coins in IRAs...anyone well-versed in this topic?
BobbyD
Posts: 65
Hi, this is Bob's wife (he said that I could post under his name on this forum) and I'm hoping that the collectors on this board (especially those who collect coins for investment potential, not just for the pure enjoyment of collecting them) could provide some insight. I'm a writer/researcher for a personal finance magazine and I thought the proposed legislation that would allow coins in Individual Retirement Accounts was a pretty good topic to write about. But I've had second thoughts. If coins are allowed as investments in IRAs, would that really make a difference to coin collectors/investors tax-wise? I guess I'm a little fuzzy on what the logistics would be. Wouldn't it make it far more difficult to collect coins--or less enjoyable? And I'm assuming that you couldn't have them in your possession--they'd have to be kept at an insured depository (I've read that the gold, silver, and platinum bullion coins that are held in IRAs must be kept at these facilities). I guess I can't imagine collecting something and not being able to see and touch it too. If any of you could help me out I'd really appreciate it. I thought coins in an IRA sounded like a good idea at first but I'm a bit worried that it might be more complex than I originally thought. 
Any thoughts would be greatly appreciated. Also, any other questions that you can think of would be great too. I'm going to be contacting Austin Rare Coins and Wexford Capital Management (they buy gold and platinum bullion for IRAs) and I'd like to be somewhat informed.
Thanks so much!
Any thoughts would be greatly appreciated. Also, any other questions that you can think of would be great too. I'm going to be contacting Austin Rare Coins and Wexford Capital Management (they buy gold and platinum bullion for IRAs) and I'd like to be somewhat informed.
Thanks so much!
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Comments
I do have a few other questions for you. The first one is simple, I hope.
The biggest advantage of this is that if I bought $2,000 worth of graded coins, $2,000 of my income wouldn't be taxed, right? If that's the case, no matter what, coins in IRAs could be good a thing to defer taxes.
Also, you wrote that:
"If you could buy DMPL Morgans for your IRA, I would bet you that your coins at the depository would be the ugliest DMPLs you've ever seen for the grade. You could get over that in a couple of possible ways, you could have each of your coins imaged, and then you would need to worry about developing a market place for the individual coins (after all, if one MS-65 is no longer the same as any other, then prices are no longer uniform, and you need to have a place to trade these individual assets)"
But isn't that where PCGS comes in? If all the coins are graded by a company like PCGS, wouldn't all the MS-65s be the same? I'd imagine that for an IRA, all the coins would have to have some value assigned to them initially (and the easiest way to do that would be based on grade). I'd imagine that's how they'd be securitized too, right? Sort of like mortgage-backed securities but instead of default risk they'd be grouped according to grade...or am I not understanding something really fundamental here?
You mentioned that there are only a few brokers that deal in bullion...I really don't understand why though. If they don't care about the dates and series of these bullion coins--and theyre just basing the value on spot prices for gold or whatever--isn't it easy for them? Or did I misread what you wrote?
And my final question, if coins are to be bought for IRAs can an individual like my husband (or me or you) buy them, or would he have to go through a broker?
I also found a very ancient link on the google coin collecting forum. It seems a lot of these people are against it but I have to read through all the threads (76 of them!) in order to find out why.
Sorry for all the additional questions,
Desiree (aka Bob's Wife)
Commemorative_Set
Sacagawea Set
wouldn't it make sense to set up some kind of holding company, run by "experts", that would attempt to invest in (for profit) rare coins, & have them issue shares of stock in the holding company? i guess that stockholders would own a proportionate amount of the profits based on how many shares they own. various of my friends and i have discussed this idea for many years, but haven't investigated the details. if anyone's reading this thread, and has some expertiese, could you please comment on this idea as well.
i don't think it's a good idea to have an IRA invested directly in coins, since $ isn't made by buying a valuable coin today & sitting on it for years. the way $ is made in coins is by buying and selling constantly at incremental profits, and always reinvesting the profits into add'l coins. the tradeoff is the amt. of time it takes to do this. i believe it is viable though, since i have increased the value of my collection several times over since i started out, with only an investment of time, not add'l $.
just my thoughts, would be extremely interested in any followup.
