This Snapshot explores the tax ramifications associated with investing in collectibles. IRS rules can have significant ramifications and should be carefully considered before investing.
Are your plan participants investing their individually-directed accounts in collectibles, and do these investments trigger Section 408? FindLaw is here to assist in understanding these regulations.
What is a “collectible”?
Collectibles can be anything that provides pleasure for its owner or an investment opportunity, from vintage toys to limited-edition dolls and beyond.
Collectibles typically hold considerable value to collectors because of their rarity or uniqueness, which means collectors appreciate them even more than usual. Products like video games or movie posters produced in limited quantities often bring additional layers of value that may fetch exorbitant prices on secondary markets.
Collectible purchases made by plan participants through their individually-directed accounts are generally treated as distributions equal to their cost; this approach mirrors that used for Individual Retirement Accounts (IRAs) and can be found more clearly explained in Publication 590-B.
What is a “retirement plan”?
Retirement plans are accounts that you establish and manage to save for the future. There are various tax-advantaged plans available to assist in funding retirement such as individual retirement accounts (IRAs), health savings accounts (HSAs) and 529 education savings plans.
Your employer may offer and administer a defined benefit pension plan, which ensures you a monthly annuity payment once you retire. The exact amount depends on your salary, age and years spent working for the company – some plans even boast government guarantees through Pension Benefit Guaranty Corporation!
When investing with an IRA to purchase coins, precious metals and bullion, you must ensure your purchases comply with IRS regulations. In general, you cannot hold them personally but instead must transfer them via trustee-to-trustee transfer in order to stay compliant and avoid breaking the law.
What is a “qualified plan”?
“Qualified plans” are employer-sponsored retirement plans that meet certain requirements of the Internal Revenue Code. Qualified plans enable employees to save tax-deferred and enjoy tax-free investment growth, significantly increasing retirement savings. Furthermore, employers may deduct contributions made up to certain thresholds.
Qualified retirement plans such as 401(k), SEP IRA and pension plans are the go-to for most employees looking for savings for retirement, however non-qualified plans may also provide an effective means for high earning executives to save more for retirement – there can be limitations with qualified plans that non-qualified plans can help address by offering deferred compensation plans.
Operating a plan according to its terms is essential, which means only covering employees specified in your plan document and providing contributions and benefits specified there. You must also comply with Code Section 401(m), making sure that matching and employee contribution percentages do not favor highly compensated employees over others.
What is a “qualified distribution”?
“Qualified distribution” refers to any withdrawal made from an eligible retirement account after reaching age 59 1/2, when any distributions before this age would be considered taxable income and subject to a 10% early withdrawal penalty.
Investment of collectibles and precious metals through an IRA is permitted, provided it adheres to IRS regulations. Coins and bullion must be held physically by an appointed trustee (such as a depository); any violation can result in significant penalties from the IRS.
As soon as they turn 70 1/2, IRA owners must start taking required minimum distributions (RMD). This rule applies both to traditional IRAs such as SEP IRAs and SIMPLE IRAs as well as 401(k) plans.
