Editor’s note: The following was first published in the Aug. 18 Market Update e-newsletter published by Krause Publications. To learn more about it, visit www.numismaster.com.
Several national coin promoters are hyping precious metals Individual Retirement Accounts as a way for individuals to own gold and silver.
At a quick glance, there is some attraction to this idea. The strongest selling point is using pre-tax dollars to purchase precious metals rather than after-tax dollars. Funds contributed to IRAs are deducted from taxable income and not taxed until the funds are withdrawn.
However, there are several drawbacks to owning precious metals in an IRA, plus a huge potential risk to owning any IRA or private retirement account. Before opening or adding to a precious metals IRA, please consider the following:
Drawback #1: Tax deferral duplication. The purpose of an IRA is to defer the taxation of income from the time it was actually received until the funds are withdrawn from the IRA. Ideal assets to put into an IRA are those that produce income that would otherwise be taxable each year, like the dividends and interest you earn on stocks, bonds and certificates of deposit.
Owning physical precious metals is a method of tax deferral in its own right. Taxes are not due until the assets are sold. Therefore, there is no need to own precious metals in an IRA for tax deferral purposes.
Drawback #2: Pre-tax versus after-tax investments. If you are prudently diversified, you already have investments other than precious metals. Since IRAs have contribution limits, most investors who set up a precious metals IRA are forced to hold other investments outside of the IRA. These other investments are acquired with after-tax dollars that could have been purchased with pre-tax dollars if owned in an IRA.
By holding these stocks and bonds personally, the income you receive this year from them would be taxed this year. The result could be that an investor could be paying higher taxes this year than if the precious metals were owned personally and the dividends and interest were earned in the IRA.
Drawback #3: A more expensive way to own precious metals. If you buy precious metals through your IRA, you are required to retain an independent trustee to handle the account, make purchases and sales and control custody of the assets. The trustee will contract with an independent depository to hold your precious metals. About the lowest costs I have seen for trustee and storage services are $160 per year. Most of our customers who pay for their own safety deposit boxes are paying less than $50 per year.
Drawback #4: Limited choices. Even with the expanded list of precious metals that went into effect on Jan. 1, 1998, the list of what precious metals can be held in an IRA is restrictive.
For instance, the only U.S. gold numismatic coins that can be safely owned by an IRA are the four sizes of the proof American Eagles (and these only if they are in their original U.S. Mint packaging). Several coin promoters have pushed these coins to their precious metals IRA customers because they have a higher profit margin than the bullion issues.
In my expectation, I expect that long term most proof gold Eagles will sell for about 10 percent more than uncirculated issues. Right now there are coin promoters charging about double the price for proof compared to an uncirculated gold Eagle. I fear that customers now paying more than about $1,100 per ounce for proof gold Eagles (and all of them are now trading above this level) will realize much worse results than if they simply just purchased the bullion Eagles instead.
The kinds of gold coins available closest to gold value, such as Austria 100 coronas, Mexico 50 pesos and U.S. American Arts Medallions, are not eligible to be in a precious metals IRA. That limits investors to higher premium issues like the Eagles, Canada Maple Leaves, China Pandas, Austria Philharmonics, Australia Kangaroos and ingots.
Drawback #5: Less privacy. When you purchase precious metals directly, there are no reports filed that you own such assets. If you set up an IRA, you have to disclose its existence in order to take the tax deduction on your tax return. It’s true that you don’t have to report exactly what assets are in your IRA. However, if the IRS ever wanted to find out what assets were in your IRA, your trustee and their storage company would likely have to provide the details.
Drawback #6: Less control over your assets. Precious metals that you have in your immediate physical possession serve as insurance against calamities much better than a piece of paper saying that you own precious metals somewhere else that you cannot access quickly.
In addition, if you have personal control of your precious metals, you don’t have to worry about business failures or defalcations by either the trustee or storage company.
Risk of government seizure. If the above list of drawbacks doesn’t deter you, then consider the risk of mandatory seizure of all private retirement accounts, including precious metals IRAs and having them converted entirely into U.S. government bonds.
Don’t laugh. On Oct. 7, 2008, the House Education and Labor Committee (Rep. George Miller, D-Calif., chair) held hearings on “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions.”
One of the speakers was economics professor Teresa Ghilarducci from the New School for Social Research. She advocated that the U.S. government seize 100 percent of assets in 401(k) and other private retirement plans and replace them with Treasury bonds paying 3 percent interest. Upon retirement, the bonds would be converted into an annuity. Upon death, there would be no retirement account assets in the deceased’s estate.
Since the late 1990s, I have warned our customers that the U.S. government would eventually get around to confiscating part or all of private retirement accounts under the guise of “guaranteeing” the safety of the retirement account. In reality, it would be a wonderful way for the U.S. government to cover part of its soaring debts. Such a step would bring trillions of dollars into the U.S. government coffers. In contrast, were the U.S. government to again try to call in gold as it did in 1933, my best estimate is that the Treasury would only benefit by about $75 billion – covering less than one month’s current budget deficit!
It is hard for me to believe that politicians, who are already holding hearings on the idea of seizing private retirement assets, will not tap this source of taxpayer funding. At first, it would probably be sold as a “voluntary” program for those worried about the loss of retirement asset values. But, like the federal income tax and Social Security program, what starts out small will almost certainly expand to cover nearly everyone.
Now, when you put all these factors together, do you really want to hold your precious metals in your IRA? About the only circumstances where it might be worth considering is if someone really has no other alternative for funding the purchase of precious metals.
(In the interest of full disclosure, I admit that I personally have a precious metals IRA as do two of my children. The total amounts invested are not a significant portion of our net worth. I also believe that if the government were to try to seize private retirement assets, there would be some time where it would be possible to take a taxable distribution out of these accounts, before it was too late.)
Patrick A. Heller owns Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com.