Invest in Gold in IRAs

With the stock market reaching levels that might be considered risky, some IRA owners may be concerned that their accounts are overexposed to equity investments. Unfortunately, however, the safest fixed income investments (CDs, Treasuries, and money-market funds) are still paying absurdly low interest rates. In this scenario, investing some IRA money in gold and/or other precious metals like silver and platinum may seem appealing.

At first blush, the IRS appears to throw cold water on the idea. As a general rule, the tax code treats an IRA investment in any metal or coin as the acquisition of a collectible item. As such, the transaction is characterized as a taxable distribution from the IRA followed by a purchase of the metal or coin by the IRA owner. In effect, this general rule prohibits IRAs from investing in precious metals or coins made from precious metals.

Thankfully, there is an important exception to the general rule. Under the exception, IRAs can invest in certain gold, silver, and platinum coins and in gold, silver, platinum, and palladium bullion that meets applicable purity standards. However, the coins or bullion must be held by the IRA trustee or custodian rather than by the IRA owner. These rules apply equally to traditional IRAs, Roth IRAs, SEP accounts, and SIMPLE-IRAs.

Physical IRA Investments in Precious Metal Coins and Bullion

Thanks to the aforementioned exception, IRAs are allowed to own certain precious metal coins and bullion. Examples include American Gold Eagle coins; Canadian Gold Maple Leaf coins; American Silver Eagle coins; American Platinum Eagle coins; and gold, silver, platinum, and palladium bars (bullion) that meet applicable purity standards. For example, gold bars must be 99.5% pure or better and silver bars must be 99.9% pure or better.

So far, so good. The big practical issue is finding an IRA trustee that is willing to set up a self-directed IRA and facilitate the physical transfer and storage of precious metal assets. Only a relatively few outfits are willing to act as precious metal IRA trustees. None of the major brokerage firms are on board (as far as we can tell). Examples of willing precious metal IRA trustees include GoldStar Trust Company, the Entrust Group, American Estate & Trust LC, Provident Trust Group LLC, and New Direction IRA Inc. Most but not all trustees will arrange for the physical storage of precious metal assets with Delaware Depository Services Company in Wilmington, Delaware.

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.

IRA owners are usually left to their own devices to find a precious metals dealer that will sell coins or bullion to the IRA or buy coins or bullion from the account. Examples of dealers include Goldline, RC Bullion, Rosland Capital, and Miles Franklin.

Note: The trustees and dealers mentioned above are presented for informational purposes only. We do not endorse any of them. Other trustees and dealers can be found by conducting an Internet search.

Indirect IRA Investments via Precious Metal ETFs

Buying shares of an ETF that tracks the value of a particular precious metal is an option for those who don't want to deal with the issues that surround the physical ownership of precious metal coins or bullion by IRAs.

A few years ago, there were concerns that an IRA's acquisition of shares in a precious metal ETF could be treated as the acquisition of a collectible. As explained at the beginning of this release, that would result in a deemed taxable distribution from the IRA. Not good!

Thankfully, the IRS says IRAs can buy shares in precious metal ETFs that are classified as grantor investment trusts without any such problems. Specifically, in Ltr. Rul. 200732026, the IRS ruled that IRAs could buy shares in a gold EFT. Apparently, the ETF in question was the SPDR Gold Trust (trading symbol GLD), which is the most popular gold ETF. Similarly, in Ltr. Rul. 200732027, the IRS ruled that IRAs could buy shares in a silver ETF. Apparently, the ETF in question was the iShares Silver Trust (trading symbol SLV), which is the most popular silver ETF.

More recently, Ltr. Rul. 201446030 concluded that IRAs can invest in trusts that hold gold. According to the IRS, the rules prohibiting direct IRA investments in gold do not apply when the gold is held by an independent trustee. In the situation addressed by the letter ruling, shares in a gold-holding trust (presumably an ETF) were sold to the public, including IRAs, and were traded on a stock exchange.

If you have doubts about IRAs being allowed to own a particular precious metals ETF, take a look at the tax section of the fund's prospectus, which should be available online. Presumably, when a reputable brokerage firm is acting as the IRA trustee, it won't let an IRA buy shares in an ineligible ETF in the first place.

Note: There are still some people out there who believe IRAs are flat out prohibited from owning shares in precious metal ETFs. Not true!

Indirect IRA Investments via Precious Metal Mining Stocks

An even more indirect way of investing in precious metals is to have your IRA by common stock shares of mining companies. There is absolutely no tax-law problem with that idea. An example would be buying shares of Barrick Gold Corporation (NYSE trading symbol ABX). Barrick claims to be the largest gold mining company in the world.

Age-related IRA Considerations

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 a traditional IRA owner reaches age 70 1/2, IRA Required Minimum Distributions (RMDs) must be taken. An individual's traditional IRAs (including any SEP-IRAs and SIMPLE IRAs) must have sufficient liquidity to allow for required minimum distributions. That said, RMDs need not be taken from each IRA. The only requirement is that the proper amount (at least) be withdrawn from one or more accounts. For example, an individual 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 annual RMD amount can be taken from the liquid account while leaving the precious metal account untouched.

