Buy high, distribute low, sell high, save taxes! That is the latest scheme circulating in the precious metals IRA industry.
More specifically the scheme is:
- Establish an IRA with a provider that prices all metals at spot;
- Buy approved metal item (usually coin(s)) that has a premium associated with it;
- Direct the IRA provider to distribute that item at spot price thus decreasing the tax on the distribution;
Result: the IRA holder now owns metal at its real value, having only paid tax on a portion of it.
The idea sounds great, but it could put you crosswise with the IRS and Federal authorities for tax evasion. If you are considering taking an in-kind distribution of gold or silver from your IRA, make sure your IRA provider has the information – many don’t – to report the accurate value of the metal! Like any asset, all metals have a real price: the amount someone will pay to purchase them. It is a critical issue when it comes to distributions in kind.
Consider for a moment the implication of a distribution of proof silver eagles at a spot price. Using round numbers, let’s say a proof eagle any year is going for $50 while the spot price for silver is at $20.
Suppose your Traditional IRA buys 1,000 proof silver eagles at a cost of $50,000, but your IRA provider, rather than showing the actual value of the coins, reports the value at spot price. Your IRA would then show a value of only $20,000. If you took a distribution of the coins, your 1099-R would only show the $20,000 value, which is the dollar value on which your tax would be based. The correct value of your distribution, $50,000, is what should be taxed, and the amount for which the IRS would hold you accountable. You avoided paying tax on $30,000, but the problem is that the IRS sees this as tax evasion.
This scheme goes particularly awry if someone is ill-informed enough to use the strategy in their Roth IRA. Distribution of metals at less than their actual value negatively impacts the account holder's taxes since their personal cost basis on the metals would be less than it should be. In the above example, the tax basis of your metals would be only $20,000 rather than $50,000. This has an adverse impact on the tax implications when the coins are sold in the future. In other words you will pay taxes on the $30,000 when you wouldn’t have to if your Roth IRA distribution was valued at $50,000.
IRA-eligible coins, rounds, bars, and other metals, just like any other assets, have prices based on what the market will bear for that particular item. The price of each type of product varies based on demand and availability, which is seldom if ever the spot price, but numerous IRA providers don’t make much of an effort to find accurate values for gold or silver in IRAs; a large percentage of providers take the “easy” route and value everything at the metal’s spot price. The difference between the spot price for gold and silver and the actual value of a given coin or bar has led some individuals to take distributions of the metals at artificially low values – which are reported to the IRS on form 1099-R – as a way to save on income taxes.
New Direction IRA often hears clients comment on the value of metals held in their IRAs; some think it is high, and some think it is low. While New Direction strives to find the best available prices to report the value of IRA-owned metals, because of the vast number of different products available and the fact there are relatively few market makers for many of them, determining an accurate price independent of an actual sale is nearly impossible. We generally report values at the Bid price, which is the price that will be received for the sale of the product. Generally the bid price is lower than what your IRA paid because most metals trade using the typical bid/ask pricing model. The best way to know the actual value is to call your dealer and ask how much they would offer to buy it back. Prior to distribution, clients can have them confirm the actual offered market price and we show that on their tax report.
Some companies are actually promoting this scheme. They encourage you to buy proof coins in your IRA, wait until your IRA provider reports them at spot value, request a distribution of the metal at the lower price, and finally sell the metal back to the dealer at the higher actual price. Note that the buy and sell transactions generate some quick profit for the company pushing the idea. For the taxpayer, the result is that the income tax on the distribution is artificially made much lower than if the distribution were reported at an accurate value. CPAs and tax attorneys note that contriving intentionally to take advantage of a reporting error to evade taxes is illegal. A tax court could find you guilty of tax evasion, and penalties and/or jail time could easily follow.
While a scheme such as this may be appealing, as it looks like the tax-payer will avoid taxes, it does constitute tax fraud. Avoid jail time and penalties by making sure your IRA provider has the information it needs to correctly report your distributions.
