What is Asset Management
As an asset, the flagship product we will be discussing today is an enormously desirable foundational asset. This product is designed to leverage your portfolio, put your lazy money to work, give you a highly favorable taxation position, and allow you to still retain complete control of your money. The ability to leverage the same dollar into multiple different venues is the core reason why this product and our utilization model are so efficient and desirable for IAN members.
We have found that more often than not, clients who understand what we are saying and follow our plan are more inclined to do additional investing because we have given them a control and responsibility for their finances that is unmatched by any competitor.
Our plan integrates and complements everything from Short-term Real Estate, Long-term Real Estate, Gold and Silver, Hedge Funds, Oil and Gas, Business Development, and Business acquisition. My point is this, while this plan is designed to run as a stand-alone retirement plan, the flexibility this plan affords may allow you to leverage into avenues previously perceived as unobtainable. This is THE retirement plan for those who want control over their money.
This plan is so solid, so safe, so liquid, has such favorable rate of return, has such tax-efficiency, and has such a low expense ratio, that it is safe and solid enough to make it a stand-alone, voluntary retirement vehicle. I feel very confident that this product is flexible enough to meet your needs, goals, and wants in ways you may have never thought possible.
Whether you care more about security in retirement, reducing a tax burden, making your portfolio efficient, or being able to have complete control in a very unstable time, you will find a value here today, unlike anything you have ever been presented before.
How to Evaluate an Asset
There are 5 key elements in any good financial asset. These elements are Liquidity, Safety, Expense Ratio, Return, and Tax-Efficiency. You can use the acronym LiSERT to remember these evaluation points. It is vital to evaluate all assets in your portfolio against these measurements.
Liquid - Can you put your hands on the money in less than 72 hours?
Safety - Do you have a potential for loss? How likely is the loss, and how much can you lose?
Expense Ratio - How much does it cost me to have or how much does it cost me NOT to have it?
Return - What is my potential for return?
Tax-efficiency - How is my tax position affected if the asset’s value decreases, increases, or stays level?
As we look for the ideal asset to serve as the foundation for a solid retirement, we must look for assets that exhibit the attributes listed above. Taking those attributes, it stands to reason that a perfect asset would be: 100% liquid from day one, 100% safe with no possibility of loss in any scenario, 100% free, have an infinite return, and tax-deductible going in, tax-deferred while growing, and tax-free when you distribute it out.
The asset I just described does not exist. This may explain why you have some level of discomfort with your portfolio! However, it stands to reason that some assets may have more of these attributes than others. Therefore, when considering a foundational asset, it makes sense to look for an asset that has the highest scores on all the above-listed attributes.
Common Retirement Vehicles and Distributions
Let’s examine some of the various tax-advantaged plans. A plan that may let you participate in the market, but since you earmarked the dollars for retirement, it allows you to be in a more favorable position than annual taxation. You will need to evaluate both a Roth and Qualified retirement account.
Both plans are designed for retirement, but in our vehicle analogy, are more like a train than a car. You have very limited flexibility, and a lot of “tracks” you have to follow. Between RMDs, Early Withdrawal Penalties, and limitations on collateralization, there is little versatility in these plans. Remember the story of EJ? His plan was on track, he had a destination, and he was in the train, but when life tried to take him on a different route than his 401k’s train tracks directed, he was unable to follow that new course without a very painful dismount.
Common Retirement Vehicles and Market Volatility
The majority of our voluntary retirement savings plans are directly influenced when the market has a major downturn. In other words, your savings vehicle is subject to market volatility. I liken using the market to grow a retirement, without using any of the available tax codes designed for retirement, to having your primary vehicle be a buggy.
It’s not very fast, you have little mechanical leverage, but you do have a lot of control when it’s working right! Unfortunately, if your horse (in this case the market) either dies, gets sick, or decides not to go in your desired direction, you have no choice but to either get out of that buggy or ride it till it rests at the bottom of a hill.
You may have some perceived measure of control, with bits, bridles, and reins, but at the end of the day, your horse is what drives you. Your vehicle is only as good as the horse. Volatility in the market, just like volatility in the horse, can prove to create a less than the optimal method of transportation for the long journey of retirement.
Common Retirement Vehicles and Taxes
First, the two most prominent options for voluntary retirement grade savings vehicles fall under two tax treatments: Qualified or Roth accounts. Qualified accounts are tax-deferred. Tax-deferred means you didn’t pay taxes now, so you will pay taxes at withdrawal. The majority of 401ks, 403bs, and IRAs are Qualified accounts.
Roth accounts are a step in another direction. You pay tax up-front before the dollars go in the account, and are allowed to harvest the principle and growth tax-free. Since Roth is just a tax-classification, you can have Roth 401ks, 403bs, and Roth IRAs, but the most common Roth vehicle is the Roth IRA. Both tax structures have their pros and cons, many of which we will address as we move through this blog.
Furthermore, in comparing a Roth to a Qualified account, you must evaluate the risk. It’s much like a farmer looking to plant his crops. Suppose he could either pay tax on the seed at the time of purchase in the spring or pay tax on the entire harvest in the fall? If his plan is for a bountiful harvest, the prudent farmer pays his tax in the spring.
The risk you run with a tax-deferred qualified retirement plan is that the future date to which you postponed paying your taxes may have a higher tax bracket than the one you are in currently. With the increase in debts and spending of our government, it is feasible to predict an increase in future taxes. This means that not only are you on a train that may be difficult to divest yourself from, you are also waiting till the end of the journey to find out how much your fare will cost.
If there was an increase in the price of fuel (Tax Increases), you can imagine that as you get off this train, your ticket price, due before you exit, will reflect all increases incurred during your trip. The control is taken out of your hands! A Roth is a step in the right direction, but still holds some restrictions related to distributions and access of your account that are less than optimal.
Unless you need to use the funds from a Roth at one of the predefined train stations built into the tax code, such as Medical Hardship, First Home, Education, or attained retirement age, you lack the flexibility to do so without a penalty.
The IUL: Internal Cost
Before I address the previous issues, I want to touch on one of the most common misnomers associated with Indexed Universal Life Insurance as a savings vehicle. I often hear objections to life insurance based on a perception that it costs too much. In fact, most people think life insurance is one of the most expensive assets to own; however, a properly structured IUL can actually be one of the least expensive assets you will ever own.
Consider this comparison: Your parents owned a taxable mutual fund. They pay 20% tax religiously every year on the gains. The day that they die, you receive your inheritance. Imagine the IRS calling you up and telling you that since your parents paid tax so faithfully, they decided to give you a full refund on all the tax your parents paid. Can you imagine that? Of course not! The story is laughable. Let’s take another situation. Your parents instead have an IUL.
It is tax-free, but instead, you pay 20% of the earnings in costs of insurance charges from this “expensive IUL”. This 20% is actually much higher than the charges we experience in our policies due to our exclusive product, which we will discuss in far more detail later. For now, let’s assume a high percentage, and say the 20% would be paid in a cost of insurance that you would otherwise have paid in taxes. Now, imagine your parents passing. You receive your inheritance.
Imagine the insurance company calling you up and telling you that since your parents paid the cost of insurance so faithfully, they are going to send you a full check, tax-free for all the cost of insurance charges your parents paid. Is that laughable? Hardly. It’s contractual. That is the power of IUL.
As I mention Life Insurance, conventional wisdom, television performers, and other so-called financial experts likely come racing to your mind. “The costs are too excessive.” “You would do better saving the dollars than putting them into the insurance contract.”
For the majority of insurance contracts that are out there, I may agree with you! However, when properly designed, an insurance policy can provide the best leverage, tax advantages (under Section 7702), and downside risk protection you will ever find in one financial vehicle.
Furthermore, this specific product, the flagship IUL at my firm, has a patented process that drastically decreases the insurance COMPANY’S risk, which is passed on to the IUL owner in the form of lower internal operating costs and increased efficiency and profitability. I will go more into what sets this apart from other life policies as we get further into the blog.
The IUL: Security against Market Volatility
The IUL addresses Market Volatility with a Fixed Indexed Account strategy. This means that your cash value gets credited interest based on the returns of an annually picked individual stock index or a blend of multiple stock indexes. Notice I said your money is credited interest BASED on the returns, not because it is invested directly in the market.
This makes a big difference when it comes to risk and control to you as a client. Since the returns are based on the stock index, the IUL can also have various guarantees, including downside loss protection. Our flagship product has an annual guaranteed minimum credit rate that will never fall below 0%.
The IUL: Preferred Distributions (Tax-free, Penalty-Free, Any Time, Any Reason)
The IUL also has the answer for an increase in future taxes. Under IRS code 7702, distributions from an IUL, if structured correctly, can be TAX-FREE. This means you pay tax on the dollars going in, but pay NO tax on the gains when you distribute the money coming out. You pay tax on the seed, not the harvest.
All the gains you reap after purchasing the policy can be distributed TAX-FREE. Should tax rates soar or markets crash, your account will be blissfully impervious to either of these two catastrophes. Also, should you need to access the money prior to age 59 and 1/2, there is no 10% penalty. You can access your money at any time, for any reason, with no penalty.
The IUL: A Financial Lever
So, obviously the IUL makes sense in comparison to other retirement vehicles for someone who wants the safety without sacrificing returns; but what about the younger investor? What about someone who wants to take a little more risk? What about the wealthy investor who is looking to increase his accumulation, and is not as concerned with the guarantees of retirement, but simply wants to take advantage of every tax and investment principle available to grow their wealth to its maximum potential?
