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Golden Opportunities: Using Self-Directed IRAs To Purchase Precious Metals

8 min read

Golden Opportunities: Using Self-Directed IRAs To Purchase Precious Metals

During the Covid-19 pandemic, the UK faced a significant financial upheaval, highlighting a crucial lesson for financial planning. UK pension funds, heavily invested in government bonds, suffered when inflation spiked due to excessive money printing by the British government. As a result, the Bank of England raised interest rates, causing new government bond prices to soar and existing pension fund values to plummet. The Bank intervened, buying £65 billion (around $70 billion USD) in debt to stabilize these funds, while Britons feared losing their life savings.

Similarly, in the U.S., the bankruptcies of First Republic Bank, Signature Bank, and Silicon Valley Bank triggered fears over savings, largely because these banks had heavily invested in U.S. bonds. The Federal Reserve stepped in to prevent a broader banking crisis, with American taxpayers bearing the costs. These examples underscore the risks of relying solely on monetary investments. With governments capable of limitless money printing, the long-term safety of such savings remains uncertain.

Instead, you could allocate money to a solid hedge against inflation and the world’s most coveted precious metal—gold.

For many American taxpayers, Individual Retirement Accounts (IRAs) are fundamental tools in retirement planning. They invest a portion of their earnings in hopes of reaping profits and beating inflation.  However, IRAs are limited to stocks, bonds, mutual funds, and other common assets, which may no longer suffice.

Since these assets are not as safe and profitable as they once were, savvy investors are opting for self-directed IRAs—a powerful alternative that offers more control and flexibility over their hard-earned wealth. That’s why, in this article, we will discuss how to use these types of IRAs to purchase gold and help you protect what’s yours.

 

Established 228 years ago, the purchasing power of the American dollar has been steadily decreasing due to rampant money printing. For instance, $147.00 in 1913 is equivalent to about $3.87 today. Thus, to purchase what $37.40 could in 1913, you would need over $1,428.00 in 2024

Established 228 years ago, the purchasing power of the American dollar has been steadily decreasing due to rampant money printing. For instance, $147.00 in 1913 is equivalent to about $3.87 today. Thus, to purchase what $37.40 could in 1913, you would need over $1,428.00 in 2024

WHY YOU SHOULD STAY OUT OF U.S. STOCKS

Despite the Fed's efforts to control inflation by raising interest rates, inflation remains well above their target. This persistent inflation can be attributed to high levels of consumer and governmental borrowing and spending. Moreover, the economic indicators showing a contraction in industrial and manufacturing outputs suggest a slowdown, yet spending remains unchecked, escalating inflationary pressures despite the higher interest rates.

Looking ahead, if economic conditions worsen or if significant threats to the financial system emerge, the Fed might revert to expansive monetary policies, such as massive quantitative easing or even cutting rates. Such actions could weaken the dollar and cause gold prices to skyrocket. This scenario points toward a larger impending crisis involving sovereign debt, currency, and financial systems, which could drastically impact personal freedoms and potentially motivate many to consider relocating internationally to preserve their autonomy and assets.

The Federal Reserve appears to overlook the significant impact of its interest rate policies. Previously, maintaining extremely low-interest rates contributed to keeping official inflation rates low, as businesses could afford to charge less due to their reduced borrowing costs. However, the scenario has dramatically shifted. Despite rate increases aimed at combating inflation, there's a growing consensus that these measures might not be effective in the long term. The market, particularly gold, is already adjusting to this reality, recognizing that the era of low inflation might be over. In contrast, the bond and dollar markets have yet to account for this change fully.

The economic environment we are entering is one of persistently high inflation, potentially leading to stagflation, where slow economic growth coincides with high inflation and unemployment. This upcoming phase is seen as a correction or "payback" for the years of artificially low-interest rates, a period that was an anomaly rather than a sustainable economic condition. Essentially, it's suggested that they’ve made a "deal with the devil" by postponing the inevitable economic challenges. Now, people face the consequences, with the "devil" coming to collect, signalling a tough road ahead for the economy.

The current banking crisis is fundamentally different from the 2008 financial crisis, primarily due to the nature of the problems facing banks today. Unlike 2008, where foreclosures and bad mortgages drove the crisis, today's crisis stems from the severe devaluation of mortgages issued at low-interest rates that are now drastically underwater due to current higher rates. This has left banks insolvent, as these assets are now valued significantly lower than their balance sheets require. Furthermore, a bank run is exacerbating the situation, as customers withdraw their funds to chase higher returns in money markets, leaving banks unable to cover these withdrawals without incurring massive losses.

The temporary relief provided by the Federal Reserve, which allows banks to exchange these devalued mortgages at face value, is merely postponing the inevitable. These measures are not sustainable as they involve loans that the banks are required to repay, yet they lack the means to do so. The funds have shifted to higher-yielding investments held by customers, putting the banks in a precarious position where, unless the Fed continues massive support, a widespread bank failure seems inevitable. This brewing crisis is more extensive than any previous, with potential systemic risks that could eclipse those of the 2008 meltdown - and you are going to lose your money anyway.

