The Bottom Line on IRAs Buying Physical Precious Metals

With instability in the stock market, many retirement investors are looking to alternative assets including precious metals. Gold, silver, and other metals carry intrinsic value not found in many traditional assets which makes them particularly valuable in uncertain times. Many IRA custodians only provide their clients with the option to invest in a Gold or Silver Exchange-Traded Fund (ETF) and give them no opportunity to purchase physical precious metals.

With a self-directed IRA from New Direction IRA, investors can use their retirement funds to purchase physical metal, rather than purchasing shares in an ETF. If you follow the gold and silver markets and would like to use your expertise to invest in what you know, or if your financial advisor has suggested that you diversify your retirement investments, your SDIRA can purchase physical gold, silver, platinum, and palladium.

The IRS has placed certain regulations on the metals that may be purchased by an IRA, as well as requiring that the metals be stored in a depository away from the physical possession of the account holder. NDIRA has a dedicated Precious Metals Asset Team to walk you through the process and answer any questions you may have concerning purchasing gold, silver, platinum, or palladium with your IRA. NDIRA will also work with any precious metals dealer and any depository, so your IRA can purchase metals from people you know and trust. Or if you are new to precious metals investing, you will shop around and  choose the dealer and depository that is right for you.

Once you reach age 59.5, you are eligible to begin taking distributions from your account without penalty, and you can decide what to do with your metals. You can choose to sell them and distribute the cash, or you can take possession of the physical precious metals. If you have a Roth IRA and take a qualified distribution the increase in the value of your gold or silver will be tax-free.

Having a SDIRA through New Direction IRA allows you to invest in physical precious metals, rather than ETFs, to help you reach your retirement goals. Contact our Precious Metals Asset Team for more information.

Tax Saving Opportunity or Tax Fraud?

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.  

How to Get Gold and Other Alternative Assets in a Self-Directed IRA

“Alternative assets” is the broader name for the suite of investment opportunities afforded by self-directed IRAs (SDIRAs). These alternative assets include real estate, precious metals, private equity and more. Alternative assets could even be oil rigs, tractors or trees. According the IRS, alternative assets can be anything except collectibles (wine, stamps, etc.) or life insurance.

The flexibility afforded by alternative assets and SDIRAs allow the IRA holder to choose what types of assets his IRA invests in. People with self-directed IRAs can rely on their own investment expertise, making tax-free or tax-deferred investments in assets they know and understand personally.

Alternative assets can be held in Traditional and Roth IRAs, SEP and SIMPLE IRAs, even Individual 401ks—as long as those accounts are serviced by a SDIRA provider. The truth is any IRA can be self-directed; it’s just that many IRA holders choose an IRA provider that restricts the types of investments it can make.

This new pool of alternative asset opportunities attracts many investors to SDIRAs. For instance, a self-directed IRA with investments in real estate can charge rent to tenants or visitors, let land appreciate in value, rent commercial space to business, fix and flip property and much more (plus, the property can be distributed for personal use after reaching retirement age.) This increases the value of the IRA as all income and payments must only be made to and from the IRA, not the account holder.

This ability to increase the value of your IRA with alternative assets continues to grow in popularity due to market volatility, favorable legislation, tax advantages, disaffection with banks and securities-based IRA and 401(k) providers, and the ability to invest in what you know.

According to IRS rules, investors need a self-directed IRA provider, like New Direction IRA, to handle the bookkeeping and administration for the account. Visit www.newdirectionira.com to get started.