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Stock-weary investors putting gold into their IRA

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05-27-2008

By Tim Grant

May 7, 2008

It used to be that an IRA could be paid for with only cash, stocks or bonds, but Congress has expanded the rules governing individual retirement accounts to include gold and silver bars and coins.

And more investors who are concerned about turbulence in the U.S. and global economies are taking advantage of that option.

“When you get into very volatile markets and people are afraid of stocks and bonds, they look for safe havens, and gold has always been a safe haven,” said Nadav Baum, managing director of investments at BPU Investment Group in Pittsburgh.

Transactions for precious metals IRAs have increased 523 percent in the past eight months at GoldStar Trust Co., a leading custodian for self-directed IRA accounts, based in Canyon, Texas, said Trey Hightower, a precious-metals specialist.

GoldStar’s IRAs allow investments in gold, silver, platinum and palladium bullion bars and coins. Its precious metal assets under management were valued at $312 million as of Dec. 31.

“The economy and the weak dollar is driving a lot of people into precious metals,” Hightower said.
Traditional and Roth IRAs that contain precious metals operate under the same rules as conventional retirement accounts. The metals cannot be withdrawn from the account without penalty until the investor reaches 59 1/2 years old and withdrawals are required starting at age 70 1/2.

But the roundabout process of setting up a precious-metals IRA is where the similarities end.
Investors must contact a self-directed IRA custodian who handles precious metals accounts. After that account is open and funded with cash, the customer then contacts a coin dealer and locks in a price for the metals.

The IRA custodian issues a purchase order to the coin dealer and then the metals are shipped to a depository, such as HSBC Bank in New York. After the custodian gets confirmation from the depository that the metals have arrived, the custodian documents it into the IRA account and pays the coin dealer.

“The customer never holds the metals while they’re in the IRA,” Hightower said. “But they can sell the metals within the IRA and take a cash distribution or take the metals out as a distribution.”
The combination of dollar weakness, falling interest rates and rising inflation has created an ideal environment for rising precious metals prices. Gold, which recently traded above $1,000 a troy ounce, is known as a crisis commodity. It tends to appreciate in value under the worst economic conditions.

In 1997, gold and silver bullion were approved for IRAs. But only gold coins having a purity of 24 karats are allowed in the retirement accounts, with the exception of the 22-karat U.S. Gold Eagle. The South African Krugerrand is not permitted in an IRA because it is a 22-karat bullion coin.
David Morgan, a world renowned silver expert and founder of silver-investor.comin Spokane, Wash., said he was familiar with the handful of IRA custodians who handle precious metals and was not aware of problems with any of them.

“I’m not advocating you put all your IRA money into gold and silver,” Morgan said. “There are a lot of people whose main savings is an IRA account, and therefore they should put at least 10 percent in precious metals.”

One of the most innovative ways to buy and sell precious metals in an IRA was recently introduced by the Entrust Group, based in Reno, Nev. Through its partnership with GoldMoney.com, investors can buy and sell digital gold, which allows the movement of physical gold bullion in their IRAs from one account to another online.

The downside of holding precious metals in an IRA is the account owner must pay storage fees to the depository where the metals are held. And there are often big spreads in the buying and selling exchange rates. Those fees can make bars and coins an expensive way to diversify low-balance portfolios.

“There’s not much advantage and a lot of disadvantages in having physical bullion,” said Bruce Fenton, president of Atlantic Financial in Boston. “What happens if it’s stolen or it melts? You don’t have to worry about that if it’s electronically protected.”