Gold IRA Rules – and the Easy Mistake Many People Make

Gold IRA rules are relatively simple, but a common mistake can quickly lead to unexpected taxation and penalties

gold ira rules - taxation mistakesFollowing a few easy rules will keep your hard-earned retirement funds out of the clutches of the IRS

Since the IRS relaxed it’s rules on physical gold in retirement funds, precious metals have unsurprisingly formed an essential part of many American IRAs. Get it wrong however and you could be looking at double taxation – or worse.

Gold IRAs – The Problem

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.

Follow these rules with your gold IRA for problem-free investment:

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 realise 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.

So what is a collectible coin?

slabbed coins and gold ira rulesWith 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, enamelled 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.

* Currently, the only collectible coins allowed in a precious metals IRA are gold and silver American Eagle proofs. Proofs are sold at a significant premium over standard bullion coins due to the quality and detail of their striking.

Gold and Silver American Eagle Proofs in an IRA

So despite being “collectible”, gold and silver proof coins can be added to a gold IRA but only if they are 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 shiny coins in a distant depository.

Other Allowable “Collectibles”

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.

Remember the one rollover per year rule

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.

There are exemptions from this rule, that the one-per year limit does not apply to:

  • rollovers from traditional IRAs to Roth IRAs (conversions)
  • trustee-to-trustee transfers to another IRA
  • IRA-to-plan rollovers
  • plan-to-IRA rollovers
  • plan-to-plan rollovers

You must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover (other than above exceptions) in the preceding 12 months. You may also be subject to a 10% early withdrawal tax on the amount you include in gross income if you are aged less than 59.5.

Full details of the One Rollover Per Year rules on the IRS site.

So these are the easily missed IRA rules – where next?

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Image of slabbed coin by Physics-fan3.14 – Creative Commons