My final point will summarize how this plan can fill the void for someone looking for a stand-alone secure savings vehicle, but also serve as a leveraged platform for those looking to vitalize their portfolio like never before.
The final and most important advantage to an IUL is the element of control and access. With a traditional retirement plan, it’s there to enhance your savings for retirement. It does not help you accumulate any more than the principle you save, plus the interest you earn. There is no element of leverage. Leverage is a positional advantage.
Leverage is having one dollar, positioned correctly in correlation with the fulcrum, which allows your one dollar to raise multiple dollars to new levels. I know the analogy seems childish, but think of a see-saw. Imagine if one end of the see-saw was twice as long as the other. One child may very well be able to lift three children of equal weight. The same principle applies to leverage of money. Having your dollars correctly positioned is KEY to having the most efficient, safe, and profitable portfolio.
In a traditional retirement vehicle, you typically save, earn interest, and then take income. The only leverage is the interest you earn on each dollar you have saved. This is better than not saving at all, but it’s still a train on tracks. It is far too rigid and unforgiving, not to mention unable to take advantage of any opportunities that aren’t at a pre-defined station point.
On the other hand, with the IUL, you have the ability to access your account value prior to hitting retirement age WITHOUT PENALTY! This means that rather than just having funds available at retirement age, should that business deal come along prior to age 59 and 1/2, should you desire to pay cash for something and finance it yourself to avoid a high interest rate, or should you need to access the money prior to retirement for any reason, YOU CAN. You have complete control over your finances, so you can make decisions unencumbered by the traditional rules of retirement plans.
Ignorance vs. Strategy
When you think of Life Insurance, conventional wisdom, television performers, and other so-called financial experts likely come racing to your mind. “The costs are too excessive.” “You would do better saving the dollars on your own than putting them into the insurance contract.” For the majority of insurance contracts out there, I may agree with you! However, when properly designed, an insurance policy can provide the best leverage, tax advantages (under Section 7702), and downside risk protection you will ever find in one financial vehicle.
I believe there are only two SMART ways to buy insurance: pay the least premium for the most coverage or pay the most premium for the least coverage.
Everyone has heard of the former idea. That’s called shopping! Suppose you want $100,000 of life insurance. You could get a variety of quotes and see who offers the best price. So the lowest price for $100,000 of insurance is determined by the insurance company, how cheap they are willing to offer it.
Most people don’t know who decides the maximum amount you can pay for that same $100,000 of insurance. This amount is actually determined by the IRS. So it stands to reason that if you want to have the MOST efficient cash value, you will have the least amount of insurance the IRS will allow you to buy, for the amount of premium you want to put into your policy.
This allows you to have the lowest internal costs for that Death Benefit attached to your IUL coverage. Basically, you don’t buy any more coverage than the amount specified by the IRS, as the minimum Death Benefit allowed for the amount of premium you want to contribute each year.
Now the math begins. I say math and not magic because magic is merely an illusion. Math is concrete. What I am about to show you is a patented, mathematically sound, viable strategy, that one insurance company has used to produce an IUL that has an unfair advantage over the competition. In fact, it blows the competition away.
Before we discuss the tremendous attributes of our Flagship Product, let’s review where we are now. The IUL is clearly a significantly better retirement vehicle than the competition. Even the so-called tax-advantaged plans can’t hold a candle to the efficiency and flexibility of the IUL.
Also, the ability to have access to your savings prior to retirement age may allow you to take advantage of some financial opportunities that otherwise would have been outside your grasp. This plan enables someone to take advantage of compound interest without interruption, leverage against this compounding asset, and make the leap from simply being a saver, to a true wealth creator. Being unable to make this shift into a position of control over their finances is what has kept so many Americans away from the elusive security and wealth they are so desperately trying to obtain.
What our flagship Index Universal Life policy has done is found a way to reduce the insurance company’s risk in relation to death benefits. Typically, when an insurance policy is issued, the Insured will make an election to name a primary and contingent beneficiary. So, for example, Dad buys a million dollar life policy, names Mom as the primary beneficiary, and son Bobby as the backup beneficiary.
Suppose dad passes away shortly thereafter. Mom will meet with the life insurance man, and he will explain to her the options for how she can receive the death benefit. She can either take installments or a lump sum, and it is entirely her choice! Mom weighs the options and decides on taking 30 years of payments, so the money doesn’t run out.
If she were to pass away during those installments, the unpaid portion of the benefit would go to the son, unless another election had been made. Not many people are like Mom! Now let’s take another example. Suppose Mom and Dad die at the same time, without a trust. That means Bobby is meeting with the Insurance man by himself.
He decides on the lump sum. This lump sum quickly turns into a few lifestyle purchases before he decides to invest a portion for future needs. It doesn’t seem all that different, but the key is in the installments. You see, there is more risk, due to the time value of money when an insurance company has to pay out a lump sum versus an installment. Therefore, to stay financially sound, an insurance company
HAS to assume that nearly everyone, if given the option, will take the lump sum. This is why you are charged an internal cost of insurance on ANY life insurance policy. It’s the cost to guarantee that a death benefit will be paid out should someone pass away sooner than life expectancy dictates.
Insurance companies know how to evaluate that risk, based on the law of large numbers, and using actuarial tables and mortality credits. The key thing to remember is that an insurance company’s net financial impact is worse if the client takes a lump sum because that money is no longer working for the insurance company.
The Flagship Product and How It Works
Now, enter our flagship IUL product. Enter the math. Enter a new era of investment grade life insurance policies. Everything else previously discussed still applies. All the strategies, protections, leverage, taxation and other features previously discussed are still applicable. There is just one small addition that was made to the already strong industry of Life Insurance.
Our flagship product has a patented a process in which the IUL owner can make an irrevocable designation that the beneficiary will receive the proceeds from the death benefit in the form of installments. This election flips the previous actuarial risk on its head! Now, instead of the insurer having to assume that a beneficiary will take the benefits as a lump sum, and consequently have to charge MORE, they know contractually that the beneficiary WILL be taking the benefit as an installment, so they can charge less!
There is an infinite amount of flexibility with this specific policy and the benefit election, allowing a parent to retain control even from the grave! The real value, however, comes from what it does to the internal costs of the policy.
Because the insurance company is able to better evaluate their risk, they are able to have the SIGNIFICANTLY lower cost of insurance charges inside the policy. This is so significant from an insurance company’s standpoint because instead of having to take the million dollar death benefit out of their interest-earning account (losing not only the million, but also what that million could have earned if they did NOT have to pay it out), they are now able to use simply the interest the million earns to pay the installments due the beneficiary.
It is not uncommon for us to see the illustrated ‘cost of insurance’ charges inside the policy be reduced to $0 mid-way through the policy’s lifespan.
What this means to a client is that they will have the lowest internal fees on their account when they need the greatest security (at retirement). You can have all the benefits of tax-deferred growth, tax-free-distribution, guaranteed no loss/floor, high potential earnings/caps, the ability to take asset-based loans, the flexibility of distributions (no age minimum), and the added benefit of a healthy built-in Death Benefit should your time be called unexpectedly.
All these benefits are built into a policy that can show an attractive net rate of return after tax. When compared to taxable vehicles, this concept, paired with our flagship, patented and exclusive product, is the clear winner. In fact, we think it’s The Asset of the Century!
To support our assertion that IUL is the best “foundational” asset for a portfolio (highest return for the lowest risk), here are some observations related to IUL compared to other assets:
IUL has no loss in bad years. The only other assets with no annual losses were government bonds and corporate bonds. (Important note: returns used in this analysis assume bonds held until maturity.)
Both government bonds and corporate bonds have significant interest rate risk (i.e. could lose money) if sold before maturity, and since most people agree that we will have higher interest rates in the future, current bonds face significant devaluation if sold before maturity, and therefore should only be in a portfolio if the investor is committed to holding until maturity (i.e. their liquidity cost increases as interest rates rise)
Insurance companies cannot force loan repayments as brokerage companies can do on margin loans
Low-interest rate risk on loans
Either fixed or capped interest rates o Loans can be used for...
Ideal for financing the acquisition of other assets Examples:
Use as down payment on investment real estate being held long-term
Since no payment required, could pay off policy loan when the property is sold o Use for acquiring and rehabbing “fix and flip” real estate
Since no payment required, could pay off policy loan when the property is sold o Purchasing gold
Since no payment required, could pay off policy loan when gold sold
More favorable than using callable margin loans from a broker o Financing automobiles
Note: must make normal car payment back to yourself/policy for this to work long-term
Pay yourself interest rather than bank
Financing business equipment
Note: must make normal lease payment back to yourself/policy for this to work long-term
Pay yourself profit rather than bank or leasing company
See your accountant for additional tax benefits associated with this strategy
Tax-free college funding
An additional benefit is that IUL policy values are not counted against you or your child for financial aid calculations
Other college savings plans (i.e. 529 plans) do count against you or your child for financial aid calculations
Tax-free retirement income Closing
In closing, I want to thank you for bearing with me thus far. I hope the information and data put forth here today was useable and valuable to you. I implore you not to sit on this information. Take the time to do the appropriate research and evaluate this in regards to your own finances.