K S
Bullion has been an historically terrible long-term investment. It may have its place as an inflation or disaster hedge, but the chances of it having significant long-term capital gains are remote.
In other words, if you want bullion, why not just buy it outright rather than wasting the tax-deferred or tax-exempt benefits of your IRA?
Even if you could put more traditionally collected coins in an IRA... again why would you? For one thing (in my opinion) they are generally poor investments.
But even if you were to put together a coin "portfolio" that performed nicely over 20 years, again you'd likely be better off keeping it yourself rather than putting it in an IRA. Your coins will appreciate tax-free, and you'll pay relatively low long-term capital gains taxes only once when you sell.
A far better use of an IRA is for the a portion of your investment portfolio that is expected to generate what would normally be taxable income, whether that's interest or short-term capital gains.
Collector's Universe (parent of PCGS)
Tangible Assets (TAGZ)
Hmm... maybe buy shares of a holding company that makes money short-selling coin stocks.
That is the advantage in general of a traditional IRA. You can put $2000 in cash into an IRA and get that benefit, no need to get coins involved. Your money is still taxed eventually, but not until withdrawal. So your earnings have a chance to compound tax-free, which can make a huge difference over time.
The other major type of IRA is a Roth IRA. For that you do not get any tax benefit when depositing, but your money is not taxed upon withdrawal. This means all your earnings are completely tax free. So a Roth IRA is generally a good choice for those with longer to retirement and/or investment geniuses.
(Insert usual disclaimers here about not basing your investment decisions upon the advice of some Ike guy on a coin message board.)
<< <i>But even if you were to put together a coin "portfolio" that performed nicely over 20 years, again you'd likely be better off keeping it yourself rather than putting it in an IRA. Your coins will appreciate tax-free, and you'll pay relatively low long-term capital gains taxes only once when you sell. >>
This is the key here. For example, I'd rather have LONG TERM stock (or coins or whatever) in my personal portfolio rather than the IRA since the IRA will be taxed like W-2 wages when withdraw at age 59. The LT stock will be taxed at 20% capital gains.
There's a hitch here though. "Collectables" are taxed at 28% NOT 20%. So now you have to know what your marginal tax bracket will be when you take the money out.
As far as the current law is concerned: "Collectables" and Insurance contracts are the ONLY thing not allowed in IRA's. You can buy virtually anything else...even US gold bullion (not a collectable I guess). Real Estate, Trust Deeds, Private company stocks, unsecured loans, etc etc. As long as you are not what they call "self dealing" you can do these types of investments.
jom
The biggest advantage of this is that if I bought $2,000 worth of graded coins, $2,000 of my income wouldn't be taxed, right? If that's the case, no matter what, coins in IRAs could be good a thing to defer taxes.
That's true, but it's also true of any investment you put into a traditional IRA (in fact there are now higher limits for married couples, and as your age increases). So what's the advantage of coins? None so far as the tax deferral is concerned.
But isn't that where PCGS comes in? If all the coins are graded by a company like PCGS, wouldn't all the MS-65s be the same? I'd imagine that for an IRA, all the coins would have to have some value assigned to them initially (and the easiest way to do that would be based on grade). I'd imagine that's how they'd be securitized too, right? Sort of like mortgage-backed securities but instead of default risk they'd be grouped according to grade...or am I not understanding something really fundamental here?
No, not all MS-65s are the same, just read some of the threads here and you will get an idea on the inconsistency involved in professional grading services, primarily because grading is a subjective art more than a science. Toning plays a role, the locations of marks play a role, etc. As an example, I recently saw several 1926 $10 Indians at a shop, all slabbed and graded MS-63. Well, one of the coins had a huge copper spot on the reverse that made the coin quite unattractive. Well, clearly not all of those MS-63s were equal. Valuation is a key issue as well, as most IRA contributions are determined very clearly by the number of dollars written on your contribution check. Then when you buy stocks or bonds or whatever other liquid security, the value is determined by the market. If you could contribute coins to an IRA (which I think the IRS would never allow), then you could take a coin worth say $1000, and find some inflated book value to get your $2000 deduction, creating all sorts of opportunity for dishonesty there at taxpayer expense. Most likely, you would contribute cash and then have to buy the coins in the IRA through the broker. That's where market illiquity causes the whole process to break down. If they were securitized, I would think it would be more like an actively managed mutual fund rather than an asset-backed security. You would have a manager that would actively buy and sell coins with funds invested in the fund. This would look more like a REIT than a traditional mutual fund, and would require additional legislation to establish the rules for coin investment trusts (lets call them CITs). The CITs would be just like any other investment vehicle in that you only own a proportionate share of the assets of the fund (you can't call your fund company and have them send you 50 shares of XYZ in exchange for your shares in the fund, and you couldn't call the CIT and ask for 15 gem CC Morgans for your shares in the CIT). Even if they were like CMOs, and you bought a share in a group of 1000 coins, you couldn't request delivery of the coins, just like if I owned some Fannie Mae bonds I couldn't decide to forclose on your house.
