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Mailbag: The Pros & Cons of Gold IRAs and Third-Party Storage

mailI’m considering rolling over a 401k from a previous employer into a precious metals IRA as a means of wealth protection and hopefully avoid the fees for early withdrawal. My concern is that those precious metals are required to be held by a third party, which means I wouldn’t have the metals in my possession. Is this a sound financial strategy, or would it be better to pay the penalty and taxes for a straight withdrawal so that I can take possession? — Jeff in St. Louis

A precious metals IRA provides all of the benefits of other IRAs. Many people get precious metals IRAs because gold and silver have a low correlation to market disruptions that can impact stocks, bonds and currency; as a result, they’re an excellent way to diversify a portfolio.

You’re allowed to transfer existing IRAs and 401k plans without penalties, although you can only transfer 401k funds from a current employer if their plan allows for in-service distributions.

Most, but not all, precious metals IRAs require you to store your gold, silver, platinum and palladium in a depository. Of course, a depository provides a safe and secure place to store your metals; and periodic audits are conducted to ensure everything is accounted for too. Most depositories also offer insurance from theft, loss or damage. On the other hand, there are usually custodian fees and depository charges for storing your bullion. The biggest drawback, however, is limited access.

Many people, myself included, believe that if you’re unable to readily access your precious metals at any time and for any reason, then you can’t rely on them as rock-solid wealth insurance because you’re still exposed to counterparty risk — which is precisely what most gold and silver owners are trying to avoid!

Ultimately, only you can decide whether or not the risk of being unable to access your precious metals when you really need them outweighs the penalty and taxes. Thanks for your question, Jeff.

I’ve not been able to get a reasonable answer as to what happens when the dollar fails and people are saddled with a house they cant pay for. If the majority lose their jobs because people can’t buy or sell products and services etc., what then? Will people go to the barter system? — Rob C.

Rob, your mortgage is a contract, denominated in dollars; by law you’re obligated to pay it back in dollars. If hyperinflation takes a year or two to play itself out, the economy will muddle along as salaries are forced to increase to keep pace with rapidly rising prices. Barter will be in use during this time, but it won’t replace the dying dollar.

The good news is people who remain employed will eventually be able to rapidly pay off their mortgages with as little as a few weeks of pay from their ever-increasing salaries. Keep in mind that during the Weimar hyperinflation unemployment was almost non-existent — people were so eager to get rid of their cash before it became worthless that it created a huge demand for goods and services. Somewhat ironically, unemployment didn’t become a problem until the Germans killed hyperinflation by introducing a new currency.

On the other hand, if the dollar goes supernova and is vaporized overnight — a very real possibility today — then I contend that the loan essentially goes up in smoke too. And, yes, barter will almost certainly be required until the US establishes a new currency.

Either way, I strongly suspect it’s the bankers who will be in a world of hurt if the dollar fails — not fixed-rate mortgage holders. Banks accept that risk when they make a loan, and risk is why they collect interest in the first place.

If you have a question you’d like me to take a crack at answering, send it to: [email protected] — and please be sure to put “Mailbag” in the subject line.

Photo Credit: gajman

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