The biggest danger with gold IRA physical possession is triggering taxable distributions, and getting sued by the IRS for substantial understatements of income tax. On November 18, 2021, the United States Tax Court ruled Andrew and Donna McNulty had a tax deficiency of $268,652 for holding American Eagle (AE) coins they bought for their Gold IRA.
Normally, this wouldn’t be a problem but the IRS sued the couple because they set up a home storage gold IRA. In this article, we’ll cover why the IRS sued them, the problem with a home storage gold IRA, and the proper steps to take when buying physical gold in your gold IRA so you don’t get hit with a six-figure tax bill by the IRS.
Can you physically hold gold in an IRA?
Yes, you can physically hold gold in a gold IRA. That’s exactly what a gold IRA does. Most IRAs hold stocks, bonds, mutual funds, and ETFs. On the other hand, a gold IRA allows you to invest in physical gold and other approved precious metal - silver, platinum, and palladium. It is more accurately known as a precious metals IRA.
But you cannot keep your precious metal under your mattress, in a safe deposit box, or in any place that you, the IRA owner, control.
The gold should be stored in a gold IRA-approved depository and managed by an IRA custodian.
Andrew and Donna McNulty did not do this, and they paid the price. Here are the steps they took.
Can I Set up a Home Storage Gold IRA?
No. you cannot set up a home storage gold IRA, whatever the ads tell you. The case of the McNultys proves it.
Even though the coins are not titled under their personal names but to Green Hill, they still had physical possession of the coins and had total control of the assets. This is the problem for the McNultys.
According to Senior Judge Joseph Robert Goeke of the United States Tax Court, “IRA owners cannot have unfettered command over the IRA assets without tax consequences.”
This is the reason Mrs. McNulty had taxable IRA distributions. She had the assets in her possession.
This also exposes the danger of trying out companies like Check Book IRA that try to circumvent the gold IRA tax rules. Be extra careful when trying unconventional tax avoidance strategies and consult many professionals before deciding.
Where should I keep my physical gold?
You should keep your physical gold in an IRA-approved depository. This is a bank or an approved non-bank trustee that meets the requirements of IRC Section 408(n). Examples of IRA-approved depositories are HSBC, JP Morgan, Delaware Depository Service Company, and Regal Assets.
Usually, you won’t need to look for your own depository. It’s best to work with the depositories that already have a working relationship with your gold IRA custodian. This simplifies monitoring of your physical precious metals because your custodian already has established lines of communication and technology linkage with the depository.
When can I take physical possession of gold in my IRA?
You can take physical possession of gold in your IRA anytime. You own your IRA asset. Just remember that you need to pay taxes. If you withdraw before you are 59 ½ years old, you also need to pay a 10% penalty.
You can keep the precious metal in your IRA for as long as you want but when you reach age 72, you are required to make the required minimum distributions.
How to take possession of gold in your gold IRA?
To take possession of gold in your gold IRA, simply instruct the IRA custodian of your wishes to remove it. The gold can be delivered straight to your house or you can instruct the custodian to liquidate the gold and deposit it in your bank.
Remember, however, that if you are below 59 ½ years old, you will pay a 10% penalty on top of the income taxes you'll pay for withdrawing your assets from your IRA.
Once you reach that age, you can withdraw without penalty but you still need to pay taxes. If you set up a Roth IRA, you can withdraw your gold without penalty and taxes after reaching 59 ½ years of age.
Can you hold physical gold in a Roth IRA?
Yes, you can hold physical gold in a Roth IRA. You can set up your precious metal IRA as a Roth IRA. Since you contribute after-tax dollars to this type of individual retirement account, you don't pay taxes when you withdraw your gold.
Can I hold physical gold in my 401(k)?
No, you cannot hold physical gold in your 401(k). If you want to buy gold for your retirement savings using your 401(k), you need to open a gold IRA. After opening, you can transfer or rollover your funds from your 401(k) to your gold IRA.