Precious Metal EFTs and Mining Stocks Held in Taxable Accounts

Long-term capital gains from selling precious metal ETF shares held in an individual's taxable brokerage firm account are subject to the 28% maximum federal income tax rate rather than the standard 20% maximum rate. Why? Because the gains are considered to be from selling collectibles. [See IRC Sec. 1(h)(1)(E) and IRS Office of Chief Counsel Memorandum dated 5/2/08.] Short-term gains are subject to a maximum federal rate of 39.6%. Gains may also get hit with the 3.8% Net Investment Income Tax (NIIT). Finally, state income taxes may also apply.

Long-term gains from selling mining stocks held in an individual's taxable brokerage firm account are subject to the standard 20% maximum federal rate. Short-term gains are subject to a maximum federal rate of 39.6%. Additionally, gains may be hit with the 3.8% NIIT, and state income taxes may apply too.

Conclusion

As you can see, IRAs can invest in gold and other precious metals in several different ways. Each way has advantages and disadvantages, which are up to you to evaluate.  

Abacoa CPA's

Jupiter, FL

(561) 331-0744

Family Member Death and Medical Expenses

Background
For federal income tax purposes, deductions for a taxpayer’s unreimbursed medical expenses are only allowed for the tax year in which the expenses are actually paid. But what happens when someone incurs significant medical expenses and then dies before payment occurs?

Good question. Please keep reading.
Election Allows Income Tax Deduction for Unpaid Medical Expenses. The executor of the decedent’s estate (called the personal representative in IRS lingo) can elect, for federal income tax purposes, to treat all or a portion of medical expenses that are paid out of the estate during the one-year period that begins on the day after the date of death as if they were paid at the time they were incurred. In other words, the election allows a deduction as if the expenses were paid when the related medical services were rendered.  Therefore, making the election usually allows medical expenses paid within one year after death to be deducted on the decedent’s final Form 1040. As illustrated by Example 1 later in this release, making the election may also allow deductions on Form 1040 for an earlier year.

Final Medical Expense Deduction Basics.

Under the current rules, medical expenses can be written off as a Schedule A itemized deduction only to the extent they exceed 10% of AGI. While the percent-of- AGI threshold are an impediment to claiming deductions, final medical expenses are often big enough to easily surpass the applicable threshold. Note that the election to accelerate the income tax deduction for medical expenses that are unpaid on the date of death is only allowed for expenses that are later paid by the estate within one year after death. So this is not a something-for-nothing deal.

Final Form 1040 Basics.

A calendar-year decedent’s final Form 1040 covers the period from January 1 through the date of death. The final return is due on the normal date—meaning 4/15/17 for a decedent who died in 2016 (unless an extension to 10/15/17 is obtained). If the decedent was unmarried, the final Form 1040 is prepared in the usual fashion. When there is a surviving spouse, the final Form 1040 can be a joint return filed by the surviving spouse as if the decedent was still alive as of the end of the year in which he or she died. The final joint return includes the decedent’s income and deductions up to the date of death plus
the surviving spouse’s income and deductions for the entire year.

Executor Has Two Options for Unpaid Medical Expenses
To claim a federal income tax deduction for medical expenses that were unpaid on the date of death, the executor must affirmatively waive the right to deduct those liabilities from the decedent’s taxable estate for federal estate tax purposes. In effect, the election to claim an income tax deduction and the related waiver of any estate tax
deduction gives the executor two options for how to handle medical expenses that are unpaid on the date of
death.
Option 1: Claim Income Tax Deduction. The executor can make the election to claim a federal income tax deduction by waiving the right to claim a federal estate tax deduction.
Option 2: Claim Estate Deduction. The executor can forego the income tax deduction (by forgoing the aforementioned election) and instead claim a federal estate tax deduction.
Note: Medical expenses paid by the decedent during the year of death (but prior to death) are only deductible on the decedent’s final income tax return.
Of course, when no federal estate tax is due (because the decedent’s estate is valued at less than the relatively generous federal estate tax exemption of $5.45 million for those who died in 2016 or $5.49 million for those who die in 2017), Option 2 has no value. So, if Option 1 would result in income tax savings, then Option 1 election should be made.
On the other hand, Option 2 is generally the correct choice when there is a taxable estate because the federal estate tax is currently assessed at a 40% rate while the current maximum federal income tax rate is “only” 39.6%. In addition, medical expenses deducted on the federal estate tax return (Form 706) are unaffected by the percent-of-AGI limitations that apply for federal income tax purposes. Finally, the increased income tax liability from not deducting the medical expenses for income tax purposes will reduce the taxable estate.
For all these reasons, the election to forego an estate tax deduction in favor of an income tax deduction (Option 1) is generally appropriate only when there is no federal estate tax liability. Note that the federal estate tax return (Form 706) is due nine months after the decedent’s date of death. However, the executor can obtain an automatic six-month extension by filing Form 4768.

Abacoa CPA's

Jupiter, FL

(561) 331-0744