Taking Gold out of Roth IRA at Age 60

[stuper1]

My wife will be 60 before too long.  Her Roth IRA is invested as a 4x25 HBPP, but of course the gold is in an ETF.  One of my goals is to increase our amount of physical gold, because most of our gold is in ETFs in our Roth IRAs and in my 401k.  I'm thinking that when she hits 60, maybe we should sell a large percentage of her gold in the Roth, take the money as a distribution (tax free since it's a Roth), and buy physical gold to replace it.  We would leave enough gold in the Roth for rebalancing purposes. 

The only drawback with this plan that I can see is that once the money comes out of the Roth, there is no putting it back in again to continue growing tax free.  So we want to make sure to leave enough gold in the Roth to be able to sell some of it if gold hits a 35% rebalancing band.  How do we figure out how much gold we should leave in the Roth for this purpose?

Are there any other drawbacks that I'm missing?

[Libertarian666]

I can't think of any, other than there may be a Roth IRA custodian that will hold physical gold. If you have checked that out and there is no such custodian, then I don't see any other drawbacks than the one you mention about rebalancing.

I'm not sure how to calculate that other than to do an example.

Say you start with $25 in each of four investments, and one of them grows to $35; assuming the others don't change, then you will have a total of $110. So to rebalance, each of them would have to be worth $27.50, so you would need to sell 3 * 2.50, or $7.50 of the gold.

[Pet Hog]

Say you start with $25 in each of four investments, and one of them grows to $35; assuming the others don't change, then you will have a total of $110.

Not quite: $35 out of $110 is only 32%.  Gold would have to increase to about $41 to become 35% of $116 (41 + 3*25).  Rebalancing would reset each asset at $29 ($116/4).  So you would have to sell $12 of your gold, or 29% (12/41).  That means you would need to keep 29% of your gold in the Roth IRA.  In other words, you could withdraw 71% of your gold to hold in physical form.

This analysis assumes only one rebalancing occurs.  If the price of gold were to shoot to the moon, then you might have to rebalance out of it several times.  Each time you would be selling 29% of your total gold holding.  For one rebalance you could have 71% in physical; for two, you could have 50% physical; for three, 36%.

Of course, gold doesn't always go up.  It is possible that you'd have to rebalance by buying additional gold outside of the Roth IRA if it ever reached the 15% band.  For an original 71/29 split, that might present a problem with a subsequent rebalance because you'd now have less than 29% in the ETF form.  So I would suggest going 50% physical (taxable) and 50% ETF (Roth).  That way you'd weather two rebalances in either direction before having to make any potential taxable sale.

[Libertarian666]

Say you start with $25 in each of four investments, and one of them grows to $35; assuming the others don't change, then you will have a total of $110.

Not quite: $35 out of $110 is only 32%.  Gold would have to increase to about $41 to become 35% of $116 (41 + 3*25).  Rebalancing would reset each asset at $29 ($116/4).  So you would have to sell $12 of your gold, or 29% (12/41).  That means you would need to keep 29% of your gold in the Roth IRA.  In other words, you could withdraw 71% of your gold to hold in physical form.

This analysis assumes only one rebalancing occurs.  If the price of gold were to shoot to the moon, then you might have to rebalance out of it several times.  Each time you would be selling 29% of your total gold holding.  For one rebalance you could have 71% in physical; for two, you could have 50% physical; for three, 36%.

Of course, gold doesn't always go up.  It is possible that you'd have to rebalance by buying additional gold outside of the Roth IRA if it ever reached the 15% band.  For an original 71/29 split, that might present a problem with a subsequent rebalance because you'd now have less than 29% in the ETF form.  So I would suggest going 50% physical (taxable) and 50% ETF (Roth).  That way you'd weather two rebalances in either direction before having to make any potential taxable sale.

Thanks for the correction.

I think I should also point out that the taxable gain in a taxable account is only the proportion of a sale that is actually gain, not the whole sale. In other words (assuming I'm doing the calculation right this time), if your gold goes up from $25 to $41 and you sell $12 of it, only 29% of the $12 sale, or about $4, is taxable gain. At the current maximum "collectibles" tax rate of 28%, that generates about $1 in tax on the $12 sale, or an effective rate of about 8% of the sale amount. Obviously this will increase with increasing gold prices and decrease if you are in a lower tax bracket than 28%.

[Reub]

Who will take care of your physical gold when you are 90 and possibly in a nursing home?

[Pet Hog]

Thanks for the correction.

I think I should also point out that the taxable gain in a taxable account is only the proportion of a sale that is actually gain, not the whole sale. In other words (assuming I'm doing the calculation right this time), if your gold goes up from $25 to $41 and you sell $12 of it, only 29% of the $12 sale, or about $4, is taxable gain. At the current maximum "collectibles" tax rate of 28%, that generates about $1 in tax on the $12 sale, or an effective rate of about 8% of the sale amount. Obviously this will increase with increasing gold prices and decrease if you are in a lower tax bracket than 28%.