To learn more and have a tailor-made custom plan, please contact Strategic Investment Network. Don’t leave money on the table or take unnecessary risks any longer! You have nothing to lose, only to gain from speaking with us.
Hard Assets are investments with intrinsic value with an excellent inflation hedge. In general, hard assets are negatively correlated to both stocks and bonds. In other words, when stocks and bonds decline, hard assets (commodities) tend to appreciate. In addition, during periods of high inflation equities and bonds do poorly.
Unlocking your IRA and 401(k) with a Self-Managed IRA
The first thing you need to understand is that there is very little difference between the Self-Managed IRA and the Traditional IRA. The only difference is who manages the investments and what can be invested. With a Traditional IRA from your typical, traditional firm, you’re restricted to a select subset of investments that the IRS actually allows. You may have a choice of a few mutual funds (usually those managed by the firm that holds your account), government bonds or low-rate CDs.
If you want to enjoy a better-than-average return and control over your own investments, then unlocking your retirement with a Self-Managed IRA and investing in non-traditional hard assets might be something in which to learn more.
According to the IRS’ Publication 590 (dealing with IRAs), the only investments that are prohibited include artwork, stamps, rugs, antiques, and gems. All other investments are allowed, including: (Traditional) stocks, bonds, mutual funds, (non-traditional) real estate, mortgages, private placements, or even Precious Metals.
To help you wrap your head around this, just think about anything you might make money on if you invest in it, (excluding the prohibited transactions stated above) and understand that the traditional firms and custodians imposed their own unnecessary restrictions. These restrictions benefit them by only offering what is advantageous to them, not necessarily what benefits you.
How it all works
This is not a grey area or a tax loop-hole. This is not something that was dreamed up by some attorney to take advantage of some ancient, forgotten tax code. This is a real and legal option, an incredible structured investment tool by attorneys that allow you to use tax-deferred or even tax-free IRA money to invest with, nothing less.
What is the secret that these savvy investors know? It’s a little section of the IRS code titled Code 4975. What is revealed is that in which you and all the other owners of IRA structures are allowed to invest. That is an astounding 5 trillion dollars’ worth of IRA money!
Actually, there isn’t a long list of what is allowed; instead, there is a very short list of what is disallowed. The IRS code “doesn’t tell you what you can invest in. It tells you what you can’t invest in.” (San Francisco Chronicle)
Here are some examples of investments that an IRA is allowed to invest of which you might not be aware:
Residential Real Estate Receivables
Commercial Real Estate Stocks, Bonds, Mutual Funds, Raw Land
Mortgage Pools Currency
Private Notes and Loans Futures
Private Placements Commercial Paper
Limited Liability Companies (LLC) Tax Certificates
Limited Partnerships (LPs) Foreclosure Property
Many individuals have asked their broker about alternative investments and have been told that it cannot be done. What they are not being told is that they can make their investment; they just can’t do it with their current brokerage firm.
See, what the IRS has published on their website about the restrictions aren’t of their own making, but of your own broker’s. “Finally, IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”
What is disallowed?
The more you research this subject, the more you will find that the IRS allows an open field of flexibility with Individual Retirement Accounts and in fact, it’s not the IRS that frowns upon truly Self-Directed IRAs, it’s the investment firms that want to keep control of your money. After all, with a Self-Managed IRA, it’s you who is making the greater returns, not them. The most common question has always been, “Can I invest in real estate with my IRA?” The answer, of course, is, Yes.
“Real estate has always been permitted in IRAs, but few people seemed to know about this option - until the stock market began to decline. Financial Institutions, meanwhile, had little incentive to recommend something other than stocks, bonds or mutual funds.” (New York Times)
So what can’t you do? Congress States the restrictions to an IRA in IRC Section 408: An IRA cannot invest in life insurance contracts or collectibles defined below:
Any work of art, any metal or gem
Any alcoholic beverage, any rug or antique
Any stamp or coin
There are some exceptions to coins such as bullion, gold, silver and platinum coins. I.R.S. Publication 590, Individual Retirement Accounts, page 33, states “Investment in Collectibles, Exception” “Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.”
Even though the Traditional IRA is similar to the Self-Managed IRA, there are some differences when it comes to setting them up. Typically setting up a Traditional IRA is easy. The Traditional IRA is managed by the custodian, so all the structures have long been created. As the name states - Self-Managed IRA - you need to be set up as the manager of the IRA.
Here is how the structure is laid out.
Technically you are not the owner of the IRA; you are the manager and the beneficiary. A custodian is needed to be the holder of the IRA but you, as the manager, direct the investments and benefit from the returns.
1. Your retirement account is moved to a self-directed custodian who allows alternative investment vehicles that can pass their compliance procedures and withstand IRS scrutiny.
2. Our legal team creates a customized entity (usually in the form of an LLC) and submits it to the custodian as a private placement. (This is not an ordinary LLC. We stress the fact that you use a professional to create this structure otherwise your IRA may become disqualified, taxed and penalized).
3. You open a business checking account for this entity.
4. You submit an investment authorization form to the custodian instructing them to fund your new bank account via check or wire.
After you complete the simple step by EIS easy process, you will have absolute control over this new structure and can direct your retirement funds into any investment you choose (keeping in mind that you still need to abide by IRS rules). Not only do you have the flexibility of cash which allows you to make a wide range of investments including the securities you are familiar with, but also solid asset protection.
Why use an LLC?
There are others utilizing C corp. and 401k structures and there are some uses for these but as a standard investment structure, these invariably incur taxes. Some companies find these easier for them to structure. But why pay the taxes if you don’t have to?
The owner of the LLC is the IRA
A Limited Liability Company is a company that has the option to be taxed as a partnership. This is beneficial because the LLC won’t pay any taxes on gains, and instead, it will be the owner of the LLC who is liable for any taxes just as if they earned the money themselves. Because the owner of the LLC is your IRA, there are no taxes unless you are running a business that is unrelated to the purpose of an IRA (making investments a business), using debt financing or taking a distribution from your IRA.
Another benefit to having an LLC is the asset protection. LLCs have the protection of a corporation, therefore you or your IRA won’t be liable for the LLCs debts and it is very difficult and cumbersome to penetrate the integrity of the structure.
Let’s say you are involved in a lawsuit that is not ruling in your favor and attacking your Self-Managed IRA. An attorney would have to work extra hard to penetrate your IRA and two, the LLC within your IRA. Even if someone won in a lawsuit against you and got a charging order for your Self-Managed IRA, all they would be entitled to is the distributions from the LLC.
If you, the manager of the LLC, didn’t make any distributions (which you don’t have to until you are 70 1/2 years old), not only would the person holding the charging order not receive any money, they would also pay taxes on the gains made in the LLC because it is a flow-through structure.
What if you received $100K a year in your Self-Managed IRA? That would spike the tax bracket of any individual holding a charging order against your IRA. So they pay the taxes for that year but can’t receive any money. That’s real asset protection.
After little research, most advisors will accept the fact that you can make alternative investments such as real estate, metals, private placements, in your IRA, but the concept of a Self-Managed IRA may be hard to accept. However, the Self-Managed IRA concept isn’t frowned upon, risky or even new.
The case law that proves the strong integrity of the Self-Managed IRA concept is Swanson v. Commissioner.
James Swanson owned a majority of shares in a U.S. Corporation and his three children owned the remainder of the U.S. Corporation. Swanson formed a new Domestic International Sale”S” corporation (DISC) where he was the director of the company and the members were Swanson’s IRA and the IRAs of his three children, each owning 25% of the DISC.
The company arranged commissions on foreign sales for the U.S. Corporation, making the normally taxed income of the DISC now tax-deferred through the IRAs.
The IRS initially challenged this based on the conception that he had violated IRC Section 4975 because Swanson dealt with the assets of the plan in his own interest. The IRS, realizing they weren’t justified in their allegations, tried to withdrawal their case. By this time Swanson had suffered extensive legal fees and demanded the IRS to compensate him for his trouble. The IRS, of course, refused to pay Swanson for his legal fees. Therefore Swanson was forced to escalate his demands to the Tax Court.
The tax court came to two conclusions:
1. Swanson’s Self-Managed IRA structure was not illegal.
2. The IRS had to pay Swanson a reasonable amount of his legal fees.
There have been a number of decisive rulings, statements, and opinions by the Department of Labor, IRS and Tax court all in favor of the Self-Managed concept; this is just one of them.
Why not just use a custodian?
Most individuals will put money aside for a tax deduction or benefits at work. Because the money is managed by a traditional Custodian, Administrator or Brokerage firm and the only interaction by the individual is looking at an annual statement, this type of account is in no way Self-Managed. Millions of Americans have spent their whole life saving for retirement just to realize once they turn 65 and are ready to retire, they ended up losing money.
Almost all custodians only handle the typical IRAs
An individual puts money aside for retirement savings with a Custodian, Administrator or Brokerage firm that empowers the individual to make investments that are allowable by the custodian’s compliance department.
In most cases, the individual can trade stocks, bonds and mutual funds from a select inventory under the Custodian, Administrator or Broker. Depending on the type of IRA the individual has structured, gains can be realized tax-deferred or tax-exempt. Contribution limits vary depending on age, employment status and adjusted gross income. Some individuals have found their way to the Self-Directed IRA custodian.
The reason we call ours the Self-Managed IRA is the fact that custodians are advertising a self-directed IRA but offering very little flexibility, making it difficult to really enjoy the opportunity that is afforded with a Self-Managed IRA.
