Letter Re: Converting Precious Metals ETFs to Physical Metals

Dear Jim,
You mentioned that someone with a Gold IRA might want to take the [warehoused gold] out and hold it in physical form after they turn 59-1/2 and are able to withdraw it without penalty.

I see the merit in that, but I am a tax accountant and want to warn you about the tax implications. When you take money out of an IRA, it is taxed as ordinary income, even if you escape the penalty. You can very well get shoved into higher tax brackets than you’d otherwise ever pay. Because, as you know, so much of the rise in gold is due to inflation, you will end up paying taxes on imaginary gains.

A better plan to avoid taxation is to move a Traditional IRA into a Roth IRA in increments. You will have to pay taxes on the amount you convert in the year you convert it, but with some tax planning you can convert only enough to fill up a low bracket that year. Be careful, this is calendar year conversion, no extended deadlines to do it, so you need to do this tax planning and make the conversion in November or December, not wait until you do your taxes.

Another thing to mention about gold outside of IRAs. It is taxed as a collectable and not subject to the lower long-term capital gains rates. Again, this is entirely about taxing inflation. It’s a tricky problem because moving large amounts of gold necessarily involves working with a reputable firm, and reputable firms also do tax reporting. My analysis suggests that having gold in a Roth IRA has the best tax advantages.

As always, your individual tax situation may differ and I encourage you to discuss this with your own accountant. There are opportunities for conversions coming up next year that make this plan newly accessible to wealthier people. Best wishes, – Gwendally, CPA