Many investors add gold to their portfolios to increase diversification and hedge against inflation. The rules governing IRAs acknowledge this interest in precious metals and carve out exceptions to a general prohibition against holding collectibles in the account. Buying and selling gold in an IRA has several tax implications, and most of them are helpful.
Tax on Collectibles
Gold sales made through a regular, non-IRA account, are taxed as collectibles, which are defined as tangible personal property that carries additional value due to rarity and/or market demand. Examples include gems, baseball cards, coins, rare books, antiques, art and rare stamps. Profits from the sale of collectibles held for a year or longer are taxed as long-term capital gains, but at a special rate. Instead of the normal long-term capital gains rates of 0, 15 and 20 percent, the long-term collectibles tax rate is 28 percent. Short-term profits from the sale of collectibles are taxed as ordinary income.
The profit or loss on the sale of a collectible equals the sale proceeds minus the cost basis, which includes the purchase price, broker fees, auction fees, insurance costs and storage costs. When you buy gold in the form of coins and bars from a gold dealer, you are charged the retail price, but if you sell it back, you receive the wholesale value. You therefore must absorb the buy/sell price spread before you can realize a profit on the sale of your gold.
Tax Treatment of Gold Losses
If you sell for a loss gold not held in an IRA or other tax-sheltered account, you can offset the loss against any capital gains you have for the year. Long-term capital losses must first offset long-term capital gains, and short-term losses must first offset short-term gains before the losses are applied to any remaining capital gains. Any excess losses can be used to offset up to $3,000 of ordinary income. If an excess loss still remains, it can be carried forward to offset future capital gains and ordinary income.
Gold IRA Investments
Certain types of physical gold can be held in a precious metals IRA, which is an IRA administered by a trustee prepared to buy and sell gold and other precious metals on the IRA’s behalf. Typically a precious metals dealer or broker serves as the IRA trustee, and the IRA must be set up as a self-directed account. This kind of account gives you the most freedom to choose investments, and you get to pick the IRS-approved account administrator. Certain rules apply to the metals you can hold in any type of precious metals IRA, such as a gold and silver IRA, including:
- The permitted precious metals are gold, silver, platinum and palladium.
- The precious metals must be in the form of bullion coins and/or bulk forms (rounds and bars). Numismatic coins do not qualify.
- The metal must meet certain specifications for quality and size. For example, one-ounce, half-ounce, quarter-ounce and tenth-ounce U.S. gold coins can be held. Foreign gold coins can qualify if they are at least 99.5 percent pure gold. For example, the Canadian Gold Maple Leaf coin is acceptable, but the South African Krugerrand is not.
- Gold bars and rounds must meet the contract standards set forth by an approved commodity exchange, and must be produced by an exchange-approved refiner or a national government mint.
- The precious metals must be in the physical possession of the IRA trustee.
- You cannot contribute precious metals to your IRA, as only cash contributions are allowed. You may be able to roll over precious metals already held in another IRA or qualified retirement account.
Traditional IRA Tax Treatment
Aside from the specialized trustee, a gold IRA is like any other. A traditional IRA can provide a tax deduction on contributions, and distributions are taxed as ordinary income at your marginal tax rate. If you withdraw money from a traditional IRA before age 59 1/2, you might have to pay a 10 percent early withdrawal penalty unless you qualify for an exception. You must begin taking required minimum distributions after reaching age 70 1/2, based upon your life expectancy as determined by the IRS. These rules have certain implications for traditional gold IRAs:
- The details of the profit or loss on your gold investments do not affect the tax you’ll pay when you distribute money from your IRA. While you may want to keep detailed records on the profitability of each of your transactions, including the costs to store and insure the gold, those details are not reported to the IRS and don’t affect your tax bill.
- You are not affected by the collectibles tax rate. The 28 percent rate on the long-term capital gains for collectibles might be higher or lower than your ordinary tax rate when you withdraw money from your IRA, which means you might end up paying a higher or lower rate than the 28 percent. High-bracket IRA owners are disadvantaged by this feature, but low-bracket owners will benefit from their relatively lower tax on withdrawals.
- The distinction between long- and short-term holdings has no impact upon an IRA.
- You can hold any number of IRAs, which means you can set up a gold IRA with a precious metals broker/dealer, and another one with a bank or broker.
- You lose the benefit of deducting losses when you experience them in an IRA. However, you might be able to deduct your total account loss if you own a Roth IRA.
Roth IRA Tax Treatment
You can hold gold in a Roth IRA, following the same rules as those used to determine eligible gold holdings in a traditional IRA. Contributions to a Roth IRA are not deductible, meaning they are composed of post-tax dollars. The total contributions to your Roth IRA form the account’s “basis,” which is an important number to know if you wish to liquidate the IRA for a deductible loss. Earnings on your contributions grow tax-free, and Roth IRA distributions are tax-free as long as they follow the rules:
- You can withdraw contributions from your Roth IRA at any time without taxes or penalties.
- You will pay a 10 percent penalty on the withdrawal of earnings during the first five years following the initial contribution to the account.
- You might pay a 10 percent penalty if you withdraw earnings before age 59 1/2 unless you qualify for an exception.
- There are no required minimum distributions for a Roth IRA owner, and you can contribute at any age, subject to the relevant contribution and income limits for the tax year.
Tax Loss on Roth IRA
You can take a tax-deductible loss on your Roth IRA investment, but only after you distribute all amounts in all of your Roth IRAs. If the distribution is smaller than all contributions (i.e. smaller than the tax basis), you can take a loss subject to the 2 percent limit on adjusted gross income for certain miscellaneous losses reported on Schedule A of Form 1040. These losses are deductible to the extent they exceed the 2 percent limit. This strategy wouldn’t work for a traditional IRA, because it typically has no basis, since contributions are usually tax-deductible. Therefore, your loss will not be greater than the account’s basis.