Self-Directed IRAs Loom Large as Alternative Assets Such as Gold and Silver Metals Go Mainstream

If you’ve suspected that public interest in so-called alternative assets such as physical gold and silver metals is on the rise, you may be onto something.

There’s a growing trend on the part of elite companies, such as Tesla, and even some U.S. state governments, to effectively diversify their reserve funds using alternative assets such as gold and silver metals. Last year, a New York Times article reported on survey results revealing that roughly half of all Americans were “seriously thinking about buying gold.”¹ And in a more recent survey conducted by global analytics firm Preqin, 81% of respondents said “they expect to increase allocations to alternatives” because of “the promise of…diversification and lower correlation with public markets.”²

It’s not difficult to understand why corporations and states might consider precious metals as a way to help diversify their reserves. Gold is fundamentally uncorrelated with popular asset classes. And last year, as the global economy was subject to significant turmoil at the hands of the pandemic, silver climbed nearly 50%.³

But if individual retirement savers are going to embrace alternative assets, they have to give some thought to just how they will access them. Savers have the option to purchase assets such as physical gold and silver metals outside of a retirement account. But if they want to own these assets on a tax-advantaged basis, that means buying them through a self-directed individual retirement account (SDIRA). Unlike the IRAs retirement savers normally encounter at banks and brokerages, self-directed IRAs allow the purchase of nontraditional assets such as physical gold and silver metals and real property.

Although self-directed IRAs have been around since the 1970s, a great deal of confusion persists about what they are and how they work. One reason for this is that the accounts are not nearly as prevalent as “regular” IRAs or non-SDIRAs. But another reason is that there’s a lot of “bad data” out there about the accounts. Whenever I encounter Internet articles about SDIRAs, I sometimes cringe at how poorly explained the accounts are, even by those who self-identify as “experts.”

I’m hoping to end at least some of the confusion with this article. As interest in physical gold and silver metals continues to mount, many retirement savers likely will view self-directed IRAs as prospective account options. But the degree to which one feels comfortable with SDIRAs will depend largely on having a solid understanding of what they are – as well as what they aren’t.

Self-Directed IRAs: What Are They – and What Are They Not?

Let’s start with what a self-directed IRA isn’t. It’s not a “type” of IRA in the way that traditional, Roth, SIMPLE and SEP IRAs are “types” of IRAs. Those IRA types are distinguished by varying rules about contribution limits, distribution requirements, participation, early withdrawals and other technical features.

Self-directed IRAs, instead of referring to a kind of IRA, refer to a type of IRA custodian.

Part of an IRA custodian’s job is to execute the purchase and sale decisions made by a customer on behalf of his account. But another part of the custodian’s job is to perform the important administrative functions required to preserve the account’s tax-advantaged status with the Internal Revenue Service. The recordkeeping and reporting requirements necessary to ensure an IRA remains compliant with the IRS can be as tedious as they are numerous.

When a retirement saver opens an IRA at a bank or traditional brokerage, he’s limited to purchasing the kinds of assets available at those institutions. And if he wants to purchase a so-called “alternative” asset for his IRA, such as physical gold and silver metals or real property? In that case, he must use the services of another kind of IRA custodian, one that specializes in performing the administrative functions unique to nontraditional assets: a self-directed IRA custodian.

The term “self-directed” refers to the ability of an IRA owner to purchase any alternative IRA-eligible assets for his account at his or her own discretion. Again, this differentiates the account from the “regular” IRA a person might buy at a bank or brokerage, limited only to the assets available at those institutions. “Self-directed” means, with SDIRAs, buyers enjoy greater autonomy and independence in asset selection.

I want to underscore that a SDIRA is not another “type” of IRA. It’s simply a type of IRA account that allows greater flexibility in the kinds of assets you can purchase. This means self-directed IRAs can be set up as your choice of traditional, Roth, SIMPLE or SEP IRA, as any IRA can be so configured. For example, just as a retirement saver can have a Roth IRA at his bank, brokerage or credit union (all different sources of IRAs with specific IRA options depending on the institution), he can own a self-directed Roth IRA containing alternative assets such as physical gold and silver metals. As always, before you purchase any long-term savings asset, be sure to consult with your financial advisor.

Self-Directed IRA Interest Could Grow with the Trend Toward Alternative Assets

In my opinion, greater interest in alternative assets such as precious metals indicates a growing distrust in the financial system.

I’m not saying people distrust the system entirely. But concerns about such factors as negative real rates, potentially overvalued financial markets and the long-term effects of unrestrained monetary and fiscal policies seem to me to be increasing. You can certainly find a lot of articles about these topics out there. It stands to reason that people, companies and even governments will take steps to diversify their risk.

According to data accompanying the previously referenced Preqin survey, alternative assets under management worldwide is expected to reach 17 trillion dollars by 2025. That figure would represent a 60% increase from present levels and a 325% increase from the dollar value of alternative assets under management in 2010. To me, that speaks volumes about asset management professionals’ concerns regarding economic uncertainty. It also says a great deal about their faith in the potential of alternative assets to help mitigate risk.

¹ Danielle Braff, The New York Times, “Where Is All That Gold Being Stored?” (July 28, 2020, accessed 3/4/21).

² Preqin, “The Future of Alternatives 2025” (November 2020, accessed 3/4/21).

³ Portfolio Visualizer, Asset Class Correlations (accessed 03/04/21).