Investing in precious metals can be an excellent way to diversify your retirement account, but it is crucial that you understand how they are taxed.
The Internal Revenue Service has determined that IRAs may hold physical precious metal coins and bullion investments; these investments are generally subject to taxes at ordinary income rates with certain exceptions available.
Gains are taxed as ordinary income
Purchase of physical gold coins and bullion is one of the more popular strategies for investing in gold. Investors can store the precious metals either at home or pay an IRA custodial account storage fee to store their investments there, though such investments often do not provide robust pretax returns due to being taxed as collectibles.
IRAs offer investors an indirect method for investing in gold through precious metal ETFs or mining stocks, with gains taxed as ordinary income instead of long-term capital gains, which would otherwise incur the 28% top marginal tax rate for high income investors.
Although IRAs are prohibited by the IRS from directly owning gold coins and bullion, they can own shares of precious metal ETFs classified as grantor trusts – this enables IRAs to purchase physical gold investments such as SPDR Gold Shares ETF (GLD), without incurring federal income tax liability on them. When considering ETFs as investments make sure you read their prospectuses for information regarding taxes as this section could vary between funds; online versions often contain this section.
Gains are taxed as a collectible
An Individual Retirement Account (IRA) is an excellent way to save for the future and invest in assets that retain value over time, while simultaneously growing. There are, however, a few key considerations you should keep in mind before opening an IRA account.
IRAs do not typically allow collectibles to be held within them, but there is an exception that allows IRAs to invest in precious metal coins and bullion that meet certain purity standards. Furthermore, indirectly investing in gold and silver production through shares in mining companies that produce these metals.
Gains from an IRA investment in physical gold are taxed as collectibles and do not need to be reported as income; they’re subject to the marginal tax rate of 28% depending on your income bracket. By contrast, gains from ETF investments that invest in gold and silver would need to be reported as income upon withdrawal.
Gains are taxed as a capital gain
IRA owners can invest in precious metals and coins through an IRA account; however, they must take note of several tax issues when doing so. For instance, collectible IRAs must be held physically by their trustee as the IRS classifies these investments as taxable distributions.
As such, investors may prefer holding precious metals in an IRA liquid account instead of dedicating one exclusively for precious metals storage. This way, annual required minimum distributions (RMDs) from this account can still be taken while leaving precious metals unmolested.
One option available to an IRA investor is purchasing shares of an exchange-traded fund (ETF) that tracks the price of precious metals, such as SPDR Gold Shares GLD and iShares Silver Trust SLV, +0.82%. The IRS recently ruled in PLR 200732026 that an IRA can purchase such ETFs without violating rules that prevent it from buying certain types of collectibles.
Gains are taxed as a dividend
Some investors also invest in precious metals through taxable brokerage firm accounts. Unfortunately, these investments will be subject to ordinary income rates when withdrawn; to avoid taxes on this investment method altogether you could invest gold and other precious metals via an IRA instead.
Qualified dividends are subject to lower tax rates than ordinary investment income. To take advantage of this reduction in taxes, the underlying stock must have been owned for at least 60 days within 121-days before its ex-dividend date and satisfy certain criteria such as being an American company or having an outstanding market capitalization of more than $5 billion.
Investors who want a different kind of IRA investment option, can direct it toward physical precious metal coins and bullion that meet certain purity standards, making this an increasingly popular alternative to stocks, mutual funds and bonds. To do this, they will need a recognized asset custody provider; established ones will often have lists of trusted dealers they can recommend as custodians.