How is GLD Taxed in an IRA?
Gold investments such as physical coins or bullion often provide strong before-tax returns; however, after-tax returns may not be as impressive.
Individual retirement accounts (IRAs) cannot invest in collectibles, with an exception made for precious metal investments. Some trustees charge an annual administration and storage fee to hold such assets within an IRA account.
Taxes on Capital Gains
An Individual Retirement Account (IRA) is the ideal vehicle for gold investments as it defers taxes until profits are distributed or sold, whereupon gains will be taxed at their marginal income rate.
However, the IRS asserted that McNulty did not qualify for this treatment because a trustee must possess bullion to qualify as its owner. To get around this problem, McNulty created Green Hill Holdings LLC as a single member LLC and transferred her IRA funds there before using those proceeds to purchase AE coins.
McNulty successfully convinced the Tax Court to side with him and overturn IRS’s position, meaning that IRAs can invest directly in precious metal coins and bullion that meet purity standards, or they can hold indirectly-traded ETFs or mining company stocks without incurring additional storage and insurance fees.
Taxes on Distributions
You must include any withdrawals from an IRA in your taxable income for the year they were taken, with certain exceptions applying. For instance, they can be withdrawn without penalty if used to cover tuition expenses for either yourself, your spouse, or children.
Congress granted an exception allowing IRAs to invest in certain precious metal coins and bullion that meets purity standards, however.
To satisfy these rules, your IRA cash must be used directly from dealers to purchase coins and bullion directly, while maintaining constructive receipt of these items. McNulty had Green Hill invest the proceeds from selling her membership interests into American Eagle coins purchased from Miles Franklin Ltd. while keeping shipping labels and invoices from coin dealers that identified herself as receiving their shipments; she retained these items after filing her taxes; the IRS rejected McNulty’s argument that Sec 408(m)(3) excludes physical possession requirements but accepted her claim of constructive possession over these AE coins purchased directly from dealers.
Taxes on Withdrawals
With stocks at record levels and traditional fixed income investments such as CDs, Treasuries and money market funds yielding near zero percent returns, some IRA owners are turning to precious metal coins and bullion as an alternative investment vehicle. It’s important to remember that distributions from your IRA must be reported as income when taken, with early withdrawal incurring an additional 10-percent penalty tax.
However, you can avoid this penalty with one exception. No penalties apply if the funds are used to purchase, construct, or renovate a primary residence within three years of withdrawal.
McNulty used her IRA funds from two other qualified retirement accounts – an annuity and 401(k) account – to form Green Hill Holdings LLC as a single member limited liability company and purchase membership interests in it. McNulty exercised control of this IRA by directly transferring from these two other retirement accounts into Green Hill, so that her money was then used to purchase gold coins from AE.
Taxes on Rollovers
If you receive a cash distribution eligible to be rolled over into an IRA, its administrator must withhold 20% of the taxable amount and redeposit it within 60 days; otherwise it will become part of your income and could trigger an early withdrawal penalty tax of 10% if you are under age 59 1/2.
To avoid falling into this trap, direct trustee-to-trustee transfers from one IRA to the next are best. This provides an exception from the one-IRA-rollover-per-year rule established in IRS Revenue Ruling 78-406.
McNulty spent much of the money she received from selling membership interests to buy American Eagle (AE) coins, storing them with other IRA assets in a safe. The IRS claimed this violated Section 408(a)(5) which prohibits commingling IRA assets with non-IRA assets; however, because their labels clearly identified Green Hill gold as being owned by McNulty instead, so the IRS relented.
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