Libertarian666, I'm confused about the bolded part.  I was suggesting that 71% of the gold be held in a taxable account as bullion and 29% held in the Roth IRA as an ETF.  If you had to rebalance because gold reached 35% of the overall portfolio, you would sell all of the ETF gold in the Roth IRA and use that money to rebalance the other assets within the Roth IRA.  You'd now have 100% of your gold as bullion.  There would be no taxable gain, would there?

Also, I realize now what a dumb thing I said in the last paragraph of my previous post about rebalancing into gold bullion outside of the Roth IRA if it reached the 15% band.  Of course, you would rebalance within the Roth IRA, leaving you with more than 29% of gold in ETF form.  In that case, you could withdraw some of that money and buy more gold bullion so that 71% was again in physical form.  Still, I would suggest a 50/50 or 36/64 split (bullion/ETF) to weather two or three rebalances out of gold without paying any tax.

[stuper1]

Who will take care of your physical gold when you are 90 and possibly in a nursing home?

It will be sitting in the bank safe deposit box waiting to pass to our heirs via our wills.

[ochotona]

Who will take care of your physical gold when you are 90 and possibly in a nursing home?

It will be sitting in the bank safe deposit box waiting to pass to our heirs via our wills.

This is a valid concern. Think about what if the fees go unpaid, and the property within is considered abandoned, because you and your wife are unable to answer the phone / email / read the postal mail.

Many people lose access to their Long Term Care insurance, because in the weeks and months prior to needing it, the premiums go unpaid! The coverage lapses. People with dementia don't pay their bills. Well... that makes sense. But how tragic. This is the parallel scenario for your physical gold.

The answer is, someone trusted, younger, and healthy needs to have Power of Attorney over your safe deposit box, and needs to be given instructions on how to pay the fees, be given keys, be on the signature card. the bank should have their contact info, etc.

[Libertarian666]

Who will take care of your physical gold when you are 90 and possibly in a nursing home?

It will be sitting in the bank safe deposit box waiting to pass to our heirs via our wills.

This is a valid concern. Think about what if the fees go unpaid, and the property within is considered abandoned, because you and your wife are unable to answer the phone / email / read the postal mail.

Many people lose access to their Long Term Care insurance, because in the weeks and months prior to needing it, the premiums go unpaid! The coverage lapses. People with dementia don't pay their bills. Well... that makes sense. But how tragic. This is the parallel scenario for your physical gold.

The answer is, someone trusted, younger, and healthy needs to have Power of Attorney over your safe deposit box, and needs to be given instructions on how to pay the fees, be given keys, be on the signature card. the bank should have their contact info, etc.

Yes, but of course you will still have the problem that the bank will seal the box when they learn of the death of one of the box holders, until the Revenuers can see what is in it. However, that won't happen just due to incapacity of a holder.

[ochotona]

Yes, but of course you will still have the problem that the bank will seal the box when they learn of the death of one of the box holders, until the Revenuers can see what is in it. However, that won't happen just due to incapacity of a holder.

OUCH. Maybe just get a honking tough safe, keep it at home.

[Reub]

This might be another reason to invest in paper gold or allocated physical gold in Australia, Perth Mint I believe. What was their deal again?

[stuper1]

The estate tax exemption is $10.9 million per couple.  I'm pretty sure we'll be under that, so I don't see what we have to fear from the Revenuers.

I believe once the gold passes to our heirs, then they get a stepped up tax basis to the current price per ounce of gold in effect at that time.

[Reub]

So when we're in the nursing home we'll have to find someone to trust with our millions in gold in a vault that only you and they have access to?

[goodasgold]

So when we're in the nursing home we'll have to find someone to trust with our millions in gold in a vault that only you and they have access to?

One of the sad realities of life, as mentioned in Craig and MT's book, is that the people we trust for our physical and financial wellbeing, such as relatives, lawyers and caregivers, are among the folks most often convicted of stealing the assets of dependent people. It helps to have additional people check on our welfare in order to minimize fraud and exploitation.

[MediumTex]

The estate tax exemption is $10.9 million per couple.  I'm pretty sure we'll be under that, so I don't see what we have to fear from the Revenuers.

I believe once the gold passes to our heirs, then they get a stepped up tax basis to the current price per ounce of gold in effect at that time.

You could prepay the safe deposit box for several years in advance.

Inside the safe deposit box, it's not a bad idea to put names on things you want certain people to have.  It's not necessarily legally binding, but it can help clarify your intentions to the person who opens the box.

[Reub]

If the names don't get "accidentally" removed when the box is opened.

[Libertarian666]

The estate tax exemption is $10.9 million per couple.  I'm pretty sure we'll be under that, so I don't see what we have to fear from the Revenuers.

I believe once the gold passes to our heirs, then they get a stepped up tax basis to the current price per ounce of gold in effect at that time.

I believe you are right about the tax basis.

As to what you might have to fear from the Revenuers, one of the "wonderful" features of government is that they can change the rules unilaterally at any time.