Are precious metals and cryptocurrency transforming IRAs? [Video]

Ask somebody British or Irish about what “IRA” means and you may come away feeling a little bruised. Depending on their point of view, your British or Irish friend will describe it as either a terrorist organization or a band of freedom fighters. The Irish Republican Army, to put it mildly, unnerved Britain during the 1970s and 1980s. To this day, it casts a giant shadow over politics in both countries.

As cultural differences often go, mentioning “IRA” to an American will return a completely different reaction.

Like its terrorist — or freedom fighting — namesake, the American IRA, or Individual Retirement Plan, came to prominence in the 1970s. Introduced in the Employee Retirement Income Security Act of 1974 (better known as ERISA), it allowed contributions from workers outside of their employment. The IRA became a portable retirement account, in which employees can accumulate savings from each job they work over the span of their career. 

The basic idea was to shelter a certain amount of investment into a specified savings vehicle and give tax advantages and protection to these funds until retirement.

As usually happens with any government-funded plan, this one became entangled in bureaucracy. However, the IRA remains a uniquely American solution to foster self-sufficiency.

Even back in the 1970s, the government recognized that unfunded liabilities would be impossible to meet for the whole working population. There was a glaring need to actively encourage people to make provision for themselves.

But there are limits

Each year, the IRS sets a maximum IRA contribution limit based on inflation. These limits are for individual contributions and there is also an age 50+ catch-up contribution. Since 1998, spouses who are not working can also make contributions up to the level of the main contributor.

What is unique about the IRA for U.S. workers is the ability to put different asset classes into a self-directed IRA.

These can range from real estate properties and art to precious metals and classic cars – the only criteria being that the IRS classifies and recognizes the asset.

The exact criteria to determine whether an IRA is deductible or not can be found on the IRS website.

Adding to this complexity – even if you are above the IRS limits – is that you can still make contributions to a non-deductible IRA.

One of the major assets historically used for self-directed IRAs are precious metals.

Gold, silver, platinum and palladium are all eligible for inclusion as long as they are of an approved purity and kept in storage until retirement.

A more recent addition to the approved assets are cryptocurrencies. Bitcoin, Ethereum, Ripple and Litecoin are among the most popular digital currencies. The IRS approved these as an alternative investment back in 2014.

Although initially perceived to be far more risky than precious metals, using cryptos as a tax-deferred investment entity within an IRA has gained popularity in the last couple of years. This is especially true with younger investors, who can ride the volatility out.

What to choose?

There are two main differences between precious metals and crypto: risk and time.

Gold, particularly, is seen as a safe-haven investment in the times we are experiencing. It’s enticing because of its stable track record and more than 5,000 years of history as a valuable entity.

Because of this, it is viewed as a more suitable tool to preserve the value of wealth, preferred over a speculative, high-return investment.

Silver, platinum and palladium also fit into this narrative — although their returns are less predictable than gold, as all three are seen more as industrial metals than they are investment vehicles.

Of the three, silver is more popular because it is cheaper to invest in than gold and is currently enjoying a resurgence of interest – and of results.

Cryptos, by contrast, are a recent addition to the asset arsenal. Relatively untried, especially in the current crisis, cryptos are still trying to find their way in the world of assets.

Crypto is steadily becoming accepted on the world stage, with banks, government and financial institutions recognizing their value and potential. More and more interest is increasing — not just in the exchange of goods and services, but as an alternate currency, like Bitcoin. Cryptos known as altcoins, which use blockchain technology and encryption to facilitate the secure transfer of information and smart contracts, are becoming mainstream.

This makes them valuable for different reasons. While Bitcoin’s price and value are tied to its ultimate scarcity, Ethereum is promising because of its ultimate utility.

IRAs are driving an increasing amount of investment in cryptos with corporations, smaller companies and their employees becoming aware of the tax advantages behind an investment that has the potential increase by thousands of percent into the future.

The IRA has come a long way since 1974 and has enabled millions of Americans to enjoy happy and comfortable retirements. It is not often that a government initiative has proved both long-lasting and popular, but the IRA is a bright and shining example.