You mentioned that there are only a few brokers that deal in bullion...I really don't understand why though. If they don't care about the dates and series of these bullion coins--and theyre just basing the value on spot prices for gold or whatever--isn't it easy for them? Or did I misread what you wrote?
No, you didn't misread my quote, and it's not easy for them. In the old days, people owned stocks with certificates, and even if they held them in "street name" the brokers needed large vaults to store all the certs. Now, most shares are held in electronic book entry form at third-party depositories like DTC (the Depository Trust Company). Now there are fewer storage issues, and much easier ways to prevent fraud and misappropriation. This can be done with securities since there is no physical requirements for them, i.e. they are just a representation of ownership that can be written on paper or stored electronically, you don't need to store some inventory and office furniture if you own 100 shares of IBM, instead the issuer handles their assets themselves. That is not true of commodities like gold or silver, where you must store that asset. The brokers have to either store it on site and bear that cost, or use a third-party depository which charges them a storage fee. And protecting physical assets like gold or even cash is much more challenging. If you are a dishonest employee and steal a stock certificate registered in the broker's name, you might just end up with a nice piece of art for you wall, but the cert will be cancelled and the company will just issue a new one. Walk out of the vault with a pocketful of gold eagles, and you are on your way to the carribbean, and the broker is out the money. This increased cost of storage and security has caused many brokers to decide not to offer this investment vehicle to their clients.
And my final question, if coins are to be bought for IRAs can an individual like my husband (or me or you) buy them, or would he have to go through a broker?
Yes, there would be no way to properly administer the account without an independent third party. In the same way, you can't buy 100 shares of IBM from me for your IRA and leave them in your desk drawer. To keep these tax-deferred funds separate, they must be maintained at a third-party in an accound designated as an IRA. In every IRA, the account is registered in the name of the custodian FBO you, whether the account is held at a bank or brokerage. So the only way to transact in that account is through the custodian.
One final note, Jom is right on the tax implications and the differentials in rates for collectibles and financial investments, though a CIT as discussed above could skirt most of those issues. And Supercoin is right on the performance of the proof eagles, but unfortunately only MS eagles are allowed in IRAs currently, as proof eagles are considered numismatic collectibles, but MS eagles are designated as bullion only by the very law that authorized their production. This is one of the reasons why that stipulation was included in the law to begin with, it's only us collectors that like to track mintages and condition that create some MS eagles to be more valuable than others.
Hope this helps!
I contacted the Industry Council for Tangible Assets earlier this week and they said that there are 2 bills before Congress (1 each in the House and Senate) right now that would allow them back into IRAs. I'm guessing that that would take them off the "collectible" list too (but I'll have to look into that further since the tax implications are important [28% vs. 20%]--thanks for that headsup Jom).
Supercoin, I just need some clarifications. Since you agree with dorkkarl (that is, the way to make significant gains in a collection's value is to actively trade coins, not to buy-and-hold them) doesn't having them in an IRA give a collector that constantly trades (buys and sells them) a tax advantage? And say you had a collection that appreciated very nicely in an IRA, there would be no cap-gains on that just regular income tax at your current bracket (or in the Roth, no tax on appreciation, period). Isn't that a good reason to get them in there too? I mean, in your view, is it bad and just plain stupid to have coins in IRAs or do you feel that there are investment vehicles that are better suited for the IRA. For example, why have coins take up part the $2,000 max per year that could be invested in something that could use the tax-break more, like mutual funds?
