Can You Own Commodities in an IRA?
Can commodities be held within an IRA depends on your investment goals, risk tolerance, and time horizon. Historically, only gold and silver coins or bullion have been permitted as investments within an IRA.
However, some investors want to diversify their portfolios with tangible assets in addition to ETFs or physical ownership. There are various strategies for doing so.
Physical precious metal IRAs like gold or silver can provide investors with a hedge against stock market crashes and currency devaluations, but keeping these assets insured and stored properly can be costly and aren’t as liquid as traditional investments such as stocks or mutual funds.
Custodians willing to act as trustees for self-directed IRAs holding precious metal coins and bullion are hard to come by, while valuations may be more complicated compared with assets traded through exchanges – forcing IRA owners to incur higher taxes and fees than they otherwise would.
One reason that precious metals may not be as popular among investors as stocks and mutual funds is because IRAs must invest physically. Exchange-traded funds that track commodities’ prices do not pose this illiquidity issue as much. Furthermore, supply and demand effects make an IRA’s precious metal holdings less liquid.
Exchange-traded funds (ETFs)
Individuals looking for indirect access to commodities may invest in shares of companies that produce them. Although such investments may track commodity prices closely, they also tend to be very volatile and can experience drastic fluctuations. Furthermore, investors must carefully consider the tax consequences when purchasing such securities – typically, holdings over one year trigger capital gains taxes depending on your taxable income and filing status.
ETFs offer an easier, diversified route into commodity markets and can be traded like stocks throughout the day. It is crucially important, however, to understand their taxation. As partnerships that own futures contracts rather than physical commodities (like Schedule K-1 or Form 1099 returns for their investors) generate information returns with hybrid rates of long-term and short-term capital gains taxation annually when their assets are sold off by ETFs.
Investment in physical assets such as bales of cotton or barrels of frozen orange juice concentrate should typically be avoided, since their returns are unpredictable and potentially volatile.
Consider investing in mutual funds instead, which are composed of multiple holdings that combine to form the overall investment fund. Performance for each underlying investment is then measured against an index benchmark and combined net asset value (NAV) plus management fees are the total return you’ll see from mutual funds.
You could invest in a fund that trades commodity futures contracts instead of holding physical commodities, similar to ETFs with low purchase minimums and relatively high risk potential. Because such funds carry significant speculative risk, you should always consult an advisor prior to investing.
Collectibles like rugs, antiques, metals, gems, stamps and coins generally cannot be held in an Individual Retirement Account (IRA). There are a few exceptions; specifically government issued gold and silver bullion coins from the Treasury Department can be held within an IRA provided they meet purity requirements such as one ounce silver coins and ones that meet 94% purity (such as one-ounce silver coins and gold, silver platinum palladium coins that meet this minimum purity level) while precious metal ETFs also qualify. However the IRS advises against keeping metals stored at home; instead recommends keeping them within an approved depository/bank for safekeeping!
Collectible items cannot be included in an IRA without using a PTE (Prohibited Transaction Exemption). A PTE allows you to buy and sell an asset without incurring tax consequences; however, this might not be the most tax-efficient method of investing precious metals; should you opt to trade coins or bullion, the tax consequences could become significant when distributed as dividends.