If the account is held by one of these flexible Self-Directed IRA custodians, the individual is empowered to purchase non-traditional assets titled in the custodian’s name for the benefit of the individual. The extent of bureaucracy necessary is at the custodian’s discretion and is always paid for out of the IRA. Custodians who offer this type of plan have a fee for everything. Below is a small list of fees and certain bureaucracy you can expect.
Fees, Fees, Fees:
1. Annual Asset Charge
3. Annual Appraisals
4. Application Fees
5. Wire Fees
6. Certified Mail
7. Cashier’s Check
8. RMD Calculation
9. Opinion Letters
10. Exit fees
1. Forms to approve and direct investments
2. Forms for investors to sign
3. Forms to wire funds
4. Forms to allow custodian rights
5. Waiting for the custodian to cut a check
6. Unnecessary Mortgage Reviews
The list goes on. This is what you are missing when you deal directly with a custodian:
The Self-Managed IRA
An individual puts money aside for retirement savings under a special legal structure specifically set up to limit custodial restrictions, red tape, and fees.
The individual opens an IRA account with a specific custodian.
A Limited Liability Company is structured in compliance with IRS rules and regulations to be owned by the IRA and managed by the IRA participant.
Depending on the type of IRA the individual has structured, gains can be realized tax-deferred or tax-exempt.
Contribution limits vary depending on age, employment status and adjusted gross income.
A Self-Managed IRA is only restricted to the rules of the IRS and arms of federal and state government, not by a company that is in business to manage your funds. It is that simple. Don’t break the simple rules of the law, and you have nothing to worry about. With a Self-Managed IRA you can expect:
Limitless Investment Option
Here are just a few possibilities: o Stocks, Tax Liens and deeds
Real Estate Purchase Notes
LLCs acquiring real estate
No Red Tape
Low annual custodial fee ($115 per year)
Use your expertise, Buy what you want. Grow your retirement, not theirs! Real World Examples
Below are a couple examples of what Self-Managed IRA structures can do. Both show good examples of investment potential. One is a very simple but a highly effective way that we have shown our clients to safely, and with great results, use their Self-Managed IRA to maximize their investment nest egg. The other is a very exciting option for those who have real estate opportunities and have a Traditional IRA but would like to build up their nest egg with TAX-FREE dollars vs. tax-deferred.
Simple IRA Real Estate Investment Example. Mary doesn’t know the real estate business but she knows that real estate has always consistently out-performed stocks and bonds. Mary, through her association with the Investment Advisory Network, found a safe, high-return real estate investment that she was comfortable with. Mary set up a Self-Managed IRA and loaned a local real estate development company 25,000 tax-deferred dollars.
The deal was safe, secured with real property and was returning 20% annually. A substantial increase from what she was getting from her custodial IRA. The real estate deal looked like this:
First lien holder (If anything should happen, she is paid first.) The real estate property is fully insured (If anything should happen, she would get her original $25,000 plus any realized gains.) No repair worries, no collecting rent from tenets.
Because of Austin’s growing real estate economy, Mary’s investment returned in less than 8 months. Because of what Mary learned and her experience with the developer, Mary took the builder’s offer of rolling it over for an annualized 28% return.
Tax-deferred IRA to Leverage Your Roth IRA
As we review the following scenario, imagine that this partnership is not between Bob and Steve, but between your current Traditional IRA and a newly created Self-Managed Roth IRA. This is a great way to really build up your nest egg, tax-free not just tax-deferred.
Bob and Steve are forming a partnership. Bob buys houses at foreclosure sales for 5% to 25% market value and sells them for 50%-75% market value. Steve only puts up the expenses it takes to fix up the houses. Steve doesn’t want to take the risk of losing his money. Bob is confident of the returns and is willing to take extra risks for the lion’s share of the profits.
Steve is guaranteed his money back + 15% before Bob sees any profits. Bob buys a property at a public foreclosure for $10k. He needs $15k to fix it up where it will be appraised at $75k. Bob sells the property to an investor for $40k. Steve takes home $17,250.00, making a pre-tax profit of $ 2,250.00. Bob takes home $22,750.00, making a pre-tax profit of $12,750.00.
The highlights of this deal are:
1. Steve puts up more money. (The Traditional IRA)
2. Bob received more money. (The Roth IRA)
Bob and Steve are both happy to do this all day long, multiple times a year. Bob takes the risk, and the bulk of the profit, while Steve minimizes his risk and is happy with his return. People make these types of partnerships all the time.
So can your Traditional and new Roth! Imagine now your Self-Managed IRA was created with a large amount of tax-deferred money (Traditional IRA) and a little amount of tax-exempt money (Roth IRA), uniquely structured to fund your tax-free Roth IRA. This type of structure with disproportionate allocations is industry-standard in the real estate investment world.
The justifiable reasoning behind this partnership is that the Roth IRA takes all the risk and gets nothing if the deal goes south. The Traditional IRA is the first lien holder; it’s guaranteed its return first.
For taking all the risk, the Roth IRA is justified to receive the lion’s share of the gains. FAQ:
1. Can an individual contribute to a Traditional IRA if he or she has other retirement plans?
Yes, individuals can contribute to a Traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer-sponsored retirement plan. (Note that contributions to a Roth IRA are not deductible and income limits apply.) See Publication 590 for further information.
2. Can I partner with my spouse’s IRA or another disqualified person within the LLC?
Yes, in Swanson vs. Commissioner, Swanson’s IRA was partnered with the IRAs of his three children and Swanson was the director of the company (Swanson won the case).
However, if you are going to make your LLC owned by multiple members (whether they are disqualified or not), the Self-Managed IRA will become disqualified for any additional IRA capitalization, as where an LLC owned 100% by one IRA becomes a part of the IRA and you are allowed to make annual contributions to the entity.
3. What is the difference between buying real estate or any other investment for me or for my Self-Managed IRA?
When you make an investment with your Self-Managed IRA you will want to make sure that the asset is titled in the name of your entity. Make sure all the expenses come from the Self-Managed IRA and all the revenue flows to the Self-Managed IRA. Also, you will always want to make decisions in the best interest of the Self-Managed IRA because once you become manager of your IRA, you become a fiduciary.
4. Can my Self-Managed IRA purchase an interest in a Subblog “S” corporation?
No. According to IRS Letter Ruling 199929029, April 27, 1999, IRAs are not qualified as investors in Subblog “S” corporations.
5. Why haven’t I heard about this before?
Since The Employee Retirement Income Security Act (ERISA) was passed in 1974, the big lobbyists for IRAs were banks and investment firms. Since then there has been a common misconception that IRAs are only allowed to be invested in stocks, bonds, mutual funds, annuities, and CDs. Nothing could be farther from the truth.
The main reason you might not have heard of this type of retirement plan is that none of these traditional custodians have an incentive to allow you to make your own investment decisions outside of stocks, bonds, mutual funds, annuities, and CDs. Since the downfall of the stock market in 2000, it has been individuals who have taken the initiative and built a market for “truly” Self-Managed IRAs.
6. What types of Retirement Accounts can be structured as a Self-Managed IRA?
As a rule of thumb, you want to make sure that your retirement plan can be rolled over or transferred to another custodian before moving forward in getting a Self-Managed IRA. Once you have established that you are eligible, most types of retirement plans can be converted into a Self-Managed IRA. Following is a list of the most popular.
a) Traditional IRA
c) Roth IRA
e) SEP IRA
7. How do I ensure my money will be safe?
Before your money is deposited in a local FDIC insured bank account of your choice, it will be moved to a registered Trust Company or Bank. To be a registered Trust Company or Bank the institution must meet stringent state and federal requirements and have adequate reserves.
Your funds will be kept in a separate account for your benefit for a short period of time (a couple days) before the funds are transferred into an LLC checking account. Even if the Trust Company or Bank goes out of business, your money will always be in your possession and the LLC can be registered as an in-kind transfer to another custodian.
8. My broker, CPA, an attorney tell me this is illegal or frowned upon by the IRS?
Your broker will naturally show skepticism when they realize that you will have to move your funds outside of their management. I have heard every excuse in the blog from brokers:
a) “If you set this up your IRA will be taxed.” (Not true, the funds are transferred from custodian to custodian ensuring that the IRA is still qualified and there are no taxes due on the conversion)
b) “This company will run off with your money.” (Not true, most companies that structure a Self-Managed IRA will never even have access to your funds but make their money by charging a set-up fee anywhere between $2,000-$5,000. Once again, the funds are transferred to a Trust Company or Bank. The likelihood that your life savings will be stolen is the likelihood that your local bank will steal it.)
c) “Why would you invest in real estate with an IRA when the gains would normally be taxed at capital gains tax but in an IRA they will eventually be taxed as regular income tax?” (This argument is pretty much stating that you shouldn’t have an IRA altogether because stocks, bonds, and mutual funds will be taxed as capital gains outside of an IRA as well.)
The idea behind IRAs is that when you retire and start taking distributions your mortgage is paid for, you aren’t in debt and you need less money to live on, putting you in a lower tax bracket. (Roth IRAs aren’t taxed at all when you take distributions). Most everything your broker will tell you is an attempt to keep your assets under their management and this becomes more and more obvious the more they talk.
