Can You Own Commodities in an IRA?
Commodities are a unique investment and should only be undertaken if they present substantial risk. Commodities don’t typically provide cash flow and their prices tend to fluctuate rapidly.
If you want to invest in physical precious metals, finding an IRA custodian who will allow this is often impossible. However, there are alternative means of owning commodity investments.
Investing in Commodities
Investment in commodities can be both risky and lucrative. Their outcomes often depend on factors outside the investor’s control such as regional conflicts that disrupt supply, weather conditions that impede production or political risks that disrupt supply chains.
Commodities encompass precious metals like gold and silver, industrial metals, energy sources and agricultural products. Unlike stocks or bonds which give investors market exposure to specific companies or governments, commodities offer investors exposure to physical assets that could have real world applications.
Investors can buy and sell commodities directly, through futures contracts or shares in companies that produce them; but many investors opt for commodity-based mutual funds or ETFs instead, which combine investments into one pool that tracks specific indexes. NerdWallet rates online brokers and robo-advisors that enable trading commodity ETFs and mutual funds based on fees, minimum deposit requirements, investment selection options, customer support capabilities and mobile app capability as well as security protocols designed to prevent outages or breaches in service provision.
Self-directed IRAs allow investors to use their retirement funds to invest in nontraditional asset classes such as precious metals like gold and cryptocurrency such as Bitcoin. Assets purchased via these exchanges tend to come with additional fees and risk of fraud should they not be properly managed.
Additionally, the IRS imposes stringent rules about which assets you can include in an IRA account and any breaches could cause its entire balance to become subject to tax all at once. You’re not permitted to buy and reside in properties owned by your IRA, nor provide services directly related to these properties.
Self-directed IRAs may provide the potential for some savvy investors to generate significant gains; however, it’s essential that investors fully comprehend both the process and risks involved before embarking on this path. Many may prefer traditional investments regulated by the SEC instead.
Commodity investments come in various forms, from physical ownership of raw materials like gold or silver to futures contracts and exchange-traded funds. Investors can even access commodity markets through mutual funds that specialize in commodity investments; since commodities’ performance can differ from that of stocks and bonds, diversifying your portfolio may benefit.
For investors seeking to forego the risks of owning precious metals, IRAs offer an alternative: ETFs that track commodity prices can provide a safe alternative that won’t pose theft risk or storage and insurance fees; plus gains made through selling ETF shares will only be taxed at ordinary income rates and not capital gains rates.
Alternative approaches involve buying stocks of companies that produce specific commodities. Such producers tend to experience increased profits as commodity prices rise; however, investing directly can introduce greater volatility into your portfolio. It’s essential that you understand what factors cause commodity price fluctuations – such as weather, politics and global production.
ETFs offer a fast and cost-effective way to invest in commodities. ETFs are structured as exchange-traded grantor trusts that give investors direct shares of a fixed portfolio like SPDR Gold Shares or PowerShares Crude Oil Fund. ETFs may provide either broad exposure or concentrated holdings focused on specific producers that may not be as able to produce as much when commodity prices drop; though such concentration could also help take advantage of rising prices.
Commodities tend to have lower correlations to stocks and bonds than the rest of the economy, making them useful diversifiers that reduce portfolio volatility. But they’re volatile too – their returns can depend on weather or other external influences such as political events or global production levels that may not be under your control, like political developments or global production levels. Furthermore, tax rules regarding commodities can be complicated; investors should consult a qualified professional when purchasing futures contracts that carry high risks of loss; this applies especially for futures contracts which carry an even higher risk – making futures contracts suitable only if investors possess enough capital.