Your gold IRA company can help you with any of these transactions.
How do you hold precious metals in an IRA?
You hold precious metals in an IRA by putting them in a special self-directed IRA called a gold IRA. Even though it's not usually called a silver IRA, you can hold silver, platinum, and palladium in a gold IRA. But they need to meet the stringent standards of the Internal Revenue Code:
- Gold bars and gold bullion should be 99.5% pure, silver should be 99.9% pure, and platinum and palladium should be 99.95% pure. AE coins are the only exception to this purity standard since they have a purity of 91.67%
- They should be made by an accredited refiner, assayer, manufacturer, or a national government mint and be made to exact weight specifications.
- A certification organization should not grade them.
- They should be bought from an authorized precious metal dealer like Birch Gold Group, American Hartford Gold, Oxford Gold Group, and Augusta Precious Metals.
- You cannot add any precious metal that you already own to your IRA even if they meet all the above conditions. They have to be bought from a dealer through a custodian and sent straight to a depository.
Most gold bullions, bars, and coins are classified as collectibles and do not qualify as investment options in a gold IRA. So be careful in choosing the type of gold to buy and buy from accredited dealers only. Always consult your gold IRA company.
How do you hold precious metals in an IRA?
You get physical gold in your IRA by following these steps.
How much of an IRA can you put in gold?
There is an annual limit to how much gold you can put in an IRA. You can only put in $6,000 per year, but it goes up to $7,000 if you are above 50 yrs of age.
Is it worth owning physical gold?
Gold acts as a hedge against inflation. When inflation rises, fiat currencies lose purchasing power. This is aggravated by the continuous printing of fiat money by the central banks.
On the other hand, the supply of gold is finite, and it is rare. It is recognized universally as a store of value. Over time, gold keeps its value as fiat currencies get devalued by inflation.
That's why holding precious metals can be a viable strategy for diversifying your portfolio. When stock markets crash because of uncertainty in the markets, gold increases in value as investors looking for stability flock to it.
Without gold in your portfolio, you could be forced to sell your stocks, mutual funds, or ETFs at heavily discounted prices if a severe market downturn happens during your retirement. Having gold in your portfolio helps protect your wealth and retirement savings during a severe market downturn because you can sell gold instead if you need liquidity.
Investing in precious metals also has drawbacks. They don’t earn interest or dividends, unlike bonds and stocks. Because of this, you don’t get the power of compounding to work for you.
Holding gold incurs additional storage and management costs. Gold depositories have maintenance and security costs that need to be covered. A traditional IRA doesn't have these costs.
During periods of rapid growth in the stock markets, gold can lag in value appreciation. Your investments in gold can't take advantage of upturns in the stock market.
That’s why financial advisors usually recommend putting only 5-10% of your portfolio in gold. Gold serves a specific purpose as a vehicle for diversification and asset protection. It shouldn't replace your entire portfolio.
What are the different types of gold investments?
There are two other different types of gold investments that you can consider if you don't like the hassle of investing in physical gold. You can opt to buy mutual funds or ETFs that hold gold or buy gold mining stocks.
The advantage of buying mutual funds or ETFs that hold gold is you don't need to go through the hassle of opening a gold IRA. You can hold them in your 401(k) or traditional IRA.
You also don't incur additional storage and administration costs; however, you still need to pay a management fee for mutual funds.
Gold mining stocks also face the risk of business failure. Gold mining has many hazards and you need to understand these risks. Only invest in established gold mining companies.
Physical gold and other precious metals have a place in your investment portfolio. Just be aware of the advantages and disadvantages of holding physical gold.
Remember that you cannot store your IRA gold at home or in a safe deposit box. Remember the case of Andrew and Donna McNulty. Had they stored the physical gold and silver coins in an IRA-approved depository, the IRS wouldn’t have sued them.
Understand the role of gold in safeguarding your wealth and retirement savings. Do your own research and always consult financial professionals before making significant financial decisions.