Gold IRA rules are pretty straight forward, however common mistakes can result in unexpected taxes and penalties.
Since the IRS relaxed their rules regarding the addition of physical gold to retirement accounts, precious metals have become an essential part of many retirement plans in the United States. Get it wrong (set up, distributions or distributions wrong however and you could be looking at double taxation – or other nasty surprises.
As we all know, Uncle Sam and the IRS likes their regulations – so it’s not surprising that gold IRA rules would come into the picture when setting up a gold-backed retirement account.
IRA Basics: Contribution Limits:
For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than:
* $6,000 ($7,000 if you’re age 50 or older), or
* your taxable compensation for the year, if your compensation was less than this dollar limit.
For 2015, 2016, 2017 and 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than:
* $5,500 ($6,500 if you’re age 50 or older), or
* your taxable compensation for the year, if your compensation was less than this dollar limit.
The IRA contribution limit does not apply to rollover contributions or qualified reservist repayments
Required Minimum Distributions
Unlike with precious metals outside of a retirement account, you cannot keep retirement funds in your IRA indefinitely. You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½.
Your required minimum distribution is the minimum amount you must withdraw from your account each year.
* You can withdraw more than the minimum required amount.
* Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
For IRAs (including SEP and SIMPLE IRAs) this starts at April 1 of the year following the calendar year in which you reach age 70½.
The IRS has prepared worksheets where you can easily calculate your minimum distributions.
For full details on distribution, early distribution and taxation, see the Full IRS Guide
By following these IRA rules and the following rules specifically looking at precious metals IRAs – you will keep your hard-earned retirement funds out of the clutches of the IRS…
Rules Specific to Gold IRAs
The Collectibles Trap
The Taxpayer Relief Act of 1997 allowed us to add gold and precious metals to our Individual Retirement Accounts, opening the floodgates to those desperate for a tax-efficient hedge in a diversified retirement portfolio.
Designed to be relatively simple to operate and set up, the gold IRA is an immensely popular vehicle, but there are still a number of potential pitfalls for the unwary in buying retirement gold.
As is typical with the IRS – this apparent simplicity can at times hide complicated rules and restrictive clauses in an otherwise perfect retirement plan.
As take-up of previously restricted asset classes, notably hard assets like gold and silver becomes widespread, these hidden rules and exceptions have begun to catch out more and more investors.
Adding to the problem – there’s a huge amount of misinformation online and it’s not unknown for unscrupulous dealers to take advantage, knowingly selling high mark-up coins as suitable for an IRA when they’re absolutely not.
Collectible Coins and Section 408(m) of the Internal Revenue Code
When most people think of collectibles they tend to think of art, antiques and ornaments – so it’s often a surprise when they realize a huge part of the precious metals market is classified as collectibles.
The simple mistake of buying the wrong gold coins for your IRA can result in a huge and unexpected tax bill.
For example if $15,000 of your IRA funds are used to invest in coins classified as collectibles, the IRS will view your transaction as a $15,000 distribution. This means the $15,000 should be reported as being part of your gross income, and liable to income tax at your standard tax rate.
It gets worse. In addition to being hit for tax on the $15,000 there’s an additional 10% penalty tax if you’re younger than 59.5.
But it doesn’t end there. You’ve already paid tax on the distribution and a penalty on the price when you mistakenly added the collectibles. But fast forward to the eventual selling of these collectible coins and the proceeds of the sale being distributed to the IRA owner or beneficiaries.
As a prohibited transaction this sale will again form part of gross income for the year of the distribution, meaning a further tax hit, with no credit being given for previous penalty tax. Effectively double taxation.
What is a collectible coin?
With the exception of a few special US coins*, if a coin is sold on the basis of any special merit over and above the value of it’s precious metal content, then it’s a collectible.
Rare coins, miss-strikes, antique coins, proof coins, slabbed coins, specially graded coins, limited edition coins, enameled coins, coins in presentation cases – are typically collectibles and therefore not allowed in a gold IRA.
