It’s not unreasonable that some IRA owners may have bad feelings about the stock market.
However the safest fixed-income investments are currently paying microscopic interest rates even though the risk of future inflation remains worrisome. So the idea of investing some IRA Gold Investments or other precious metals might seem attractive. Here’s the story on what you can and cannot do with your IRA.
Physical IRA ownership of precious metal coins and bullion
Our beloved Internal Revenue Code allows IRAs to own certain gold, silver, and platinum coins and gold, silver, platinum, and palladium bullion that meets certain fineness standards. For example, an IRA can own American Gold Eagle coins, Canadian Gold Maple Leaf coins, American Silver Eagle coins, American Platinum Eagle coins, and gold and silver bars (bullion) that are 99.9% pure or better.
However, some well-known gold coins, including the South African Krugerrand, are off limits as are bullion bars that are not sufficiently pure. The coins or bullion must be held by the IRA trustee rather than the IRA owner. In other words, you can’t have your IRA buy coins or bullion and then stash the stuff in your safe deposit box or bury it in your backyard. Sorry about that. These tax rules apply equally to traditional IRAs, Roth IRAs, simplified employee pension (SEP) accounts, and SIMPLE-IRAs. No problems so far.
The big issue with IRA ownership of precious metal assets is finding a trustee that is 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. Only a relatively few outfits are in the game, and none of the major brokerage firms are willing to play. Conduct an Internet search to find a trustee. Most trustees will arrange for the physical storage of coins and bullion with the Delaware Depository Service Company in Wilmington, Del.
A precious metals IRA trustee will usually charge a one-time account set-up fee (maybe $50), an annual account administrative or maintenance fee for sending account statements and so forth (maybe $150 or an amount based on the account value), and an annual fee for storage and insurance (maybe $125-$250 or an amount based on the value of the stored assets). Additional fees may be charged for transactions including contributions, distributions, and precious metal purchases and sales.
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Since precious metal prices are volatile, using an IRA to invest in precious metal assets becomes (arguably) more problematic as retirement age is approached and reached. Also, once you reach age 70½, annual required minimum distributions (RMDs) must be taken from traditional IRAs. Therefore, your 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 the proper total annual amount (at least) be withdrawn from one or more accounts. For example, you could have one IRA that is invested in precious metal bullion and one IRA that is invested in liquid assets like publicly traded stocks and mutual funds. The entire annual RMD amount can be taken from the liquid account while leaving the precious metal account untouched.
Indirect precious metal investments via ETFs and mining stocks
Due to concerns about transfers and storage, physical ownership of precious metal assets by IRAs is not for everyone, although it has become more popular in recent years.
One option for folks who are uncomfortable with the idea of physical IRA ownership of coins or bullion is buying shares of an exchange traded fund (ETF) that tracks the value of particular precious metal. A few years ago, tax advisers worried that having your IRA buy such shares might be treated for tax purposes as buying collectibles (coins and metals are generally treated as collectibles under the tax law). Since IRAs are not allowed to own collectibles, that would have resulted in a deemed taxable distribution from the IRA with you then using the money to buy the prohibited EFT shares. Not good.
Thankfully, the IRS has ruled that IRAs can buy shares in precious metal ETFs that are organized as grantor trusts without any tax problems.
The two most-popular precious metal EFTs are the SPDR Gold Trust (trading symbol GLD) and the iShares Silver Trust (trading symbol SLV). The IRS has approved them both. If you have doubts about your IRA being allowed to own a particular precious metal ETF, read the tax section of the fund’s prospectus, which should be available online. (Be aware that there are still some folks out there who wrongly believe that IRAs are not allowed to own precious metal ETFs.)
Another indirect way of investing in precious metals is to have your IRA by stock in a mining company. For example, your IRA could buy shares in Barrick Gold Corp. ABX, -0.30% , the world’s largest pure gold mining company. There are no tax concerns with this option, because IRAs are allowed to invest in stocks of all kinds.
The IRA Rules You Need to Know
Play by the rules with your retirement accounts and you can accumulate a lot of money.
Saving for retirement can seem a daunting and confusing affair, and if you don’t know anything about IRAs, you might assume that they’re daunting and confusing, too. The basic rules for IRAs aren’t so complicated, though. Read on for the IRA rules you need to know.
What are the tax benefits of IRAs?There are two main kinds of IRAs: the traditional and the Roth. With a traditional IRA, you contribute money on a pretax basis. The value of your contributions is subtracted from your taxable income, so it reduces the tax you pay now. (For example, if your taxable income is $50,000 and you contribute $5,000, your taxable income falls to $45,000, shielding $5,000 from tax in your contribution year.) The money grows tax-deferred until you withdraw it in retirement, when it’s taxed as ordinary income. Your tax break is an upfront one.
The Roth IRA offers no upfront tax break, accepting only post-tax contributions. With a taxable income of $50,000 and a Roth IRA contribution of $5,000, your taxable income will still be $50,000. But if you follow the rules, it’s withdrawn in retirement completely tax-free.
Breaking some rules has dire consequences. Breaking IRA rules will just cost you financially.
How much can you put into your IRA?The IRA contribution limits for both Roth and traditional IRAs are the same. For the 2015 tax year, the limit is $5,500 — plus an extra $1,000 “catch-up” contribution for those aged 50 or older.
Per the rules, you can have multiple IRAs, all Roth, all traditional, or a mix, and can contribute to all of them each year — as long as you stay within the $5,500 or $6,500 limit in total. In other words, you can spread that contribution across more than one IRA if you want to.
What are the IRA deadlines?Contributions to IRAs for a given tax year are due by the tax-filing deadline for that tax year, which is usually April 15. So for tax year 2015, the IRA contribution deadline is April 15, 2016. (Be sure to specify which year the contribution is for on your check!)
How do you set up an IRA account?It’s easy to set up an IRA account. Many financial institutions would love to help you open one up with them. Visit any major brokerage’s website, for example, and you can access account-opening information and forms that you can fill out online or print and mail in.
What can you invest in, in your IRA?While 401(k)s typically limit you to a selection of investment offerings, such as some stock and bond funds, IRA money can be invested in a much wider range of investments, such as stocks, bonds, ETFs, mutual funds, gold coins, bars of silver, and CDs. You can even invest in real estate or buy a business or a stake in a business through your IRA, though there are a bunch of additional rules surrounding those investments. IRA rules forbid investing in insurance or collectibles.
When can you withdraw funds?You’re generally fine withdrawing money once you reach the age of 59 1/2. Traditional IRAs (but not their Roth counterparts) impose required minimum withdrawals (RMDs) beginning at age 70 1/2.
If you want your money before age 59 1/2, a traditional IRA will charge you a 10% penalty on what you withdraw (plus, you’ll owe taxes on it, as you will with regular withdrawals). Roth IRAs permit early withdrawals, but only of the money you contributed to the account, not the earnings on it that have likely accumulated in the account or funds converted into the Roth from a traditional IRA.
Withdrawals after age 59 1/2 from a Roth IRA can be freely made as long as you first contributed to the account at least five years ago. Also, any money converted from a traditional IRA to a Roth must remain in the Roth for at least five years to qualify for penalty-free withdrawals.
That’s pretty much it, for the basic IRA rules you need to know. Armed with this information, go open an IRA account or make sure you’re making the most of the one(s) you have. You’ll be happy you did, come retirement.
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