By the editors of BIG GOLD, Casey Research
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.
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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
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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. That being said, I do understand your point, there have been allegations of big banks purporting to hold physical gold but in reality holding imaginary gold and simply paying the value when someone wants to redeem it. Which could result in someone not getting their gold should the bank have problems. Which might be another argument for not holding gold in an IRA.
Tim McMahon, Publisher
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Editor’s Note:
If you are considering an investment in Gold for your IRA or otherwise the BIG GOLD Report is the place to go for all things gold-related.
It is no accident that gold is currently trading at around $980 again. I have written many times about how Gold is a “Crisis Hedge”. In an economic crisis, the gold price is bound to go up dramatically and Gold stocks generally multiply the moves in the price of gold. If you want learn how to use Gold to preserve, and multiply your assets, Click here to Check out Big Gold.