Play safe. Stick to buying standard bullion coins and rounds of sufficient purity, from mints recognized by the IRS. We list them here.
You’ll know a coin is effectively standard bullion by it’s price. Standard bullion coins and rounds sell at the spot price, plus a small premium of 5-20%. To be extra safe, only buy coins listed as being definitively suitable for an IRA. Not coins that should be suitable or may be suitable.
The Exception: Gold and Silver American Eagle Proofs in an IRA
Despite being very obviously “collectibles”, there are gold and silver proof coins that can be added to a gold IRA but they must be American Eagle proofs.
Proofs are beautiful coins. The gleam with a true mirror finish and when looked at next to a regular bullion coin, the regular coin seems almost disappointing. Extra care goes into a proof coin’s production, and they tend to be sold in display cases – adding to their overall beauty.
It’s this beauty that commands higher premiums and greater dealer markups and commission. Is that beauty worth an extra 20%, 30% 50%, even 100% to you?
Will it be worth that same premium when you come to sell? Our experience says no.
A quick test – if you are looking to buy proof coins from a dealer, phone them and say you have say 20 gold proof eagles you’re looking to sell. See what you’re offered and compare it to their sale price.
Do the math and ask yourself if you want to take that kind of hit on your account for the sake of owning some slightly more shiny coins held in a distant vault.
Beware “Collectibles” that are not collectible
Numismatic coins can make good investments outside of an IRA, but for the purposes of a gold IRA, remember all you’re really interested in is the weight of precious metals in your account.
As we’ve mentioned before dealer margins on regular bullion coins and rounds are pretty low especially if you shop around.
So some dealers, will take steps to increase their margins. They will sell fairly common bullion coins as being special for some reason – be it last of a design run, first of a design, or will imply a limited production of “only” 10,000 coins or some other must-buy reason.
They can make a very convincing argument and it’s easy to believe what these “experts” are saying if you’re new to precious metals investing.
And these coins WILL be suitable for your IRA, despite being collectible.
Why? Because they’re not collectible, or rare, or limited – or at least not in a sense that will give them a resale value over their basic intrinsic metal content.
But the dealer will have made a nice profit from you.
Home Storage Gold IRAs are NOT allowed
Gold in an IRA must remain with your custodian or trustee at an approved depository.
You can take a distribution from your IRA, however this will be taxable and may carry additional fees and penalties.
In recent years some IRA companies have started promoting “Home Storage”, “Check Book” IRAs or “LLC” IRAs as a loophole to this rule, where the IRA holder forms a Limited Liability Company. This LLC then buys gold coins (not bars, and so far only American Eagle coins are used in the scheme), which can be in turn be stored at the new LLC company HQ – which will typically be the IRA holder’s home.
However IRS Publication 590 specifies that for all IRAs, “The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.”
Again the IRS website states This rule [Gold in an IRA should be held at a bank etc.] also applies to an indirect acquisition, such as having an IRA-owned Limited Liability Company (LLC) buy the bullion. [These] IRA investments… run the risk of disqualifying the IRA because of the prohibited transaction rules against self-dealing.
Therefore storing Gold IRA products in the IRA owner’s home or in a safe deposit box to which the IRA owner maintains a right of access is not within the letter or the spirit of the Internal Revenue Code – that is, the tax-advantaged IRA assets should be held outside the possession and personal control of the IRA owner until retirement or early distribution.
Some Home Storage IRA companies mention the Swanson v. Commissioner case in 1996, adding that the IRS and the Department of Labor have, through field service advisory letters, and DOL advisory opinion letters, consistently acknowledged the existence of the CheckBook IRA – however the Self-Storage IRA arrangement has not been approved or recognized by the Internal Revenue Service – formally or in a no-action letter issued by the IRS, Employee Plans Division. And now they’ve explicitly stated it is not allowable.
In short, don’t do it.
Finally remember the one rollover per year rule
As mentioned above, from January 1, 2015, you are only permitted to make one rollover from one IRA to another IRA in any 12-month period, regardless of the number of IRAs you own.