Your CPA is in business to file taxes. Your local attorney doesn’t specialize in Self-Managed IRAs. These professionals usually won’t want to take the time and effort to study the tax code in depth and give you a straightforward answer for free. To blow you off you might be told, “That is illegal” or “Technically you can but it is frowned upon,” or “This is a loophole and the laws will change.”
If you are told this is illegal simply ask your professional where “exactly” that is stated in the tax code. They won’t find it. Ask them where it is stated that you can buy securities; they won’t find that either. To tell you that this type of structure is frowned upon by the IRS or any other government is completely wrong.
Nowhere is it ever indicated that the government doesn’t want you managing your own retirement account, and in fact, there have been private letter rulings that allow individuals to take advantage of their IRA without incurring penalties. To say that this is a loophole in the law may sound like it makes sense but isn’t true.
Also, unless the professionals telling you this are senators or high-level officials, I wouldn’t listen to their opinion on how the laws will change. Once again, the tax code has always granted these abilities, but the big brokerage firms have a vested interest in controlling your money and distributing the profits into their pockets, not yours.
9. Can I purchase an asset that I currently own?
No. This is a prohibited transaction. If this is something you really want to do you might get a private letter ruling from the Department of Labor allowing you to make this investment. Private letter rulings can be very costly and may not be approved.
10. What if I need to borrow money to buy real estate?
Because you cannot extend credit to your IRA, and your IRA cannot be used as security, it makes borrowing money a little more difficult; however, for us, this isn’t a big problem. As long as you get a loan that doesn’t take recourse against you or your IRA, you aren’t making a prohibited transaction.
What most individuals do is use a property owned by the Self-Managed IRA as collateral. As long as the Loan-To-Value, or LTV, meets the right requirements, most banks will loan money to the Self-Managed IRA. A good Self-Managed IRA advisor will have relationships in place to help you facilitate this transaction.
11. Can I work on a property owned by my IRA?
Some outfits may consider this to be sweat equity and prohibited. The code doesn’t mention anything about sweat equity but does state that you cannot directly or indirectly extend credit to your IRA. You are allowed to day trade stocks with your IRA, so why wouldn’t you be allowed to swing hammers in a property owned by your IRA?
Unfortunately, the code doesn’t define “credit”, leaving this question to be one of those grey areas. In the case Swanson vs. Commissioner, as Swanson was the only salesperson for his entity, this was never challenged.
12. Do I need to ask permission to make an investment?
No. You are the manager of your Self-Managed IRA and all decisions are made by you. When you want to make an investment, you write a check, use your debit card, wire funds, etc. All contracts can be signed by you. If you want to hire another decision-maker you can also do that.
You will need to report to the custodian on an annual basis. Most custodians don’t have any formal documents to make this reporting. A simple letter will suffice; we recommend keeping a balance sheet for your entity and sending that to the custodian annually.
America is at a crossroads.
With a backbreaking federal debt, recurring annual budget deficit, a sputtering economy and fiscal irresponsibility in all levels of government, this country need a miracle to turn things around.
The two biggest threats to your business and financial security are taxes and lawsuits. Taxes (federal, state and local) eat up between 25 and 50 percent of your annual income, and estate taxes can cut your family’s net worth in half. Lawsuits are insidious because, like many risks that only show themselves occasionally, we put down our guard. Then, when you least expect it, you get stunned by a lawsuit without having properly prepared. Unfortunately, I’ve seen friends and clients lose everything they own as a result.
W-2 wage earners with $100,000 salary would pay taxes of approximately $30,000. This leaves them about $70,000 in after-tax income to pay for all their living expenses such as their mortgage, auto expenses (use of expenses here would imply these are business-related, but they are not), phone, medical, travel, insurance, entertainment, etc. This is likely to leave them with very little “left over”.
Displayed as a math equation, it looks like this:
Example B A business owner with $100,000 income (after typical operating expenses). Here, you’ll see that business owners can pay for many of their “personal” expenses (i.e. virtually all of the expenses on the above list) through the business by converting them into legitimate business deductions.
That’s a difference of $7,533 in your pocket. This can continue year after year for as long as you own your business. Granted, this is an oversimplification (The C.P.A.s are going nuts right now.), but it accurately demonstrates that by properly maximizing your deductions, you can save a significant amount of money in taxes.
Once you’ve read this blog, you’ll never look at your expenses in the same way again. From now on you’ll always ask yourself, “How can I turn this expense into a deductible business expense?” These rules are in the tax code to benefit business owners who know how to properly capture and use them. Knowing how to document these expenses bullet-proofs your tax returns.
The list can also (indirectly) include your kids’ clothing and other expenses, electronic gadgets, get-aways, blogs and seminars, boating, skiing, golfing, fishing and other social outings, etc. It’s said that more business is done on the golf course than in the boardroom. It’s not a matter of trumping up your expenses and paying for them through your business.
It’s that many of the expenses that you are paying for personally are reasonable and necessary for your business to operate. These expenses can and should be paid for or reimbursed by your business.
Here’s the secret that can save you $10,000 or more each year. The deductibility of many of your expenses isn’t a function of the expense item itself. Rather, it’s a function of the circumstances surrounding the expense. For example, if you ask your tax professional if you can deduct a pizza, they’ll probably immediate say “no” (and they may give you a funny look or two). Yet the fact is that there are three distinct ways of handling this expense.
1. If you purchased the pizza for a working lunch for your staff, it’s 100% deductible.
2. If you take a prospect to lunch and discuss business, its 50% deductible.
3. Lastly, if you shared that same pizza with a friend or family member and did not discuss business, it’s not deductible at all.
By applying this same technique to all of your personal expenses, you will find many that can be converted into legitimate business expenses. The key here is to first identify the business expenses that you are paying for personally (have someone “in the know” go through your personal credit cards, debit card, checkblog and cash expenditures).
Then, determine which ones can and should be paid for by your business. Depending on your income, this strategy can increase your deductions by as much as $75,000 (a year which results in an annual tax savings to you of about $20,000-$25,000 or more for as long as continue in business).
Having covered these basic deductions, let’s discuss some more advanced strategies that can reduce your taxes and protect your assets. Each of these has been around for decades and has received the blessing of Uncle Sam.
Energy Tax Credits To encourage the development of alternative sources of energy, the government gives tax incentives for projects such as solar, wind and clean coal energy production. An investment in such a project can provide taxpayers with passive income and at the same time save them about $1.30 for each dollar invested in the project.
E.S.O.P.s In order to encourage business owners to “share the wealth” with their dedicated employees, Employee Stock Ownership Plans were created. They are established as employee benefit plans that give employees a stake in the company. At the same time, they provide the owner with a built-in exit strategy and can put the entire company in a tax-free structure. They work best for companies with 50 employees or more.
Captive Insurance Business owners often have insurable risks that are impractical or not cost-effective to ensure through the normal property and casualty companies (for example, very specialized doctors such as a neurosurgeon, commercial real estate owners, heavy equipment companies, companies prone to cyber-attacks, etc.).
You can set up your own private insurance company with premiums up to $1.2 million. These premiums represent deductible expenses to your core business and a rainy day fund should disaster strike. At a later date, usually three to five years down the line, any unneeded reserves can be returned to the owner at the lower capital gains rates.
These are just a few examples of the strategies available to you to protect your business and keep your taxes to the legal minimum. They’ve been around for many years and when done properly, they are not risky. What we have done is to take the strategies that billionaires have been using for decades and make them available to millionaires and future millionaires. In fact, we regularly see clients cut their taxes in half, or better.
Don’t fire your C.P.A.
Early in my career, I thought there was a big failing on the part of the accounting profession, particularly on the part of my family’s C.P.A. Growing up in a family business gave me some knowledge about business and finances. Yet, I rarely heard any discussion about tax strategies.
When I started my law practice I was surprised and frustrated at the lack of tax planning by my advisor. In fact, I often felt like my C.P.A. was working against me. My office was located in a suite of accountants and tax attorneys and I would often pick their brain. If my accountant told me something was not deductible, I would ask one of my colleagues. Invariably I would get a different answer. If I asked three colleagues the same question, I would likely get three different answers and so on.
Then I began to hear news stories of wealthier business owners paying extremely low percentages in taxes. It was reported that people like Donald Trump and Bill Gates were paying less than 10%. I was still paying between 30% and 40%, even though I was making far less money than them. Obviously, I began to wonder what my CPA was doing wrong that was causing me to pay several times my fair share.
Tax Compliance vs. Tax Strategy
The answer lies in understanding the difference between tax compliance and tax strategy. The overwhelming majority of tax preparers (C.P.A.s, accountants, or tax franchisees) focus on compliance, not strategy. For example, they know which form to file and by when. They know what schedule to use and on what line number the item is reported. This is an important and daunting responsibility.
The tax code is a huge body of law (approximately 75,000 pages long), yet there’s more to the tax code than the statute itself. There are levels of interpretation of tax law from revenue rulings, private letter rulings, case law and audit guidelines to be followed that can impact the deductibility of an expense. Now add the fact that the IRS has effectively deputized your accountant as part of the “tax police”. So, if you thought that accountants were a conservative group of people before the added scrutiny, just imagine how cautious they are now.
Your current tax professional isn’t enough You’ve already got a tax preparer on your team; now you need a tax strategist. Without one, you are likely paying twice as much in taxes as you need to. This accumulates year after year, so unless you do something proactive about it, the situation will continue to get worse. So far, we’ve focused on saving you more of your hard-earned money, now let’s look at protecting it from creditors and predators.