 

In July 1944, at a posh hotel in Bretton Woods, New Hampshire, delegates from 44 countries gathered as World War II appeared to be nearing its end

In July 1944, at a posh hotel in Bretton Woods, New Hampshire, delegates from 44 countries gathered as World War II appeared to be nearing its end

THE END OF THE GOLD STANDARD AND THE FALL OF FIAT CURRENCY

The shift away from the gold standard in the United States, initiated during the Great Depression with President Franklin D. Roosevelt's 1933 mandate to outlaw private gold ownership and exchange gold for U.S. dollars, is often seen as a pivotal but negative turn in economic policy. This policy was ostensibly designed to stabilize the banking system and expand the monetary base as a means to counteract the economic downturn. However, it also marked the beginning of a detachment from a stable, gold-backed currency, leading to the devaluation of the dollar. The subsequent Gold Reserve Act of 1934 further devalued the dollar by redefining the price of gold from $20.67 to $35 per ounce, which, though intended to help the economy by boosting commodity prices, fundamentally undermined the dollar’s intrinsic value.

The complete abandonment of the gold standard came under President Richard Nixon in 1971 with the Nixon Shock, ending the dollar’s convertibility into gold. This move terminated the Bretton Woods system that had established the U.S. dollar as the central pillar in global finance, pegged to gold. While Nixon’s decision was aimed at averting a gold reserve crisis amidst escalating international and domestic pressures, it also paved the way for unrestrained fiscal policies and a departure from disciplined economic management, setting the stage for potential financial instability and inflation.

Moving away from the gold standard precipitated prolonged periods of currency devaluation and higher inflation, stripping governments of the natural fiscal restraint provided by gold-backed currency. This transition has indeed allowed for more adaptable monetary policies, which can look “beneficial” in managing short-term economic fluctuations but at the expense of long-term economic stability and confidence in the U.S. dollar. As a result, investors should consider divesting from U.S. stock markets, which are susceptible to these inflationary pressures, and instead use vehicles like Self-Directed Individual Retirement Accounts (SDIRAs) to invest in gold, thus returning to a more stable and tangible asset base in anticipation of ongoing currency devaluation.

 

WHY GOLD?

Gold has a unique historical appeal, as it has been used as a medium of exchange and also a standard for the U.S. Dollar until 1971. However, this precious metal remains a safe choice in times of uncertainty. When currencies decrease in value and stock markets crash, gold offers stability and even appreciation. This perk makes gold an attractive asset for investors interested in preserving wealth over the long term and beating inflation.

Gold’s unique qualities, including its physical scarcity, universal value and status as a tangible asset, make it a worthwhile diversification tool. In times of market volatility and underperformance of traditional assets, gold stands tall as a reliable investment. If you want to invest in gold, you can do it easily and economically here.

 

IRAs represent formidable financial instruments transcending the limitations of mere savings accounts; they serve as investment conduits empowering individuals to strengthen their financial future with enhanced stability and security

IRAs represent formidable financial instruments transcending the limitations of mere savings accounts; they serve as investment conduits empowering individuals to strengthen their financial future with enhanced stability and security

UNDERSTANDING IRAS

IRAs are fundamental financial tools that stimulate retirement savings. However, they are not mere savings accounts but investment vehicles with enticing tax benefits. They allow you to set money aside for later years and ensure more secure and stable golden years. By leveraging their tax advantages, you can grow your retirement savings over time, keeping more money in your pockets and reinvesting if desired.

When it comes to IRAs, there is no one-size-fits-all solution. Everyone has their own wants and needs, so it is crucial to know at least the three common types of IRAs.

 

TRADITIONAL IRA

The traditional IRA is probably the most popular type. Contributions made to this account may be deductible, depending on factors like income and filing status. The money you grow is tax-free until you withdraw funds in retirement, which will be taxed as regular income. The major downside is that you can only invest in traditional assets like stocks, bonds, and mutual funds. Note that early withdrawals, usually before age 59 ½, may incur penalties, with possible exceptions.

 

ROTH IRA

Another common type of account is the Roth IRA, which differs from other IRAs in that contributions are made with net dollars. Like traditional IRAs, you can invest in a small set of assets. While there is no tax deduction when you contribute, your investments grow tax-free, and withdrawals during retirement are also tax-free, provided certain conditions are met.

 

SELF-DIRECTED IRA (SDIRA)

Finally, we encounter the self-directed IRA (SDIRA), a type that stands out thanks to its investment freedom. There are still ROTH and Traditional SDIRAs. Instead of relying on someone else to manage your money and invest where they see fit, you do your due diligence and choose the assets you reckon will perform the best. However, with great freedom comes great responsibility, as you must be aware of IRS rules to avoid penalties. As long as you do not use your SDIRA to invest in assets prohibited by the IRS, such as collectibles or antiques, you can invest in multiple asset classes like gold.

