How Does a Precious Metals IRA Work?

Federal tax law governs the tax-favored savings vehicle known as an individual retirement account. With an IRA, you can salt away funds for later in life, with either a tax deduction for contributions (in a traditional IRA) or tax-free income when you withdraw (with a Roth). IRAs can hold a wide range of assets, including stocks, bonds, mutual funds, and exchange-traded funds without restriction. There are some additional rules and conditions, however, on IRAs that contain physical gold, silver and other precious metals.

Going for Gold -- and Palladium

A precious metals IRA gives the account owner an opportunity to deposit physical assets, rather than company shares or mutual funds. This means gold or silver bullion or coins, as well as platinum or palladium. The account owner must work through a qualified dealer or broker to purchase the assets, and store them with a qualified third-party depository. Collectibles such as rare coins do not meet the IRS requirements, nor do jewelry or antiques.

The Gold and Silver Standards

The IRS sets purity standards for gold and silver coins and bullion held in your IRA. Gold must be 99.9 percent pure and certified by an assayer approved by COMEX or the New York Mercantile Exchange. Coins that meet the IRS standards include the American Eagle, Canadian Maple Leaf and Australian Philharmonic. Silver must be .999 pure or "fine," with qualified examples including American Silver Eagles, Mexican Libertads and Canadian Silver Maple Leafs.

Handling a Precious Metals IRA

You open a precious metals IRA by completing an application with an account custodian who offers management of these self-directed accounts. Fund the account with cash, and then select a broker or dealer, as well as a depository. All instructions for buying assets go through the IRA account manager, who relays your orders to the appropriate agent and charges a fee for the service. The account owns the assets, and pays handling fees, shipping, and storage fees. The IRS treats distributions from the account the same way as withdrawals from a conventional IRA. If you take an early distribution before age 59 1/2, for example, you may be subject to a 10 percent penalty as well as income tax on any capital gains.