Entity Structuring for Asset Protection
Corporations in their various forms were created for one primary reason: asset protection. Historically, business failures often resulted in the loss of money and loss of life. For example, if a cargo ship carrying supplies to a foreign country sank, the cargo and crew were both lost. Not only would the owner of the vessel lose his investment, but the grieving widows and families could sue for the loss of their loved one and the income he produced. Corporations were created to legally limit this liability.
Today, there are “C” corporations, “S” corporations, Limited Partnerships, LLCs and their cousins PLLCs and LLLPs.
If you started your business more than ten years ago, you were probably told by your C.P.A. or family attorney to operate as a sole proprietor - which provides no asset protection - or to set up an “S” corporation. More recently, you were steered toward an LLC “because they are better than “S” corps”, but you probably were not told what makes them better. Why?
The fact is that there is a lot to consider when choosing your business entity. For example, is the business generating active or passive income? Does it rely primarily on a single asset to generate that income (such as a rental property)? Is the activity inherently risky (for example, certain assets that generate income, job sites, income streams, etc.) Also, tax and liability laws differ from state to state, so you have to navigate varying state laws. Unfortunately, most mainstream attorneys and CPAs do not fully understand this topic.
I approach entity structuring in layers. This gives me maximum flexibility to start small and add to your structure as your business empire grows. Each entity, and each layer serves a distinct purpose. The different entities and layers must be made to work together, as opposed to being independent of one another.
The result is maximum asset protection, and tax savings.
Winners think differently than others. They make sure that they are structured to win. In business, this means that you control everything while owning nothing. That is to say, you should have few or no assets in your personal name. They should all be protected by the proper kind of entity.
Structured to win what?
Business is a battle. Every day, you are battling for customers, for market share, for profitability for recognition and security. You are also battling against lawsuits, intellectual property infringement, internet slander, excessive costs (including taxes), embezzlement and frivolous claims. You must play to win these battles.
The best way to win a fight is to avoid it altogether. Yet, this is not always possible. So the next best option in business is to structure yourself so that your adversaries learn early on that they cannot beat you so that they sound the retreat before wasting your time and resources.
Business people typically don’t look for trouble, but often it finds them. Let’s face it, you are doing business with the public and the public is litigious. Bad stuff happens - that’s real life. By structuring yourself to win, you can minimize the damage, avoid some problems altogether, dramatically reduce your income and estate taxes and provide financial security for yourself and your family.
A proper structure is your best defense and your best friend. The first step is to separate your personal assets from your business assets. The next step is to separate your different business assets from each other. On the personal side we use things like trusts and family limited partnerships to accomplish this. On the business side we use limited liability companies (LLCs), corporations and limited partnerships to do so.
Keep in mind that asset protection is not a “set it and forget it” proposition. As things evolve, you will acquire new assets and sell off others. Your entity structure will have to be updated.
Let’s look more closely at the different types of business entities. Pay particular attention to their practical application.
Sole proprietorships are actually non-entities because there is no legal distinction between you as a person and you, the sole proprietor. They are the simplest type of business to set up; perhaps this is why they are the most popular. There are no formal requirements; basically, you just start doing business. You may or may not even wait to get a business card or website.
Just decide that you are in business for yourself and away you go. Sole proprietorships have a calendar year (January 1 through December 31) and their income and expenses are reported on your personal tax return (Schedule C of Form 1040).
The problem is that sole proprietorships offer no asset protection at all. Legally, you and the business are one in the same. So a claim against your business automatically results in a claim against you. As a result, your personal assets including your home, automobiles, and bank accounts can all be attached in the event a judgment is entered against you. This may even be the case if you didn’t know about the lawsuit and a default judgment is entered against you. Sole proprietorships are a risky way of doing business.
Never do business as a sole proprietorship. They give you no protection and can be tougher to defend in a tax audit. Don’t be penny wise and pound foolish. Incidentally, filing a fictitious name certificate, otherwise known as a “DBA”, does not help. A DBA is simply another name (like a nickname) for the business. It offers no asset protection or tax benefits.
A general partnership is also simple to set up. The law defines them as the association of two or more people who get together for the purpose of making a profit. Again, there are no business filing requirements, annual fees or forms to fill out. Most people form general partnerships without even having a written partnership agreement.
This is insane. Partners fail to realize that in business there are always challenges and disagreements and the partnership agreement can provide a roadmap for navigating these difficulties. Without this roadmap, you are virtually condemning yourself to failure.
In terms of asset protection, a general partnership is the riskiest form of business. In a sole proprietorship, your business risk is at least limited to your own negligence or wrongdoing. In a general partnership, your partner’s bad conduct can bring you down as well. You might be completely innocent, but you are legally joined at the hip and therefore equally responsible for any claims.
Plus, there is a legal doctrine for partnerships known as joint and several liabilities. This basically means that the plaintiff can choose to enforce a judgment against the assets of either partner or both partners. If there are multiple partners, the plaintiff can pick and choose. So, for example, if you have $1 million cash in the bank and your partner has no assets, the judgment creditor can enforce the entire judgment against your assets alone, even if you did nothing wrong. This is another example of why quick and easy is not a good approach in business.
Corporations are the first kind of entity that gives you the needed legal separation between the business and interpersonal life. They are separate from you, the business owner. Legally, it’s almost as if you created a separate being when you set up the corporation.
One type of corporation is called a regular corporation or “C” corporation. Assets owned by the corporation fall under its protection. Income to the corporation is reported separately from your personal income (on form 1120). This means it’s a separate taxable entity. It can be run on a calendar year basis or it can have its own fiscal year. It may have one shareholder (you), or it may have many, even thousands, of shareholders. Only a “C” corporation can be publicly owned.
In addition to filing its own tax return, a “C” corporation may retain earnings. Unlike other business owners, they operate either on a calendar basis or on a fiscal basis. There are also certain business deductions that can only be taken through a “C” corporation.
“S” corporations are so-called because they were created under subblog S of the tax code. They start off as “C” corporations and are converted to “S” corporations through simple tax election by filing IRS form 2553. I think it would be expected from an attorney and gives a good foundation of believability and authority.
Like “C” corporations, “S” corporations are separate legal entities. However, the most distinguishing factor is that they are what is known as flow-through entities. This means that any profit or loss from the “S” corporation is reported on your personal tax return. Almost all “S” corporations operate on a calendar year - January 1st through December 31st.
“S” corporations are still a very popular form for startup businesses. One reason is that many new businesses lose money during their first few years of operation. So, the flow-through feature allows the owner to offset their other taxable income by any loss they have in the “S” corp. So, for example, if you made $100,000 in salary but your “S” corporation loses $30,000, your gross income would be just $70,000 that year.
Limited partnerships have been around for a long time. They were originally designed as a means of separating the money partners from the management of the business. This would allow an entrepreneur to raise operating capital by bringing partners on board, while at the same time maintaining total control of the operation of the business.
These were very popular with real estate projects because they allowed large amounts of money to be raised to purchase the property or building without the sponsor losing control. Limited partnerships have two types of participants, limited partners, and general partners. The difference between the two is a matter of allocating risk versus control.
The investors are known as limited partners. The risk of the limited partner(s) is limited to the amount of the money they invested in the partnership. So, for example, if the limited partnership issued for $1 million and each limited partner has invested $200,000, then the maximum risk each partner assumes is limited to their $200,000 investment.
A creditor cannot force them to come out of pocket for the balance of the judgment. Limited partners have no voting rights in the business or its operation. All of the decisions are made by the general partners.
General partners have all the authority. They are responsible to make the day-to-day decisions of the company. They also carry all of the financial risks on their shoulders personally. So back to our earlier example, a million-dollar lawsuit and three limited partners each with $200,000 in the partnership. This leaves a $400,000 shortfall.
The general partner will be personally responsible for the $400,000. Barring extraordinary measures, the personal assets of the general partner (including their home, cars, and bank accounts) can all be attached to satisfy the judgment. Yet, even this liability can be protected against by making the general partner a corporation. That way, only the assets of the corporation can be seized by a judgment creditor. The personal assets of the corporation’s owner remain safe.
Limited Liability Companies (LLCs)
LLCs were initially created in the 1970s and are powerful both in their asset protection features and flexible for tax purposes. On the tax side, they can be treated in one of three ways for tax return purposes. LLCs are initially taxed as “disregarded entities” which means that they are ignored for tax purposes. Any income or loss is reported on a partnership return which flows through to the owner’s personal tax return.
Alternatively, the owner may choose to have the LLC treated as a “C” corporation for tax purposes. In that case, any income or loss would be reported on form 1120; you can choose to operate it on a fiscal year and the other tax treatment of “C” corporations would apply as well. The other option is to elect to have the LLC taxed as an “S” corporation, in which case those tax rules would apply.
So what’s the big deal about LLCs? Well, one initial benefit was that the requirement for keeping up with corporate formalities (in other words written corporate minutes, resolutions, etc.) was dropped in the LLC statutes. However, the IRS has effectively overruled this by requiring all such documentation in the event of an audit.
Nevertheless, LLCs are still my ‘go to’ entity. That is because of something called the charging order. The charging order only applies to LLCs and limited partnerships (not corporations or general partnerships). The charging order is an incredibly powerful tool for business owners yet it is virtually unknown in the business world and under-appreciated by the professional community.
