outside the box of many investment professionals that it’s not uncommon for customer service representatives at custodian locations to have their hands full – some may be new, and still working their way through the learning curve. It’s not a warning sign if you have to be placed on hold while the representative with whom you’re speaking has to confer with someone else in order to answer your particular question, but the point is that you should, ultimately, be getting knowledgeable, detailed assistance, and the overall experience should be excellent. As you’re working your way through the custodian selection process, keep that in mind.
Again, as you’re working to find a dealer, depository, and custodian, it does not matter with which you speak to first. You will likely start out having ongoing telephone and email exchanges with representatives from several of each, as you begin gathering up information, and that’s just fine.
Note that in this era of increased synthesis of investment entities, it is now common for each of the role players here…dealers, depositories, and custodians…to have resource lists and information about each other. For example, a dealer with which you speak may have a “suggested list” of depositories and/or IRA custodians, a depository may have information on dealers and custodians, and custodians…well, you get the picture. The point is that, nowadays, in the interest of facilitating a client’s intended investment transaction, as well as given the nature of the required interrelationships between the entities, it’s no big deal for one to have a lot of information on the others. However, while that can help make doing research a little easier, be sure that you’re still engaging in your own independent study.
Once You Have Your Roster Selected
With your three entities chosen, the hard part is over, and things get easier from here.
As noted, while you may well be having multiple interactions with the dealer, depository, and IRA custodian during the information-gathering phase, the general process to consummating the transaction is to first open and fund your IRA account at the custodian you’ve selected. Once the account is open and money is available, the actual transaction can occur in a timely fashion. You will also formalize the relationship with your chosen depository at this time, so that they will expect the impending arrival of your metal on behalf of your IRA.
However, as previously mentioned, the depository relationship may prove to be a function of the relationship with your custodian, or otherwise “go through” your custodian, particularly if you end up choosing a depository with which your custodian regularly deals.
From this point, you will clarify just what it is you will be purchasing from the dealer, so you will next reach out to them. The dealer will provide you with a price quote, as well as the information needed by your custodian to complete the transaction – you may be asked to sign a trade confirmation that you will then forward to your IRA custodian.
Your custodian will then ask you to sign their version of an “authorization to purchase” form, which serves as their formal instructions from you to buy the gold. The custodian will then transmit the funds, as well as a packing slip and/or shipping instructions for the depository, to the dealer. The dealer will complete the purchase transaction, pack up your gold, and ship it to the depository. You will receive notification once your metal has been received by the depository.
Be advised that the earlier on in the process you establish your IRA, the more useful you may find the custodian representatives to be in facilitating the transaction, all the way around. In other words, while what is being outlined here suggests you will be doing a good deal of the legwork yourself, the fact is that any questions you need answered, as well as any help you need with any part of the process, should be something for which you can rely on a quality custodian. This is why it’s important that you do a good job vetting your IRA custodian, and going with one that you can determine has a lot of experience with precious metals IRAs and that has an excellent client service record.
Some Final Details
It’s important to remember that your gold IRA is an IRA first; the rules that govern IRAs remain paramount, regardless of what it is in which you’ve decided to invest the monies inside of your IRA. Sometimes, self-directed IRA account owners get a little confused about “acceptable behavior,” because the assets they buy are so much different from what they’re used to holding in an IRA.
For example, some gold investors are puzzled as to why they can never take possession of their bars or coins during their working years or while they wish to retain the tax-deferred integrity of the IRA umbrella. If an investor were to withdraw his physical gold from the depository at which it is held, that would be considered a distribution, for tax purposes, and, just like the IRA you might have at a bank or brokerage, any distribution you take before age 59 ½ is subject to IRS penalties, and may also be counted as ordinary income in the year you withdraw the gold, depending on the type of IRA you have. Of course, withdrawals made after age 59 ½ are not subject to penalty.
When it does come time to take distributions, you may do so in either the form of the physical metal or cash; you will simply inform your custodian of your preference, and they will assist you with arranging the transaction. Of course, if you want the money, the process will include liquidating (selling) the metal through a dealer…again, while it remains inside of the IRA…and then the custodian cutting you a check for the amount of the distribution.
If you want to open your gold IRA with a transfer or rollover from an existing retirement plan, that is no problem. The tax-deferred retirement plan processes and rules remain universal, without regard to what it is, precisely, you’re using your monies to buy. For example, if you have a 401(k) that you want to move from a previous employer, or an IRA at a brokerage that you’d like to now use for the umbrella for your tax-deferred physical gold investing, that is no problem. You can open your self-directed IRA using the proceeds from the transfer or rollover of an existing IRA or other qualified retirement plan, subject to IRS regulations as well as the terms and conditions of your present plan and custodian. In the case of a direct transfer (which is preferred, because at no time do you take possession of the money), your first move is to open the self-directed IRA, and then arrange for the transfer through the new custodian.
If you want to move the money in the form of a rollover, a situation in which you actually receive the check for the retirement plan proceeds from your previous custodian, and have up to 60 days to redeposit the money into another IRA or qualified plan before taxes and penalties, as appropriate, might ensue, you could get away without having the self-directed IRA account open before receiving the dough; you just have to make sure that you’ve set up the new account, and funded it (that’s the really important part) with your proceeds by the time the 60-day window closes.
You’ll notice I did not address the question of if investing in physical gold through your IRA, or at all, is a good idea. For purposes of this article, I did not want to get sidetracked into that discussion. The truth is that people who believe in putting some or all of their investment monies into precious metals tend to view those assets as being fundamentally different from anything else in which they might invest, and are even guided by a philosophical, trans-secular outlook that shapes how they see life itself. That is, they tend to see having money socked away in gold as something that transcends a typical investment perspective, and speaks to a worldview that is not usually in synch with that of the “regular” investor. This particular article accepts that as a given, and starts from that point.