Many investors who have accumulated decent growth in their retirement savings--whether IRA, 401(k), or anything else--are certainly looking forward to enjoying their Golden Years. And why not? If they’ve stuck to a long-term diversified investment strategy, then they’ve done everything right, more or less.
But many near-retirees often forget to take into account one critical caveat: not all of the money in their IRA or 401(k) is entirely theirs to keep. The point of a traditional IRA and 401(k) is to defer taxes. You still owe Uncle Sam on the total value of your contributions and gains.
Despite this, however, you should still be way ahead of the game, especially if your portfolio has done well. Just don’t forget that Uncle Sam will be taking a chunk of your hard-earned cash.
The Higher Your Income, the More You Owe
Given the progressive US tax system, the middle to higher income brackets will often get hit the hardest, from 12% of your portfolio value to a whopping 32%. According to a MarketWatch screenshot, here’s what it looks like:
Now, if you’re on the upper end of the income spectrum, having saved $416,000 in your IRA, then you may be disappointed to see that you have $100,000 less. This is a significant figure considering that a) you need to stretch that out for the rest of your life and b) your cost of living will likely rise as the years pass.
If you were fortunate enough to accumulate over $1 Million, then the 32% tax will hit you really hard, as your portfolio, once over a million, is now nearly half that amount.
And like every investment, the value of your portfolio rises and falls based on the underlying assets in the market. Perhaps you will begin taking withdrawals near the top levels of a future bull market. Or perhaps you will make withdrawals in the middle or end point of a bear. Investing is subject to market risk, but it’s one of the few ways to achieve real financial growth.
If only there was a way to take withdrawals that exceed both the value of the market and the value of Uncle Sam’s rightful chunk.
Well, there is, and it’s a well-kept secret that savvy (often wealthy) investors typically keep to themselves. We’ll share it with you.
What Happens When You Stash Precious Metal “Coins” Into Your IRA
Numismatic gold and silver coins have two values: numismatic (or collectible) value and melt (or spot market) value. In other words, a numismatic silver coin contains its value in pure silver and in its rarity of proof and design (e.g. American Eagle edition). Hence, a numismatic coin costs more than its spot value.
When it comes to sheltering precious metals coins in an IRA account, there is a slight disadvantage that later can serve as a major financial boost:
- IRAs cannot accept collectibles, only financial assets.
- Numismatic gold and silver coins are both collectibles and financial assets.
- This means that an IRA custodian can only report the financial (melt) value but not the numismatic value.
Naturally, this restriction devalues your coins, but it also gives your coins a major advantage. Can you see it?
Caveat: the following information is not intended as tax advice but as educational information for which the reader must exercise judgment and due diligence. We advise that you contact a tax professional for accurate advice pertaining to all matters concerning the following IRA-related information.
The Financial Advantage of Melt Value vs Market (Numismatic) Value
If an IRA custodian cannot accept a coin’s numismatic market value but only its melt value, then upon withdrawal, you owe on its melt value only...but on the open market, you can sell it for its numismatic value, offsetting your liabilities.
Here’s how it works (hypothetical market scenario):
- The market value for American Eagle proofs is $38.00 per coin, but the melt (or “spot”) value is only $14.45 per coin.
- An investor owns 1,000 American Eagle proofs in an IRA, and since the custodian can only account for melt value, the total value of the coins are worth only $14,450 (although the actual market value is $38,000).
- The investor (now in retirement) withdraws all 1,000 coins from his IRA, and is subject to owing, say, 12% of the total value of the withdrawal ($1,734).
- To cover that liability, the investor then sells only 46 coins (out of the 1,000 s/he owns) valued at $1,748.
- Having covered the liability, the investor is now left with 954 coins with a market value worth $36,252.
If the IRA custodian took into account the full market value of the coins worth $38,000, then the investor would owe 12% of that amount, which would be $4,560. But because IRA custodians can’t account for the “collectible” value of the coins, the investor is to a considerable degree “sheltered” from that large sum.
The same can’t be said for the stocks in your portfolio. Only gold and silver have this unique advantage in your IRA account. As you’ve always known, the wealthiest and savviest investors utilize a number of tactics to optimize their wealth. This is just one of them. You might want to consider using it to your own advantage.