The stock market is at levels that could be viewed as frothy, especially in these uncertain times. Some IRA owners and investors may be concerned that their accounts are overexposed to stocks. Who can blame them?
However, the safest fixed income investments (CDs, government bonds, and money market funds) pay near zero interest rates. Investing some IRA funds in gold and / or other precious metals like silver and platinum might appeal to some people.
This column covers the details of using IRAs to direct investments in actual precious metal coins and bars, as well as indirect investments in precious metal ETFs (exchange traded funds) and mining stocks, and the impact on federal income tax. We also cover holding precious metal assets in a taxable form. Here goes.
Precious metals investments in IRAs
At first glance, our beloved Internal Revenue Code seems cold water to the idea of keeping physical precious metal assets in an IRA. It is said that an IRA investment in a metal or coin is usually considered to be an acquisition of a collector’s item. Therefore, for federal income tax purposes, the transaction is characterized as a taxable distribution from the IRA, followed by the IRA owner (that would be you) buying the metal or coin. In fact, this general rule prohibits IRAs from investing in precious metals or coins made from precious metals.
Our beloved Congress, however, has identified an important legal exception to the foregoing general rule. The exception is that IRAs can invest in certain gold, silver, and platinum coins, as well as gold, silver, platinum, and palladium bars that meet applicable purity standards. However, the coins or gold bars must be held by the IRA trustee or custodian and not by you as the IRA owner. These rules apply equally to traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.
IRA physical investments in precious metal coins and gold bars
Thanks to the aforementioned exception to the tax code, IRAs are allowed to own certain precious metal coins and bars. Examples are American Gold Eagle coins; Canadian gold maple leaf coins; American Silver Eagle Coins; American Platinum Eagle Coins; and gold, silver, platinum and palladium bars (gold bars) that meet the applicable purity standards. For example, gold bars must be 99.5% or better and silver bars must be 99.9% or better.
So far, so good. The big practical problem is finding an IRA trustee willing to set up a self-directed IRA and facilitate the physical transfer and storage of precious metal items. Relatively few outfits are ready to act as IRA trustees for precious metals. None of the big brokerage firms are on board (as far as I can tell). Examples of willing Precious Metals IRA Trustees include the GoldStar Trust Company, the Entrust Group, American Estate & Trust, and the New Direction Trust Company. Willing trustees provide the physical storage of precious metal goods from IRAs. An important store is the Delaware Depository in Wilmington, Delaware.
A Precious Metals IRA Trustee will usually charge a one-time account setup fee (possibly $ 50-100), an annual account management or maintenance fee for sending bank statements, etc. (possibly $ 50-300 or an amount based on the account value) and one annual storage and insurance fee (may be $ 100 to $ 300 or an amount based on the value of assets stored). Transactions, including contributions, distributions, and commissions on purchases and sales of precious metals, may be subject to additional fees (possibly 2% to 5%).
Key Point: The above trustees are presented for informational purposes only without any endorsement. You can find trustees by doing an internet search.
Indirect IRA investments via precious metal ETFs
Buying shares of an Exchange Traded Fund (ETF) that tracks the value of a specific precious metal is an option for those who do not want to deal with the problems associated with IRA’s physical possession of precious metal coins or gold bars.
There was a concern at the time that an IRA’s acquisition of shares in a precious metals ETF could be treated as an acquisition of a collector’s item. As explained at the beginning of this column, this would result in a taxable distribution from the IRA under federal income tax rules. Not good.
Fortunately, the IRS had stated that IRAs can easily buy shares in precious metal ETFs that are classified as Grantor Investment Trusts. In particular, in Private Letter Ruling (PLR) 200732026, the IRS ruled that IRAs could buy shares in a gold ETF. This was apparently the SPDR Gold Trust GLD, + 0.75%,
This is the most popular gold ETF. Similarly, in PLR 200732027, the IRS ruled that IRAs could buy shares in a silver ETF. This was apparently the iShares Silver Trust SLV, + 0.13%,
It’s the most popular silver ETF.
If you have any doubts about whether IRAs are allowed to own a particular precious metals ETF, see the tax section of the fund’s prospectus, which should be available online. If a reputable brokerage firm is acting as the IRA trustee, it will likely not allow an IRA to even buy shares in an unapproved ETF.
Indirect IRA investments via precious metals mining stocks
An even more indirect way to invest in precious metals is to have your IRA buy common stock from mining companies. With this idea, there is absolutely no problem with federal income tax law. An example would be buying shares in Barrick Gold Corporation GOLD, + 0.54%.
Barrick is one of the largest mining companies, producing gold and copper in 13 countries.
Key Point: This is not an endorsement from Barrick. I’m mentioning the company for informational purposes only.
Age-related considerations for IRA owners
Because precious metals prices are volatile, using an IRA to invest in precious metals assets becomes more problematic as retirement age is reached and reached.
Once a traditional IRA owner is 72 years old, the IRA required minimum distributions (RMDs) must be made. A person’s traditional IRAs (including all SEP IRAs and SIMPLE IRAs) must have sufficient liquidity to allow RMDs. That said, RMDs don’t have to be taken by every IRA. The only requirement is that you withdraw the correct amount (at least) from one or more accounts during the year. For example, you could have an IRA that is invested in bullion of precious metals and an IRA that is invested in cash such as publicly traded stocks and mutual funds. You can deduct the annual RMD amount from the liquidity account while the precious metals account remains untouched.
Key point: The CARES law has suspended RMDs for 2020.
Precious metal ETFs and mining stocks held in taxable accounts
For 2020, long-term capital gains from the sale of precious metal ETF stocks held in an individual’s account with a taxable brokerage firm are subject to the maximum federal tax rate of 28% rather than the standard maximum tax rate of 20% on long-term profits. Why? Because the profits come from the sale of collectibles. For 2020, short-term gains from the sale of precious metal ETF shares held in an individual’s account of a taxable brokerage firm are subject to a maximum rate of 37%. Both long-term and short-term gains can be impacted by the dreaded 3.8% Net Investment Income Tax (NIIT). Finally, state income taxes may also apply.
For 2020, long-term gains from the sale of mining stocks held in an individual’s account of a taxable brokerage firm are subject to the standard federal maximum rate of 20%. For 2020, short-term gains from the sale of mining stocks held in your account with a taxable brokerage firm are subject to a federal tax rate of no more than 37%. Both long-term and short-term gains can also be affected by the 3.8% NIIT, and state income taxes may also apply.
Of course, nothing prevents you from keeping gold bars, valuable coins or precious metal bars in your safe. Or bury them in your back yard, though I advise against the latter option.
The final result
As you can see, IRAs can invest in gold and other precious metals in a number of ways. Each path has advantages and disadvantages that you can assess for yourself. Your tax and investment advisor can advise you.
Finally, precision metal ETFs and mining stocks can also be held in brokerage firm taxable accounts, with the federal income tax implications discussed here.