By Terry Coxon, Casey Research
You likely have seen invitations to open a “Gold IRA” or something with a similar name. Perhaps you should, but before you do, think about why an Individual Retirement Account might or might not be a good place to hold gold. That may tell you something about the best way to introduce gold into your IRA.
Gold isn’t the only investment that raises the “Does it belong in an IRA?” question. Every investment does. And for every investment, the answer is, “It depends.” It depends on the nature of the other assets in your overall portfolio. It depends on how big the IRA is compared to your total holdings. And it depends on your judgment as to which investments are likely to be the most profitable.
It’s against the rules for you to buy anything from your IRA or sell anything to it. But there is a way for investments to commute between your personal accounts and the IRA. You can in effect take an asset that you now own directly and move it into your IRA by selling it from your personal account and simultaneously buying it for the IRA. And you can do the reverse.
Even though the asset migration trail is wide open, you don’t have a free hand to simply move unlimited amounts of assets into the IRA. So, to get the best tax results, you need to consider which investments would do the most to reduce or defer your tax bill by living in the IRA rather than in your back pocket.
Tax-Efficient Allocation
The general answer is that what belongs in the IRA are the investments that you would expect to contribute the most to your tax bill if you owned them directly. To identify them, start by sorting out your investments, whether they are in an IRA or held directly, into three categories:
High-tax-rate assets. These are investments owned primarily to earn income or to generate short-term trading profits – high-yield stocks, bonds (if you like such things), money market instruments (in more normal times), and trading sardines that you expect to generate short-term capital gains. All of these, if you own them directly, generate income that is taxed at up to 35%.
Middle-tax-rate assets. Profits on holdings of physical metals (including ETFs that own physical metals) are taxed, if you own them directly, at up to 28%.
Low-tax-rate assets. Investments other than precious metals that you hold primarily for long-term appreciation, such as no-dividend stocks. If you own them directly, the profits will be taxed at no more than 15%.
In more normal times, the most tax-efficient approach would be to start with the high-tax assets and march them into the IRA one by one until the IRA is full. That would mean starting with cash and bonds. But if you take this publication seriously, you probably don’t own any bonds, and if you do own high-yield stocks, you probably don’t expect them to do nearly as well as precious metals. And for the foreseeable future, the yield on cash is going to be zero, so there is no tax to be saved by keeping it in an IRA – and it would be taking up valuable space.
So in today’s abnormal environment, the first assets to put into your IRA are the speculative investments that you expect to hold for less than one year. Next come precious metals. Then high-yield stocks. Only if there is still room would you move in stocks being held for long-term appreciation.
Available Gold and Silver Media
IRAs are subject to a general prohibition on owning “collectibles,” which are defined to include physical metal. However, there is an exception to the general prohibition that makes room for two types of gold. Gold is permitted if it is bars that are good delivery on a futures exchange and the bars are in the possession of an IRA custodian. Gold is also permitted if it is in the form of certain bullion coins, including American Eagle or Buffalo coins.
Assuming that you have a garden-variety IRA sponsored by a mainstream stockbroker, only one medium is available for including gold in your IRA. It’s an exchange-traded fund, such as GLD. The bars that GLD owns are good delivery on futures exchanges, and the fund has obtained a revenue ruling (from the IRS) that GLD shares are a permissible investment for IRAs. If you prefer a different ETF, check the Tax Considerations section of its prospectus to confirm that it has obtained a similar revenue ruling.
For silver, the story is exactly the same. Use an ETF, but first read the prospectus to be sure the shares are a permissible investment.
A second approach is to use an IRA that is dedicated to gold. A number of such programs are available, and each is sponsored by a gold dealer. The advantage, at least in the eyes of some investors, is that a gold IRA cuts out the need to use an ETF. The IRA holds actual bullion or coins, not shares in a fund that owns gold. If you are an ETF-doubter (sorry, I won’t be joining you for that party), avoiding ETF worries can look like an important advantage, even though a gold IRA still leaves the metal in the hands of a third party.
That method of ETF avoidance comes at a cost, however. With a gold IRA, you are a quasi-captive of the gold dealer that sponsors it and of the custodian that holds it. When you buy or sell, expect spreads or commissions that are bigger than what you’d pay if you were free to shop around. In addition, you’ll be paying the custodian something for each transaction, and you may be paying storage fees. There’s also a convenience factor to consider: if you decide you want to sell part of the gold and buy something else, you’ll need to move the proceeds of the sale into an IRA that will accommodate the new investment.
There is a third alternative, which I’ve dubbed the Open Opportunity IRA, that starts with a simple idea but opens many doors for you. It’s an IRA that directly holds just one thing – a limited liability company that you manage. The IRA custodian is the legal owner of the LLC, but you deal with the custodian only during the setup process. During that process, assets are rolled over from your old IRA to the new custodian and then into the LLC. After that, you as Manager of the LLC have your hands on the steering wheel and can invest and reinvest in just about anything with any broker, dealer or other party, and you can do so without waiting for the custodian to approve anything and without paying the custodian for storage or for handling transactions.
In the case of gold and silver, since the metal will be owned by the LLC and not by the IRA custodian, you will be limited to American Eagles and Buffaloes. But you are free to buy them from any source that is not related to you, and you can store them in whatever way you think is best – in a safe deposit box, under the floorboards at home, or in the back of your refrigerator. And they don’t need to stay or even be purchased in the US. If you think that a dealer in Uruguay is the best place to buy the coins or that a hollow tree in Patagonia is the right place to store them, you can buy and store in those places. You are in charge, and you only deal with the third parties you want to do business with.
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