If your corporation sue and you lose the case, the result is a judgment against the corporation. In the case of an LLC, the judgment must be converted into a charging order by the court. That order effectively makes the judgment creditor a quasi-partner of the LLC. So far, this doesn’t sound so good. However, your new quasi-partner has no voting rights so you still have full control of the business operations.
The real benefit shows up at tax time. You are still in full control of the LLC and can choose not to distribute the profits of the business. Nevertheless, you can issue a K-1 to your quasi-partner for their undistributed share of the profits. This results in a tax obligation without the offsetting benefit of the cash distribution. In other words, the creditor gets taxed on the money even though they received nothing. Keep in mind; you will still be able to access your share of the profits through other means.
Here’s how it plays out in practice.
Remember my earlier story about Jeremy in the lawsuit brought by a female an employee against the manager? At the negotiating table, what we were able to show the young lady is that even if she won a judgment of $1 million she would never get a penny of it because Jeremy, as the manager of the LLC, would simply opt not to distribute profits. At the same time, she would get a K-1 for the paper profits of the company which would result in a tax liability.
If the paper profits were paying $1 million, she’d have a tax liability of approximately $400,000 even though she got no cash from my client or his business. Obviously, this is an un-winnable situation for potential judgment creditors. As I said earlier, the only thing better than winning a lawsuit is avoiding one altogether. Score a victory for the good guys. This is why, as your net worth and entity structure grows, you must have one or more LLCs in your structure.
LLCs can have one owner (single-member LLCs) or multiple owners (multi-member LLCs). Because the charging order is such a powerful tool, in recent years, some states have determined that single-member LLCs are not entitled to charging order protection. Currently, these states include California and Florida. The workaround is simple enough. You may already have a business partner or you could add your spouse or child as a partner. Alternatively, your main LLC could be owned by one or more other LLCs.
Other types of entities: Professional Corporations (P.C.s)
P.C.s are a special type of corporation reserved for professionals, typically doctors and lawyers. They can be treated as “C” corporations for tax purposes or you can file the S election to have the corporation treated that way. There are also professional associations, professional limited liability companies, (PLLCs), Limited Liability Partnerships (LLPs), Professional Limited Liability Partnerships (PLLPs), Serial LLCs and International Business “S” corporations (IBCs). Each of these can have its proper place in an entity structure.
Structuring Yourself to Win
Now that you’ve got a basic understanding of the different kinds of business entities, let’s look at how you can make them work for you. The two primary purposes for having a business structure are asset detection and tax savings. The fact is that you can go into business without a formal business structure.
Many lawyers and CPAs recommend that their clients postpone setting up an entity until the business is profitable. “After all”, they reason, “why spend the money on a corporation when you don’t know that the business is going to make it?” While there is some cost saving benefit to this advice, I would err on the side of caution. Establish your corporation sooner rather than later.
A professional football player would not go into the game without his helmet and shoulder pads. Although cycling isn’t much of a contact sport, even a cyclist wears a helmet, gloves, and protective eyewear. Business can be a battle, and business entities are your protective gear. Setting up the proper structure early in the life of the business tilts the odds in your favor.
Without a protective structure, it’s you against the world completely unprotected. Legally speaking, you and your businesses are one and the same. A judgment against the business can be enforced against your personal assets. That is to say that your savings, your home, bank accounts, etc. can all be attached by judgment creditors. These could be clients or customers or even business vendors.
The same rules apply to a judgment against you or a member of your family. If your teenage son gets into a car accident on Friday night, you and your spouse will be dragged into the fight. The resulting judgment can be enforced against your personal assets and your business assets. In fact, the more successful you are, the bigger the target you represent. Your success will give you “deep pockets”. Your successful business, and therefore your livelihood, is a big target for creditors to go after.
Start your Structure
Your first entity is likely to flow through for tax purposes, either an “S” corporation or an LLC. My ‘go to’ entity is the LLC because of the added asset protection of the charging order and the flexibility for tax planning. But they don’t work in every situation.
At this point your simple entity structure might look like this:
You’ve taken the important first step; you have separated your personal assets from your business assets. Now, a problem with your business won’t wipe out your personal assets and vice versa. Instead of being completely unprotected and vulnerable to creditors, you’ve effectively put a 10 foot high, 10-foot thick wall of protection between you and the bad guys.
Multiple corporations for added protection
Take a trip to your favorite ski resort. Look past the beauty of the snow covered mountains, beyond the luxurious hotel, enjoyable food, great ski shop, and private ski lessons. From an entity perspective, what you would see is that the hotel is in one corporation, the restaurant in another; the ski shop has its own, as does the ski school. On the mountain, each chairlift is probably held in a separate entity and the mountain itself is in multiple limited partnerships.
I think of asset protection in terms of layers. This allows my client's maximum protection and flexibility. I can increase their entity structure as they grow financially. At first, you’ll have one layer, and probably just one or two entities. As your income and net worth grow, we’ll add an entity and a second layer.
There is a concept in the law called privity of contract. Basically, this means that in the business context, no one can sue you unless they have a contractual relationship (privity) with your company. Your management company sits outside of that contractual relationship which makes it difficult to sue. Also, you may want your management company to remain private. For that reason, we could set it up as an out-of-state entity. Also, it will not have a website, nor will you print business cards for it. It is primarily for management and asset protection purposes.
It is likely to be “C” corporation for several reasons. First, “C” corporations can elect to be taxed on a fiscal year basis instead of using the calendar year. We can leverage certain tax strategies by setting your management company’s year-end on a date other than December 31st. Also, there are certain deductions that can only be taken with a “C” corporation.
Keep in mind that your core business (LLC) is fortified by the charging order and now you’ve added a second layer of protection with your management company. These multiple layers of asset protection are the key to you protecting yourself and your family. As you add multiple streams of income and your net worth increases, we may add additional entities.
Family Limited Partnerships
Known as “FLPs”, these are simply limited partnerships where the only participants are family members. FLPs are the final layer of asset protection, sometimes referred to as the “umbrella” entity. They should be used in conjunction with your living trust. Effectively, the trust provides the asset distribution plan while the FLP provides the asset protection. Properly used, they also have a powerful, though underappreciated estate tax planning function.
There are various kinds of trusts that can be used in your entity structure. for example Dynasty trusts, intentionally defective trusts, life insurance trusts (ILITS), and trusts with funny names like Crummey trusts and Grantor Retained trusts (GRITS, GRATS, and GRANTS). One or more of these trusts may have a place in your comprehensive entity structure.
Each client’s entity structure will be unique based on his goals, assets, income, values, and desires. Our approach is designed to maximize your asset protection while minimizing your income and estate taxes. Entity structuring and tax strategies are not a “do it yourself” project; they are properly left to capable professionals. Make sure to make such professionals part of your team so that you are “Structured to Win”.
What You Need to Know Before Investing in Gold and Silver
Throughout recorded history, the rewards of investing in gold and silver have been proven time and time again. I invite you to learn more about one of the most important asset classes of all time. It’s my opinion that physical gold and silver should be a critical part of a solid wealth strategy. In this blog, I will clearly explain the reasons why this is a very prudent course of action.
To begin, let’s first take a look at some of the reasons you should consider adding physical gold and silver to your portfolio.
Why Consider Gold and Silver as an Investment Option?
Anytime you make an investment, there is always a risk of capital loss. So it’s always wise to evaluate the risk/reward factors of any investment before diving in. The risk/reward factors for gold and silver are unmatched.. Throughout the rise and fall of the greatest empires, this world has ever seen, precious metals always kept their purchasing power as a solid value.
Why Haven’t I Heard More About Investing in Precious Metals?
You may be asking yourself this question, “If gold and silver are such great investments, why don’t more people own bullion and why hasn’t my investment advisor encouraged me to invest in them?” Good question. After all, it’s estimated that only about 2% to 3% of Americans own any form of precious metals bullion. Interestingly, many Eastern countries have much, much higher levels of bullion ownership per capita.
There are many reasons for this but one big reason is that the traditional “paper” investment options like stocks, bonds and mutual funds, ETFs, Treasury notes, Forex markets, etc. make up the gigantic majority of the investment capital in the world. When you compare the amount of available, investable physical gold and silver in the world, to the total value of all the “paper” investment options in the world, gold and silver looks like a fly on an elephant.
The key to finding out “why” is to follow the money trail. The giant global brokerage houses and mega banks make billions in profits by selling these traditional paper investments and the majority of them don’t offer physical metals at all.
The chances are good that your investment advisor or broker does not offer physical precious metals as an investment option. If they suggest you buy them, they will not make any profits on your metals purchases or future commissions on the portion of your invested money that you shift to metals. It’s a lose-lose situation for them to suggest that you buy physical metals.
For newer advisors, they typically don’t even realize this other world of real assets even exists because they are pushed through a cookie cutter training program that brings everyone back to an overpriced / incorrect insurance plan. The key point here is to do your own research and make your own investment decisions based on the facts and do not allow yourself to be swayed by the mass investment media or self-serving investment advisors.
Physical Precious Metals vs. Paper Gold and Silver
It’s important to understand that there is a HUGE difference between the actual physical, hold-in-your-hand gold and silver, and any “paper” gold and silver investment. Many traditional investment advisors will try and convince you that paper metals investments are not only the same thing, but that they are actually better than dealing with all of that bulky physical metal.
