Gold has been a symbol of wealth since the first gold coins were minted 2,500 years ago. Among its many attractions to investors and their advisors, gold provides diversification, liquidity and no credit risk. It provides a hedge against inflation and, historically, it has rewarded investors with significant returns; from 1997 to 2016 only real estate investment trusts (REITs) and large-cap domestic stocks provided higher annualized returns.
When invested in an IRA or 401(k) plan, gold can also provide tax advantages. Many traditional financial services firms allow only approved stocks, bond, mutual funds and CDs to be held in an IRA or 401(k) plan, so a self-directed IRA is often used for investing in precious metals.
While it is ultimately the investor’s responsibility, advisors who recommend gold for their clients should be aware of regulatory restrictions, which can negate the tax advantages. Jeffrey Kelley, senior vice president of Equity Institutional, pointed out that the Internal Revenue Service (IRS) allows IRAs to hold gold, silver and platinum coins, as well as gold, silver, platinum and palladium bullion that meet certain standards.
Internal Revenue Code (IRC) Section 408(m) provides a list of approved precious metals that may be purchased with retirement funds for both IRAs and 401(k) plans. Typical investments include: American Eagle, Australian Kangaroo/Nugget, British Britannia, Canadian Maple Leaf and other coins. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) also allows the purchase of state-minted coins. On the other hand, coins that are considered collectibles—like the Dutch 10 Guilder, French 20 Franc, German Marks and many others—are excluded from inclusion in retirement funds.
Storing Gold
The question of whether IRA investors can hold their gold coins at home and still retain their tax-advantaged status gets a little complicated.
With the multiple ways of storing precious metals, there are also a number of misconceptions. Some investors think they can save on storage costs by purchasing precious metals in their IRA through an LLC structure, and choosing to then store the metals at home or a place of the investor’s choosing.
“What investors don’t realize is that they could end up paying as much or more in costs to establish and maintain their LLC while also adding administrative complexity,” Mr. Kelley said. “In addition, it has not been determined that non-traditional methods of storage are acceptable to the IRS. Some investors even pursue precious metals IRA custodians who offer overseas storage options, without realizing that these facilities may operate with lower security standards than those in the United States. These offshore arrangements may also delay the timely retrieval of assets should they be needed quickly.”
Admittedly, storage and trusteeship are grey areas for most investors. However, finding ways to potentially color outside the lines hardly seems worth it. Section 408(m) is clear enough concerning the requirement that gold, silver or palladium bullion must be held in the physical possession of a trustee, such as a U.S. bank, financial institution or approved trust company. Applying the same standard to coins can make a lot of sense, too.
Generally, the key issue with IRA ownership of precious metal assets is finding a trustee willing to set up a self-directed IRA, handle the transfer of funds to the precious metals dealer, and facilitate the physical transfer and storage of the purchased coins or bullion. Investors in the market for an IRA provider should give preference to firms that offer flat annual fees, storage that segregates one’s metals from other owners, online account access and excellent customer service, including comprehensive quarterly statements.