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By the
editors of
BIG GOLD,
Casey Research
February 2009
Within the last year,
401(k)s and IRAs have ceased to be a safe
haven for Americans’ nest eggs. In 2008,
employees lost on average 14%, or about
$10,000, of their retirement money. Those
with more than $200,000 are even worse off –
they lost more than a quarter of their
savings. No wonder that more and more people
are asking whether they can, or should, use
an Individual Retirement Account (IRA) to
hold physical gold. Our answer to the first
part of the question is yes, indeed
you can. The tax rules governing IRAs leave
room for gold. But our answer to the second
part is equivocal.
Background
In 1986, as the U.S. Mint began issuing gold
coins for the first time since 1933, a tax
rule against holding “collectibles” in an
IRA was relaxed to allow gold and silver
Eagles. Later, in 1997, the Tax Payer Relief
Act opened the IRA door for a broad spectrum
of precious metals (gold, silver, platinum,
and palladium), whether in the form of
bullion or coin. The easier rules now apply
to all types of IRAs, including traditional,
Roth, Simplified Employee Pension (SEP) and
Simplified Incentive Match Plans for
Employees (SIMPLE).
The only stipulation is that all bars and
all coins other than Eagles must be .995
fine. Thus Canadian Maple Leafs and Austrian
Philharmonics qualify, but the South African
Krugerrand, minted with an alloy, does not.
Numismatic coins are also impermissible for
an IRA.
Mechanics
The procedure for putting gold into an IRA
is somewhat more complicated than with paper
assets, but the requirements aren’t onerous.
To begin with, you have to find an IRA
custodian that handles investments in
metals, and they are few. Don’t look to your
discount broker or a fund family like
Vanguard; they won’t touch the stuff.
Instead, you’ll need a specialist like the
two original gold IRA custodial companies,
American Church Trust (acquired by GoldStar
Trust in 2007) and Sterling Trust. These are
the most respected names in the business. An
Internet search will turn up others, and if
you do your due diligence on them, you might
find one that works for you.
But remember that it’s especially important
to choose a custodian with a solid
reputation, because your gold will be stored
at a location twice removed from you. A firm
such as GoldStar or Sterling would be merely
your IRA’s legal custodian; for vaulting
your IRA gold, it will employ a certified
depository, likely either HSBC Bank USA
(which is also a COMEX gold depository) or
Delaware Depository Services.
So chances are you’ll have to open a
separate IRA for physical gold, which will
be a matter of doing a little paperwork and
paying some fees. Then you put money into
your account and tell the custodian what to
buy. (Dropping in coins you already own is
against the rules – a “prohibited
transaction.”) And if you want to mix in
some paper – for example, to consolidate
your gold, ETF, and mining stock holdings
into one account – that’s fine, too.
The custodian will charge either a fixed
annual fee or a percentage of the IRA’s
value, with a ceiling. And the depository
will charge its own fee for safekeeping.
There also may be a transaction fee each
time you add to your IRA. In all, you can
expect the basic cost to run between $160
and $340 per year, depending on the fee
structure of the custodian you choose.
You can make the same tax-deductible
contribution each year to a gold IRA as with
any other IRA. The current limit is $5,000,
or a “catch-up” limit of $6,000 for those 50
and over. Custodians generally set their
minimum initial investment at that $5,000
mark but will accept smaller subsequent
contributions.
When the time comes to withdraw from your
gold IRA, you don’t get any coins or bars,
alas. You get cash. The custodian sells the
gold and distributes the proceeds, with the
money then taxed at your ordinary income
rate, just as with any other asset held in
an IRA.
Who Should
Consider It
That takes care of the how-to. The
trickier part is whether it’s a good idea.
For most readers, the answer is likely no.
Here’s why.
The idea behind a traditional IRA is
twofold. First, reduce present taxes by
taking a deduction upfront for your yearly
contribution of $5K or $6K. Second, defer
taxes on the investment income and gains
that build up inside the IRA until after
retirement.
Physical gold, of course, doesn’t generate
income. So you might be wasting part of your
IRA’s tax-saving power by filling it with
gold instead of investments that earn
interest, dividends, or trading profits.
Does that mean it never makes sense to have
physical gold in an IRA? No. There are some
situations when an IRA may be the right
place to hold part or all of your investment
in physical gold.
No-income portfolio. If you’ve
decided that the outlook for bonds and
dividend-paying stocks is so bleak that you
don’t want any at all, then putting gold
into your IRA won’t crowd out any
income-earning investments.
Strategic switching. Perhaps you plan
at some point, when you judge that the gold
bull market probably has run its course, to
liquidate part of your gold. Whatever gold
you have in an IRA then could be sold and
reinvested, with no loss to current tax, in
something else.
IRA Only. If your IRA is the only
investment vehicle you have, and you want
gold, then using funds within the IRA to buy
gold may be the only way for you to hold it.
Transfers
and Rollovers
In researching this, we chatted with Glen
Kirsch of Asset Strategies International,
who has been dealing with gold and
gold-related investments for more than
thirty years. We asked Glen what would be
the benefit of a gold IRA. His experience
accords with our analysis of when putting
gold in an IRA makes sense.
He said he rarely if ever sees people open a
gold IRA just to deposit that five grand a
year. What he does see is individuals making
the flight to quality with their accumulated
retirement assets. Say, someone with most of
his wealth in a pension fund limited by a
menu of poor investments is searching for a
way out. If the individual is generally
suspicious of paper investments, a gold IRA
will look attractive.
Making the move is simple if the pension
fund is already an IRA. You’re free to
transfer funds from an IRA that’s invested
in stocks or anything else directly into a
gold IRA.
Or if the pension fund is run by your
employer, when you leave (quit, retire, or
get fired), you can roll your interest in
the pension fund over into an IRA, without
tax consequences, and use the money to buy
gold.
***
Reader Comments:
Dear Tim,
I think that if you
contact Sterling Trust, you will find that
they **do** allow what are called "in-kind
distributions", that is, if you purchase
coins from a dealer and those coins are
deposited directly in your IRA, you can
withdraw those same coins from your IRA
later. They get valued at the current bid
price at the time of withdrawal for tax
purposes. Places like Fidelity and Everbank
are more like what you describe in your
article: they allow you to buy coins in your
IRA, but they cash them before allowing any
distributions, which are always in cash from
these organizations. I think you might want
to clarify this for your readers, because
for a person who buys physical gold, the
difference between those two approaches is
large.
Thanks.
Mark
***
Editor's Response:
Mark,
I didn't write the
article... the editors at "Big Gold" did.
So I'm not the expert on this one.
I do know you can
get into big trouble with the IRS
disallowing stuff if you don't follow the
rules to the letter. The article does
allude to this.
I agree that if I
bought collectable coins I would want the
exact one back (but they aren't allowed in
IRAs anyway). And buying a specific coin
that doesn't meet the rigorous criteria of
weight, fineness etc could blow up your
IRA... not a risk I would want to take.
As far as bullion
goes why would you take it out of your IRA
unless you wanted to spend it? To spend it,
you would need cash anyway, so getting a
direct deposit into your checking account
would be much easier than getting the gold,
finding a buyer, getting a check, cashing it
etc.
Tim McMahon,
Publisher
____________________________________________________________
Editor's Note:
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