Can You Own Commodities in an IRA?
Commodities have proven their value during periods of inflation, yet may not be suitable for long-term retirement planning. When investing in commodities it’s essential to understand their limits as well as your objectives and risk tolerance before proceeding with investment plans.
Investing in commodities can provide your retirement portfolio with diversification benefits while possibly lowering taxes, but before opening an Exempt Commodity IRA it’s essential that you become informed on its rules and regulations.
Precious Metals
Precious metals like gold, silver, platinum, palladium and rhodium have long been valued for their beauty, rarity and durability. Used in jewelry making, currency exchange and industrial applications – their prices fluctuate with supply and demand.
Investors looking to add precious metals to their portfolio can do so through physical purchases of bullion or coins, mutual funds that hold these assets, or publically traded companies that mine these metals. Investors should be mindful of any storage fees, custodial charges or setup costs associated with these investments as well as not producing any cash flow while owning precious metals.
Exempt commodities offer retirement investors a way to diversify their investment portfolio and guard against inflation or any economic challenges. Before considering adding such assets to an IRA, however, it’s advisable to consult an investment professional for advice about any tax ramifications of doing so.
Commodities ETFs
Commodity ETFs offer an effective way of diversifying into raw materials such as oil and metals, providing an excellent way to hedge against inflation as hard assets like these tend to appreciate in value when prices increase.
Commodity exchange traded funds (ETFs) track price movements in their respective markets rather than holding physical stocks of these resources, tracking either futures contracts or stocks of companies producing, transporting and storing the commodities they hold – these ETFs or equity funds provide more cost-effective investing alternatives than investing directly in commodity index futures contracts that underlie them.
USO is the go-to ETF for playing crude oil prices, allocating 90% of its assets across futures contracts that expire and rolling them out over time, so as they expire. Other oil funds may hold physical reserves but these tend to be less cost-effective investments.
Futures Contracts
Commodities are tangible assets like crops, energy resources, agriculture products, precious metals and currencies that can be traded for cash. While collectibles are usually prohibited from IRA accounts, you can still indirectly invest in commodities by trading futures contracts, ETFs or mutual funds.
Futures contracts allow you to commit to buying or selling certain assets at a set date in the future at predetermined prices; should they rise, you’ll make money; should prices decline, you risk incurring losses.
Futures contracts provide traders with a means of expressing their views on market direction without being bound to actually owning the commodity when the contract comes due. Before investing with your IRA money in futures trading, however, it’s crucial that you understand its risks. An alternative to speculate on commodity direction would be investing in ETFs that track specific companies that produce or process commodities; these may be subject to capital gains tax rates depending on your taxable income and filing status.
Gold IRA
Gold can serve as an attractive investment during times of inflation, as its price typically increases as paper currency’s purchasing power declines, making it an invaluable alternative to more conventional investments.
IRAs may hold precious metals that meet specific purity standards and are stored in an IRS-approved depository. To acquire physical gold, one must find a custodian willing to collaborate with a precious metals dealer and purchase and transfer the bullion metal to their depository.
Investment in precious metals such as gold can also be done through exchange-traded funds that follow its price, although these investments tend to be more volatile and don’t offer tax benefits like precious metals IRAs do. Speaking to a financial professional can help evaluate all available options.
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