 

HARNESSING THE POWER OF YOUR SELF-DIRECTED IRA FOR GOLD INVESTMENTS

A Self-Directed IRA (SDIRA) is not just a retirement savings tool; it may be what you need to profit and secure your golden years.

An SDIRA is an ideal vehicle for gold investment. It offers the flexibility to invest in various types of gold, such as bars or coins. These investments can diversify your portfolio, boost your net worth, and increase the cash flow in your IRA when stocks and bonds plummet.

However, you must stay compliant while using your SDIRA for gold investment. For instance, you can only invest in gold with a fineness of at least 99.5%. Some accepted gold products are Canadian Maple Leaf Coins or U.S. Buffalo Bullion Coins.

Your SDIRA can become a potent asset for improving your retirement savings via international gold investments, but only if you have the right guidance and planning.

 

In a gold investment SDIRA, you can only invest in gold with a fineness of at least 99.5%. In the image, we can see a specimen of Canadian Maple Leaf Coins that meets the necessary requirement

In a gold investment SDIRA, you can only invest in gold with a fineness of at least 99.5%. In the image, we can see a specimen of Canadian Maple Leaf Coins that meets the necessary requirement

HOW TO USE A SELF-DIRECTED IRA TO PURCHASE GOLD

Using a Self-Directed IRA to purchase gold can look like a complex endeavour. However, by following a step-by-step guide and understanding the legal considerations and IRS rules, you can make informed decisions and potentially enhance your retirement savings.

 

STEP-BY-STEP GUIDE:

  • Choose a custodian: Start by connecting to a custodian who specializes in self-directed IRAs and allows for gold investments;

  • Open an account: Once you've chosen a custodian, you must open a self-directed IRA account. This process typically involves completing an application and providing the necessary documentation;

  • Fund your account: After opening your account, you can roll over funds from an existing IRA or make a fresh contribution to your self-directed IRA;

  • Identify your investment: Research and identify the type of gold you want to invest in, such as bars or coins. Consider factors like fineness, scarcity of the asset and potential returns;

  • Direct your custodian: Once you've identified your investment, instruct your custodian to purchase gold using the funds in your self-directed IRA. The gold will be in your IRA's name, not yours as a person;

  • Manage your investment: After the purchase, all expenses related to the gold must be paid from the IRA, and all profits must be returned to the IRA until you withdraw your funds.

 

LEGAL CONSIDERATIONS AND IRS RULES

While a Self-Directed IRA offers greater investment freedom than a regular IRA, take your time to understand the IRS rules to avoid potential penalties or consult with a qualified professional. Here are some fundamental rules to remember:

  • Prohibited Transactions: The IRS prohibits certain transactions within a Self-Directed IRA. For instance, you cannot buy collectibles, although exceptions may apply;

  • Unrelated Business Income Tax (UBIT): If your IRA is used to run a business or if debt financing is used to purchase gold, you may be subject to UBIT;

  • Distribution Rules: Similar to other IRAs, distributions from a Self-Directed IRA without penalty are only allowed once you reach the age of 59½.

 

It's crucial to partner with a reputable and trustworthy company, familiar with financial regulations, and able to provide all the necessary specialized advice. With these tools at your disposal, you can manage your SDIRA confidently and secure your financial future

It's crucial to partner with a reputable and trustworthy company, familiar with financial regulations, and able to provide all the necessary specialized advice. With these tools at your disposal, you can manage your SDIRA confidently and secure your financial future

FINAL THOUGHTS

A Self-Directed IRA (SDIRA) presents a unique and strategic chance to diversify your retirement savings by investing in gold— a reliable hedge against inflation. This approach not only mitigates risk by leveraging this tangible asset but also taps into the potential for higher returns and enhanced wealth protection.

Partnering with a reputable company knowledgeable in financial regulations is essential, especially when investing in assets like gold within a Self-Directed Individual Retirement Account (SDIRA). Adherence to IRS guidelines is critical to avoid penalties, as not all gold qualifies for SDIRA investments, emphasizing the need for expert advice. Strategic planning and professional guidance are key to ensuring a prosperous retirement, allowing you to manage SDIRA investments confidently and secure your financial future.

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Mikkel Thorup

Written by Mikkel Thorup

Mikkel Thorup is the world’s most sought-after expat consultant. He focuses on helping high-net-worth private clients to legally mitigate tax liabilities, obtain a second residency and citizenship, and assemble a portfolio of foreign investments including international real estate, timber plantations, agricultural land and other hard-money tangible assets. Mikkel is the Founder and CEO at Expat Money®, a private consulting firm started in 2017. He hosts the popular weekly podcast, the Expat Money Show, and wrote the definitive #1-Best Selling book Expat Secrets - How To Pay Zero Taxes, Live Overseas And Make Giant Piles Of Money, and his second book: Expats Guide On Moving To Mexico.

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