Stock market levels are generally considered frothy, especially in these uncertain times. Investors and IRA owners may worry that their accounts are overexposed to equities. Is it really their fault?
The safest investments (CDs, Treasury bills, and money-market funds) offer interest rates near zero. There may be some individuals who are interested in investing IRA money in gold or other precious metals like silver, platinum, and palladium.
In this article, we’ll discuss how to use IRAs to invest directly in actual precious metal coins and bullion, and indirectly in precious metal ETFs (exchange-traded funds) and mining stocks.
In addition, we discuss holding precious metal assets in taxable forms. Let’s get started.
IRA holdings of precious metals
It might seem that the Internal Revenue Code does not approve of holding physical precious metals within an IRA. Basically, any metal or coin investment in an IRA is considered the acquisition of a collectible item.
In this case, the sale to the IRA owner (that would be you) is classified as a taxable distribution from the IRA followed by a sale of the metal or coin.
A general rule prohibits IRAs from investing in precious metals or coins made of precious metals.
Despite this general rule, our beloved Congress carved out an important exception. A gold, silver, platinum, or palladium bullion that meets applicable purity standards can be invested in IRAs that meet the exception.
IRA trustees or custodians, however, must hold the coins or bullion as opposed to you as the IRA owner.
These rules apply to all IRAs – traditional, Roth, SEP, and SIMPLE.
Physical IRA investments in precious metals and bullions
A number of precious metal coins and bullion are permitted to be owned by IRAs under the aforementioned Tax Code exception.
The American Gold Eagle coin; the Canadian Golden Maple Leaf coin; the American Silver Eagle coin; and the American Platinum Eagle coin; as well as gold, silver, platinum, and palladium bars (bullion) that meet applicable purity standards.
Similarly, gold and silver bars must be 99.5% pure or better.
Overall, things are going well. One of the biggest practical concerns is finding an IRA trustee who is willing to set up a self-directed IRA and facilitate the transfer and storage of precious metal assets. Few companies act as trustees for precious metal IRAs.
It appears that none of the major brokerage firms is on board (from what I can tell).
Among the willing precious metal, IRA trustees are GoldStar Trust Company, the Entrust Group, American Estate & Trust, and New Direction Trust Company. The trustees of IRAs who wish to do so will arrange for the storage of precious metal assets.
Located in Wilmington, Delaware, Delaware Depository is one of the major storage facilities.
I personally recommend investing in gold with a reputable company called Regal Assets. You can read the Regal Assets review here.
Point to remember: The trustees mentioned above are listed for informational purposes only, without endorsement. An Internet search can be used to locate trustees.
IRA investments through precious metal ETFs
For those who do not want to deal with the issues surrounding the physical ownership of precious metal coins or bullion by IRAs, an exchange-traded fund (ETF) that tracks the value of the precious metal is an option.
The acquisition of shares in a precious metal ETF by an IRA was viewed as the purchase of a collectible back in the day.
According to the federal income tax regulations, that would be deemed a taxable distribution under the IRA rules. That’s not good.
Fortunately, the IRS had stated that IRAs can buy shares in precious metal ETFs that are classified as grantor investment trusts without any complications.
The IRS ruled that IRAs could invest in gold ETFs through Private Letter Ruling (PLR) 200732026. A gold ETF with the most popular was the SPDR Gold Trust GLD, -1.05%.
A silver ETF may be purchased by IRAs in PLR 200732027.
A popular silver exchange-traded fund was mentioned here, the iShares Silver Trust SLV, -1.32%.
Look at the tax stipulations in the fund’s prospectus if you are unsure whether an IRA can own a particular precious metals ETF.
If a reputable brokerage firm acts as the IRA trustee, it most likely won’t let an IRA buy shares in an ineligible ETF in the first place.
IRA investments through precious metal mining stocks
Another indirect way to invest in precious metals is to purchase common stock shares of mining companies with your IRA.
The federal income tax law does not have a problem with that idea.
A good example would be buying shares of Barrick Gold Corporation GOLD, -0.82%. Barrick is one of the world’s largest mining companies, producing gold and copper in 13 countries.
IRA owners’ age-related considerations
As retirement age approaches and is reached, precious metal assets become more problematic to invest in via an IRA due to their volatility.
In addition, when a traditional IRA owner reaches 72, required minimum distributions (RMDs) must be taken.
Traditional IRAs (including SEP-IRAs and SIMPLE IRAs) must have sufficient liquidity to meet RMD requirements.
However, RMDs do not need to be taken from each IRA. All you need to do is withdraw the proper amount (at least) from your accounts over the course of the year.
For example, you could invest in precious metal bullion in one IRA, as well as liquid assets such as publicly-traded stocks and mutual funds in another.
A liquid account could be used to take RMDs while leaving the precious metal account untouched.
Gold and mining stocks held in taxable accounts
Individuals owning precious metal ETF shares in their taxable brokerage accounts will pay 28% tax on long-term capital gains, not the standard 20% rate.
What is the reason?
Gains from collectibles sales are considered taxable gains. In 2020, short-term gains from selling precious metal ETF shares held in an individual’s taxable brokerage firm account are subject to a maximum federal tax rate of 37%.
NIIT (Net Investment Income Tax) is a dreaded tax that can hit both long-term and short-term gains. The state may also impose income taxes.
For 2020, long-term gains from selling mining stocks held in an individual’s taxable brokerage account are subject to a maximum federal tax rate of 20%.
The maximum federal tax rate on short-term gains from selling mining stocks held in your taxable brokerage account is 37% in 2020.
Long-term and short-term gains can both be subject to the 3.8% NIIT, and state income taxes may also apply.
There’s nothing stopping you from keeping gold bars, valuable coins, or precious metal bullion in your safe-deposit box. You can also bury them in your backyard, although I advise against this option.
IRAs are able to invest in gold and other precious metals in a variety of ways, as you can see. There are advantages and disadvantages to each method, which you must weigh. Tax and investment advisers can provide guidance.
In addition, you can also hold mining stocks and precision metal ETFs in taxable brokerage accounts. Here are the federal income tax consequences.