The Tax Implications of Having Precious Metals in Your IRA

0
9
Precious Metals or Coins with Your IRA or 401(k) | IRA Financial Group

The current level of stock markets seems to be frothy, especially with the pandemic and other uncertainties. Some investors and IRA owners are worried because their accounts may be exposed to equities. Also, safe investments like mutual funds, CDs, and Treasuries are paying close to zero interests. Therefore, investing some of your IRA funds in precious metals may appeal to you.

Holding Precious Metals in an IRA

At first glance, the Internal Revenue Service does not say much about holding precious metals in physical form in your IRA. It simply says that the investment in coins or metals will count as a purchase of collectible items. As a result, such transactions are categorized as taxable distributions from the company offering the account to you, the account owner, when you purchase a coin or metal. You can check out this website to know more about taxable distributions.

However, there is a critical statutory exception that you should be aware of. It explains that the IRA is free to invest in some platinum, gold, and silver coins as well as in palladium, gold, and silver bullion. But they must meet specific purity standards. 

You also need to note that the bullion or coin must be kept by a custodian or the account trustee, not the account owner. The rules also apply to other IRAs like SIMPLE, SEP, Roth, and traditional retirement accounts.

Physical Bullion and Coins in IRA

We earlier mentioned the Tax Code that allows IRAs to hold certain bullion and coins that must meet a certain purity standard. For instance, a 99.5 percent and above purity is acceptable for gold bars while a 99.9 percent or better purity is acceptable for silver bars. Now, the big question is – how can you find a custodian that is willing to help you set up an SDIRA as well as facilitate the acquisition and storing of physical precious metals?

So far, only a handful of trustees can willingly offer such services. Most major brokerage outfits will turn you down. However, when you eventually find one, you will pay a fee, between 50 – 100 US dollars, to set up the account. 

Afterward, you will pay an annual maintenance or account administration fee, between 100 – 300 US dollars or a percentage of your stored assets. You can also expect to pay extra fees for transactions. This also applies to commissions on the sale and purchase of precious metal (usually between 2 – 5 percent), contributions, and distributions. You can visit gold metal res to get guidance on how to set up a precious metal IRA account.

Indirect Investment via ETFs

20 Precious Metals ETFs to Diversify Portfolios | ETF Trends

If you cannot handle all the inconveniences that follow the ownership of physical bullion or coins, you can buy shares from an ETF (exchange-traded fund). Before now, people were worried that ETF shares could be regarded as the purchase of collectible items. Just like holding physical bullion in an IRA, collectible items are taxable distributions under the tax rules of the Federal Government, and this is not good news.

Fortunately, the Internal Revenue Service permits IRAs to buy ETF shares related to precious metals. These shares are categorized as a grantor investment trust, and it does not pose any problems. However, if you do not think that IRAs are not permitted to hold a particular type of bullion in ETF, you can check the fund prospectus’ tax section. The copy is available online.

Indirect Investment via Mining Stocks

A more indirect method of precious metals investment is to use your IRA fund to purchase stocks from mining companies. The tax law does not apply to this method. All you need to do is study the market and pick out mining companies that produce precious metals in several countries.

Holding Mining Stocks and ETFs in a Taxable Account

In 2020, if you held ETF shares in an account issued by a taxable brokerage company, the capital gains, over a long period, derived from selling those shares would attract a 28 percent tax rate. However, the standard rate for a long-term gain is 20 percent. So why was the Federal Government collecting an additional 8 percent? The government considered those gains as profits from selling collectible items. 

Furthermore, in the same 2020, the short-term gain from selling your ETF shares would attract a whopping 37 percent tax rate. Both the short-term and long-term capital gains may also be affected by the 3.8 percent NIIT (net investment income) tax, which many investors dread. And to crown it all, there may be state taxes on your income.

In the case of selling your mining stocks; in 2020, they attracted a 20 percent tax rate for long-term profits. Meanwhile, the short-term profits attracted a 37 percent tax rate. Also, both the short- and long-term profits would be affected by the 2.3 percent NIIT as well as state taxes.

However, nothing is stopping you from keeping gold or silver bullion or valuable coins in a safe. Or you can also go the old-fashioned way by digging a deep hole in your yard and burying them; that was just a joke, do not choose that option. If you still want to read further, go to https://investorjunkie.com/retirement/5-considerations-for-choosing-an-ira-custodian/ to get tips for choosing an IRA custodian.

Final Thoughts

You can now see that there are different methods of investing in precious metals within an IRA. Each method has advantages as well as disadvantages. So choose the one that appeals more to you. Your investment and tax advisor can guide you. Finally, do not enter the world of precious metal investment as a novice. Ensure you arm yourself with adequate information.