The Tax Payer Relief Act of 1997 made it possible to diversify your retirement savings further by adding gold to your IRA account. It effectively removed the barriers in the U.S. tax code that prevented such investments, and gave investors an alternative to traditional IRAs that hold stocks and bonds. This law, in addition to other parts of the U.S. tax code, outline the gold IRA rules for backing your retirement savings with precious metals. It is important to understand these rules before choosing to rollover your 401K and add gold or silver to your IRA.

Limits on Investment Options for Self-Directed IRAs

According to gold IRA rules, not just any IRA can hold precious metals. Instead, a self-directed IRA is needed. Self-directed IRAs allow you to combine traditional investments with gold or silver, or a number of other investments. It is important to note, however, that not all self-directed IRAs are created equally.

The custodian you chose for your IRA will determine your options when it comes time to choose your investments. Some banks offer what they call self-directed IRAS, but then offer only a short list of options for investment. These usually include stocks, mutual funds and annuities, but leave out nontraditional investments. Others let you to invest in anything allowed by section 408 of the U.S. tax code, which outlines the gold IRA rules. This is the custodian you will be looking for if you want to back your retirement savings account with gold or another metal.

The tax laws list only what cannot be included in a self-directed IRA, and any other investment is allowed as long as it meets the other stipulations in the code. You can invest in approved metals, bank certificates of deposit, real estate, mortgages, energy investments, LLCs and other private businesses, corporate debt and even promissory notes. Section 408 only makes it illegal to hold art, antiques, collectibles, gemstones or life insurance in an IRA.

Only Investment Grade Metals Are Allowed

Self-directed IRAs can be backed by silver, palladium, gold or platinum, according to the U.S. tax code. The quality of the metals, however, is heavily regulated based on the gold IRA law. Gold must be at least 99.9 percent solid gold, or .999 pure, in order to be included in this type of investment. Because most coins do not meet this requirement, gold IRAs are typically backed by bullion bars or coins. There is an exception, though. American Eagle coins are only 91.6 percent pure, but are allowed. These are the only U.S. Mint gold coins that can back an IRA. Silver must be at least 99.5 percent pure, which rules out all coins aside from silver American Eagles or silver Canadian Maple Leaf coins.

Tax Advantages of Self-Directed IRAs

Because an IRA is designed to be a tax-deferred retirement savings account, gold IRAs have the same tax advantages as a traditional IRA. These advantages allow you to transfer or rollover holdings from a 401K or IRA into a metals IRA without having to pay taxes on your investment or incurring other penalties. At the same time, you cannot deduct losses in your account from your taxes.

There are some differences from traditional investments, though. You lose the option of capital gains treatment when you make a withdrawal of profits in a gold IRA. You can, however, choose to take possession of the physical gold that backs your investment when your term ends. This is not an option in a traditional IRA.

Importance of Choosing a Gold IRA Custodian

The tax code states that an investor must work through a third-party custodian, just like any other IRA. There are a number of custodians out there, and it is important to find one that is trustworthy. Checking reviews and ratings on Trustlink and the Better Business Bureau should be the minimum research done before choosing a custodian.

It is also paramount to select a custodian who offers the options you want. Not only will you need a custodian who offers gold-backed IRAs, you will need to decide how you want to back your IRA with metals. Some custodians use gold bullion and coins while others purchase exchange-traded funds that hold only allowed precious metals. The advantages and disadvantages to each type of investment need to be weighed before you make your decision on which is best for you.

Avoiding Fraudulent Investments

While the rules are designed to protect investors, there are some drawbacks to investing in a precious metals IRA. The possibility of fraud is one of the biggest issues with this type of investment. In fact, both the Securities and Exchange Commission and the North American Securities Administrators Association have warned investors about the heightened risk for fraud when you direct your own investments. Some unscrupulous companies and individuals prey on uneducated investors, and the self-directed nature of these IRAs often make their owners easy targets.

The key to investing safely is to research, and be sure that you know what it is you are investing in. You must ensure that fraudulent schemes cannot take advantage of your lack of knowledge. To do this, you can check with the SEC and your state securities groups, and discuss your options at length with a financial planner before you choose how to invest. This is the best way to reduce the chances that you will become a victim of fraud.

Gold and precious metals allow you to diversify your retirement savings while banking on the steady value of gold, silver, platinum or palladium. Since 1997, it has been possible to use these metals to back a self-directed IRA. With the uncertainty of the current economic situation worldwide, this is becoming a more and more popular way to ensure your investment is not lost. It is important, though, to know and understand the rules and regulations surrounding this type of investment before you rollover a traditional 401K or transfer funds from an existing IRA into a self-directed IRA. By doing your homework on the rules, you can make a more educated decision about your investments.