All That Glitters: What Happens When IRA Clients Want to Hold Gold?
Recent market anxiety means advisors are fielding an increasing number of client questions about owning gold in their IRAs.
This should come as no surprise. Clients commonly see gold as a safe-haven of sorts whenever there is market volatility. As an advisor, you should know the basic rules so you can be ready for those questions. For example, contrary to the implications of TV ads, IRA gold cannot be held at home or in a personal safe. It must be purchased by the IRA.
In general, IRAs are pretty flexible when it comes to the types of investments they can own. Other than S-corporation stock, life insurance and collectibles, an IRA may own anything. While the term “collectibles” conjures up images of classic cars and comic books, it also generally includes coins and metals, including gold.
That collectibles restriction might lead one to believe that holding gold in an IRA is not possible, but thanks to a specific exemption in the tax code, it is doable. Specifically, IRAs are allowed to invest in one ounce, one-half ounce, one-quarter ounce and one-tenth ounce Treasury Department minted U.S. gold coins. They can also invest in bullion — such as the proverbial gold bar or other gold coins — as long as its fineness, or purity, is 995 parts per 1000, or greater.
WHEN CLIENTS GET IT WRONG
What happens if clients get it wrong and invest in gold that’s not IRA-worthy? In such cases, the investment is deemed a collectible and penalties apply. The funds used to purchase prohibited IRA investments are treated as a distribution from the IRA. That could trigger a tax and a 10% penalty if under age 59 ½.
If the mistake is caught within a 60-day rollover window, IRA owners may be able to complete a rollover to eliminate the tax bill, but mistakes are rarely caught so soon.
When speaking with clients, it’s important that advisors stress that IRA-owned gold must actually be held by an IRA. Gold purchased with IRA funds can never be stored in their home, a safety deposit box or an underground bunker. Instead, physical gold must be held by a qualified trustee or custodian.
Not all custodians will hold physical gold, so clients and their advisors need to double check. Custodians that do hold gold often charge fees for this service, which may be used help to offset storage and security costs.
If a client wants to roll over their gold, they must roll in-kind assets over to another IRA. If they sell the gold for cash and try to roll that cash over, it would be a violation of the “same property” rollover rule. If clients do it anyway, the initial distribution would be taxable and could lead to additional excess contribution penalties.
DOOMED FROM THE START
Knowing the rules can save clients — and their advisors — time, money and aggravation. Just consider the IRS private letter ruling (PLR) 201535026 from August. This ruling aptly illustrates the pitfalls of misunderstanding IRS regulations around IRA gold.
In this case, the IRA owner was advised that her current IRA custodian would not allow a gold investment, so she contacted a precious metals company that did not sponsor IRAs. A company representative said the firm could facilitate her request, but advised her to speak with her financial advisor because the funds to purchase gold would be from her IRA.
She took a distribution from her IRA and then used the funds to purchase coins. The IRA owner took physical possession of the coins, but she did not complete an IRA rollover within the 60 days. To try and rectify her situation, she sought a PLR to extend the 60-day window based on the premise she received bad information from her financial advisor.
The IRS denied the request, saying that her failure to complete a timely rollover was not caused by financial advisor error. In her initial conversation, the IRA owner’s advisor accurately indicated that her current financial institution could not hold the investments she sought. Therefore, the IRS said that the IRA owner was put on notice that an IRA could not be established through the precious metals company.
AN ALTERNATIVE APPROACH
If clients are convinced gold is their best defense for Armageddon-type scenarios in which cash is essentially worthless, then physically holding gold will be imperative for them. However, as PLR 201535026 shows, that simply doesn’t work with IRA money.
Plus, most clients looking to own gold are simply looking for an investment that can serve as a refuge of sorts in times of market turbulence.
Fortunately, there are some ways to own gold within an IRA, without actually owning the physical material. One option: using gold exchange traded funds (ETFs) or similar investments. IRS has issued multiple PLRs saying they are not classified as a collectible for IRA purposes.
The latest evidence of this comes from PLR 201446030, released in November, 2014. Simply put, the IRS confirmed that an IRA’s purchase of shares of a trust investing primarily in gold bullion would not be considered an acquisition of a collectible.
Thus, the ownership of shares appears to be a protective layer of sorts, shielding the IRA investment from being deemed a collectible. For clients seeking exposure to gold within their IRAs for investment purposes, and without too many headaches, this is welcome news.
Other PLRs have reached similar conclusions. In PLR 200732026, the IRS decided that an IRA owning shares of a specific ETF that invests in gold did not constitute owning a collectible for IRA purposes. PLR 200732027 came to the same conclusion for an ETF invested in silver.
Whenever markets experience a significant decline or volatility, there is an increased interest in owning gold and similar investments. Unfortunately, the IRA rules can complicate the purchase of such an investment. Advisors can help clients avoid mistakes that could cost them valuable tax dollars and exacerbate any investment losses they may have already incurred.