The stock market is at levels that might be considered frothy, especially in these uncertain times. Some IRA owners and investors may be concerned that their accounts are overexposed to equities. Who can blame them?
But the safest fixed income investments (CDs, Treasuries, and money-market funds) are paying near-zero interest rates. Investing some IRA money in gold and/or other precious metals like silver and platinum may be appealing to some folks.
This column covers the specifics on how to use IRAs to make direct investments in actual precious metal coins and bullion and indirect investments in the form of precious metal ETFs (exchange traded funds) and mining stocks — and the federal income tax implications. We also cover holding precious metal assets in taxable forms. Here goes.
Precious metal assets in IRAs
At first blush, our beloved Internal Revenue Code appears to throw cold water on the idea of holding physical precious metal assets in an IRA. It says that, as a general rule, an IRA investment in any metal or coin counts as the acquisition of a collectible item. As such, the transaction is characterized for federal income tax purposes as a taxable distribution from the IRA followed by a purchase of the metal or coin by the IRA owner (that would be you). In effect, this general rule prohibits IRAs from investing in precious metals or coins made from precious metals.
However, our beloved Congress carved out an important statutory exception to the preceding general rule. The exception says that IRAs can invest in certain gold, silver, and platinum coins and in gold, silver, platinum, and palladium bullion that meets applicable purity standards. However, the coins or bullion must be held by the IRA trustee or custodian rather than by you as the IRA owner. These rules apply equally to traditional IRAs, Roth IRAs, SEP-IRAs, and SIMPLE-IRAs.
Physical IRA investments in precious metal coins and bullion
Thanks to the aforementioned Tax Code exception, IRAs are allowed to own certain precious metal coins and bullion. Examples include American Gold Eagle coins; Canadian Gold Maple Leaf coins; American Silver Eagle coins; American Platinum Eagle coins; and gold, silver, platinum, and palladium bars (bullion) that meet applicable purity standards. For example, gold bars must be 99.5% pure or better and silver bars must be 99.9% pure or better.
So far, so good. The big practical concern is finding an IRA trustee that’s willing to set up a self-directed IRA and facilitate the physical transfer and storage of precious metal assets. Only a relatively few outfits are willing to act as precious metal IRA trustees. None of the major brokerage firms are on board (as far as I can tell). Examples of willing precious metal IRA trustees include GoldStar Trust Company, the Entrust Group, American Estate & Trust, and New Direction Trust Company. Willing trustees will arrange for the physical storage of precious metal assets owned by IRAs. One major storage facility is Delaware Depository in Wilmington, Delaware.
A precious metals IRA trustee will usually charge a one-time account set-up fee (maybe $50 to $100), an annual account administrative or maintenance fee for sending account statements and so forth (maybe $50 to $300 or an amount based on the account value), and an annual fee for storage and insurance (maybe $100 to $300 or an amount based on the value of the stored assets). Additional fees may be charged for transactions including contributions, distributions, and commissions for precious metal purchases and sales (maybe 2% to 5%).
Key point: The trustees mentioned above are presented for information purposes only, without any sort of endorsement. You can find trustees by conducting an Internet search.
Indirect IRA investments via precious metal ETFs
Buying shares of an exchange traded fund (ETF) that tracks the value of a particular precious metal is an option for those who don’t want to deal with the issues that surround the physical ownership of precious metal coins or bullion by IRAs.
Back in the day, there were concerns that an IRA’s acquisition of shares in a precious metal ETF could be treated as the acquisition of a collectible. As explained at the beginning of this column, that would result in a deemed taxable distribution from the IRA under the federal income tax rules. Not good.
Thankfully, the IRS had said that IRAs can buy shares in precious metal ETFs that are classified as grantor investment trusts without any such problems. Specifically, 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
which 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
which is the most popular silver ETF.
If you have doubts about IRAs being allowed to own a particular precious metals ETF, take a look at the tax section of the fund’s prospectus, which should be available online. Presumably when a reputable brokerage firm is acting as the IRA trustee, it won’t let an IRA buy shares in an ineligible ETF in the first place.
Indirect IRA investments via precious metal mining stocks
An even more indirect way of investing in precious metals is to have your IRA buy common stock shares of mining companies. There is absolutely no federal-income-tax-law problem with that idea. An example would be buying shares of Barrick Gold Corporation
Barrick is one of the largest mining companies, producing gold and copper in 13 countries.
Key point: This is not an endorsement of Barrick. I mention the company for information purposes only.
Age-related considerations for IRA owners
Because precious metal prices are volatile, using an IRA to invest in precious metal assets becomes more problematic as retirement age is approached and reached.
Also, once a traditional IRA owner reaches age 72, IRA required minimum distributions (RMDs) must be taken. An individual’s traditional IRAs (including any SEP-IRAs and SIMPLE IRAs) must have sufficient liquidity to allow for RMDs. That said, RMDs need not be taken from each IRA. The only requirement is that you withdraw the proper amount (at least) during the year from one or more accounts. For example, you could have one IRA that’s invested in precious metal bullion and one IRA that’s invested in liquid assets like publicly traded stocks and mutual funds. You could take the annual RMD amount from the liquid account while leaving the precious metal account untouched.
Key point: The CARES Act suspended RMDs for 2020.
Precious metal ETFs and mining stocks held in taxable accounts
For 2020, long-term capital gains from selling precious metal ETF shares held in an individual’s taxable brokerage firm account are subject to the 28% maximum federal income tax rate rather than the standard 20% maximum rate for long-term gains. Why? Because the gains are considered to be from selling collectibles. For 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 rate of 37%. Both long-term gains and short-term gains can also get hit with the dreaded 3.8% net investment income tax (NIIT). Finally, state income taxes may also apply.
For 2020, long-term gains from selling mining stocks held in an individual’s taxable brokerage firm account are subject to the standard 20% maximum federal rate. For 2020, short-term gains from selling mining stocks held in your taxable brokerage firm account are subject to a maximum federal rate of 37%. Both long-term gains and short-term gains can also get hit with the 3.8% NIIT, and state income taxes may apply too.
Of course, there’s nothing to prevent you from holding gold bars, valuable coins, or precious metal bullion in your safe-deposit box. Or burying them in your backyard, although I advise against the latter option.
The bottom line
As you can see, IRAs can invest in gold and other precious metals in several different ways. Each way has advantages and disadvantages, which are up to you evaluate. Your tax and investment advisers can offer guidance.
Finally, precision metal ETFs and mining stocks can also be held in taxable brokerage firm accounts with the federal income tax consequences explained here.