Also, I really thought that buying coins and holding on to them for a VERY long time was the way to go for appreciation. Why isn't it?
Commemorative_Set
Sacagawea Set
I'm not sure how you'd set that up legally. But even just from a practical standpoint, how are you going to buy and sell your coins frequently if they are under a custodian's control?
And say you had a collection that appreciated very nicely in an IRA, there would be no cap-gains on that just regular income tax at your current bracket (or in the Roth, no tax on appreciation, period). Isn't that a good reason to get them in there too?
No. The longer you plan on holding something for capital appreciation -- particularly something like coins that has no taxable side-effects along the way (like dividends or distributions) -- the better off you are keeping it outside your IRA. An investment held for 20 years outside an IRA is already an excellent form of tax deferral.
I mean, in your view, is it bad and just plain stupid to have coins in IRAs or do you feel that there are investment vehicles that are better suited for the IRA. For example, why have coins take up part the $2,000 max per year that could be invested in something that could use the tax-break more, like mutual funds?
Yes, yes, and yes. Actively managed mutual funds (if you choose to use them) are a good choice for an IRA because they often generate taxable income while you're holding them due to frequent trading and redemptions.
Also, I really thought that buying coins and holding on to them for a VERY long time was the way to go for appreciation. Why isn't it?
Coin dealers will tell you this in the hopes that they are dead by the time you decide to sell.
Also, the longer you hold them, the better their performance looks at first glance simply due to inflation.
A less cynical and legitimate reason for a longer holding period is that the transaction costs on coins are extraordinarily high compared to more traditional investments, so you need a longer time period for price appreciation before you can even break even.
But generally speaking, bad investment idea. Coins just sit there costing you money. When you subtract inflation, and the costs of holding expensive coins (storage and insurance, plus risk of damage) the returns look pretty dismal.
There are exceptions to the rule, of course, but when you start "picking and choosing" after the fact, and do the same thing with stocks for example.... stocks kick coin butt every time.
But, coins are undeniably prettier than stocks! Which, come to think of it, is another reason you wouldn't want them locked up in an IRA.
i think there's a difference though, between those 2 co's, and what i was proposing.
collectors-universe provides a "service", but it is not in buying and selling "investment quality" coins (however you define "investment quality").
tagz (a co. i happen not to like much) is in the business of selling a product in a sense, ie. "collector coins" (however you define "collector")
what if there was a company that specialized in nothing but buying and selling coins for the sole purpose of increasing the value of their stock (ie. the value of the coins being held) based on some "magic formula" for choosing coins w/ potential to increase? ie. w/ sufficient funding, they ought to be able to practically corner the market on, say, a particular series of coins, hold them until the market got hot, then sell them right away. part of the equation would be in the marketing of such coins.
not sure if my explanation is making any sense, but maybe you all could help me out here. it'd almost be like those holding corporations that invest in real estate, w/ each owner getting a fair cut of any profit once a sale is made.
K S
There are at least two major impediments to your success: Buying and Selling.
Let's say you formed a consortium with $100 million in buying power, which is on the small size of a mutual fund. Now you're looking for undervalued coins to buy.
Let's say you determine MS65 Wigwarts are a steal at $100 each, and you are prescient enough to correctly predict they will double in value in 3 years. Not too shabby.
Great! Now all you have to do is send out hordes of educated buyers to scour the coin show circuit looking for correctly graded, eye-appealing Wigwarts, or post ads in Coin World and sort through all the junk that will be sent to you. That is extraordinarily expensive in labor and incidental costs. And oh yeah, you need to find about 10,000 of them to make it worthwhile for your portfolio.
Three years later when you want to sell your Wigwarts, it's even worse. You have to take your Wigwarts to coin shows, or advertise them for sale via mail-order. And deal with thousands of different customers. And all the associated haggling, returns, etc...
Now compare that to someone running a stock fund. One person alone sitting in an office can buy and sell $1 million of a liquid stock with the click of a mouse -- for just a few dollars!
The problem (and joy) of coins is that they are all unique individual items. Great for collecting, terrible for buying and selling in bulk. Which is a big reason why the coin business is so tough... it's very difficult to leverage success.
jom