They will try to steer you to precious metals stocks, ETFs, mutual funds, mining stocks and funds, metals certificates, leveraged positions, and more. Often they will claim that’s all you need to do to become diversified into gold and silver. Plus, you don’t have to worry about shipping and storing these “paper” forms of metals, so they are much easier to deal with and much quicker to buy and sell. This all sounds so nice and easy, doesn’t it? That’s why most people invest in paper metals.
I encourage you to take a moment and think about this. All of these other forms of investments are “paper” investments. The entire idea is to truly diversify and actually get the real, honest to goodness, hold-in-your-hand physical gold and silver. If or when we have the next stock market crash, most if not all of these paper investments will likely get caught in the selloff downdraft and their values will fall. What will happen to all of these “paper” metals investments if the U.S.
Dollar were to crash or collapse? After all, their value is backed by the dollar. If the dollar crashed, so will the values of these paper investments. My advice is that if you want to invest in stocks, bonds and other paper investments then do so. But if you want to buy gold and silver, then buy the real thing. Voltaire got it right in the 1700s when he said, “Paper money eventually returns to its intrinsic value - zero.”
Basic Precious Metals Terms
If you are new to precious metals investing, it’s important to be familiar with a few basic industry terms. Let’s take a look at some of the most common and important terms.
Bullion: This is usually the most misunderstood term. Some think of bullion as pirate treasure or giant bars of gold. The term bullion is used to describe gold, silver, platinum or palladium coins, bars, ingots or wafers which directly follow market spot prices and have known amounts and purities of the respective metal.
Spot Price: This is a key term that is critical to know. Spot price is the current, real-time market price of the precious metal, determined by the latest trades on the futures market as well as the over-the-counter markets. Thousands of websites around the world display the current spot prices of precious metals. When you buy or sell precious metals, the price is always based off of the current spot price. Spot price is a global price and it changes moment by moment.
Margin or Premium: This is one way to purchase paper metal. (It does not apply to buying physical metal). To buy or sell a futures contract, each party or side of the transaction must put a “down payment” on the futures contract. The contract is held by an independent central clearer. With your deposit, the central clearer “guarantees” the balance of the contract, promising to either party their potential profit.
This is like purchasing the right to collect on the profits of an order of precious metals without having to buy the metal outright. The percent of risk is magnified because a small drop in spot price could force the buyer out of their paper metal position. Margin percentage requirements are set forth by the COMEX.
Spread: This applies to physical metal transactions. It is the difference between the selling price and buying price of a specific metals product. If a vendor sells Silver Eagles at $6 over spot price and offers to buy them for $4 under spot price then they have a spread of $10. The smaller the spread, the better off the consumer stands when doing business with a vendor.
Premium: These terms are used to describe the difference between spot price and what the actual price is for a specific kind of gold or silver. For example, a 1oz U.S. Silver Eagle made by the United States Mint is easily recognized and guaranteed for its weight and purity. However, a 1oz generic bar of silver made by an unknown refinery would be unfamiliar and not guaranteed after it is in circulation. So naturally, the Silver Eagle has more value and therefore, a higher price.
Other things to consider would be the size of the metal. Also, generally speaking, the smaller the piece of metal is, the higher the premium will be. It is much easier to create a single 100 oz silver bar than it is to create one hundred 1oz bars. Premiums will follow suit as well. Factors for the metal Premium can include the costs of fabrication, distribution, supply/demand factors, broker/dealer fees and desired profit from the dealer.
Troy Ounce: This is the traditional unit of weight used for precious metals.
Fiat Money: Paper money or currency that is made legal tender by government law. Fiat currency is not backed by gold or silver.
Legal Tender: This is a coin or currency that is identified by a government to be an acceptable form in the discharging of debts within that country.
Mint: A place where coins or bars are manufactured. There are government mints and private mints.
Numismatic Coins: Precious metals coins that hold some collectible value are deemed numismatic. This is a broad term and its definition is unclear. Technically, a U.S. Silver Eagle is a numismatic coin as soon as it’s made. It is both bullion and numismatic. The law that created the production of these coins even defines them as both numismatic and bullion.
A numismatic coin’s price consists of not only the precious metal’s content but also commonly depends on their rarity, condition, production dates, historical significance, mint marks and beauty. Because of these factors, more valuable numismatic coins are often encased in clear plastic “slabs” for preservation and given a “grade” or score by Numismatists. The coin would be considered a numismatic coin before and after the grading process.
Ask Price: The price at which a dealer offers to sell precious metals items to you.
Bid Price: The price at which a dealer offers to buy precious metals items from you.
Rounds: A round is a metal disk made of precious metals usually produced by a private mint. They are not intended to be used as money nor legal tender. They are struck with various images on the coins, are different sizes than legal tender coins and the weight and purity are not guaranteed by a government. Rounds generally carry less of a markup premium than legal tender, the government issued coins.
Junk Silver: A term used to describe a bag of pre-1965 U.S. coins containing 90% pure silver. The coins have been circulated as currency thus the bags will not typically contain rare coins. They are sold in bags based on the total face value of the coins within the bag. A “bag” of junk silver is jargon for $1,000 face value of dimes, quarters, half dollars and/or dollar coins. A half bag would be $500 face value of the coins in the bag. Because the amount of silver in the coins is already known and easily traded, it is not economical to melt the coins just to be in another shape / purity.
Assay: A test to determine the quality and purity of a gold or silver product. When a gold or silver product has an “assay” test certificate, this is a guarantee from the assayer that the product in question does indeed contain the described amount and purity of gold or silver.
Why Precious Metals are a Critical Part of a Solid Wealth Strategy
Liquidity As long as you buy the right forms of metals, physical gold and silver are very liquid. It’s so easy to call up a broker and lock in a buy or sell price for any quantity of bullion, and place your order. For a non-paper investment, precious metals are one of the most liquid investments you will find.
Precious metals are perhaps the world’s most liquid asset and they are traded throughout the world. I have an acquaintance that travels the world. He used to carry pockets full of cash on his trips. Now he carries 1oz Gold Eagle coins. He tells me he can walk into most any bank in the world, place the Gold Eagle coin on the counter and receive the approximate market value in any currency he wishes. Gold truly is the world’s form of money.
It’s true that unlike selling a stock or mutual fund on the phone or online, you do have to get the metals shipped. Many people who sell paper assets tend to make a big deal out of the shipping issue. Actually, it’s really not that big of a deal. It’s amazing how many tens of millions of dollars’ worth of gold and silver are shipped every day by FedEx, UPS, the U.S. mail and by other shipping methods.
It’s also hard to beat gold and silver’s flexibility. You can buy and sell gold and silver from the other side of the planet with a click or a phone call, and you can also buy and sell it from individuals and small local shops right in your home town. You can use metals for trade, and buy and/or sell them to anyone you wish, at any time you wish. Try doing that with a stock or mutual fund.
Portable Gold is a very portable form of wealth. Many people are shocked to discover that, if you had some good size pant’s pockets, you can put a half million dollars’ worth of gold in your pant’s pockets. You can put millions of dollars’ worth of gold in a brief case. If there comes a time when you need to grab as much wealth as you can, with short notice, and take off, gold is not a bad way to go.
Silver on the other hand, is quite a bit more bulky and less portable from a dollar value standpoint. I have a friend who always travels with his special belt. The belt has 1/4 ounce Gold Eagle coins sewn into it. If anything was to happen to him and he was to lose his wallet and his credit cards, etc., his plan is that he has enough gold in his belt to buy an inexpensive car or whatever he needs to get back home.
Creditable Some people call gold and silver global money. If you have the right forms of gold and silver, you will find that it is accepted practically anywhere in the world. Gold and silver are so creditable that they were officially recognized in the U.S. Constitution which states; “No State shall make anything but gold and silver coin as tender in payment of debts.”
Privacy Privacy is one of the big reasons so many wise investors choose to buy these shiny metals. They’re some of the most private forms of wealth available. If you buy certain types of coins and bars in the United States, there is absolutely, positively no reporting required at all. That goes for when you purchase the metals and when you sell them. Additionally, for certain items, the quantities that you can buy and sell them in without having to be reported are completely unlimited! This is a HUGE benefit and if privacy is important to you, you will love this.
There are certain types of coins and bars, and certain quantities of coins and bars that can be bought and/or sold that DO have to be reported to the government. For these certain items and quantities, the broker/dealer whom you are buying or selling the coins from is required to complete the IRS form 1099-B with the person’s name, address, social security number and more.
They send a copy of that same form to the Internal Revenue Service. Clearly, when you have to report the sale of your metals, your transaction is no longer private. For many investors, it’s very important to know exactly which forms and quantities of metals are able to be kept private.
You will find many metals’ broker/dealers who will not tell you the entire story on this and suggest that if you do not buy numismatic coins, you have no privacy when buying bullion. This is simply not true. If you purchase the right types of bullion, in the right way, bullion can be as private of an investment as you will ever find. For more information on this and a detailed list of exactly which types of metals are private and which ones are not, please visit our website.
Tax Advantages (This tax information applies to United States citizens only. Contact your accountant to verify if the information is valid for you.) A great aspect of owning precious metals is that you never have any capital gains or losses until you actually SELL your precious metals. You can hold your metals for decades with no reporting required.
You can even have huge “paper” gains and huge “paper” losses during that time. But it’s not until you actually sell them, that you then realize a gain or a loss. You do have to pay short-term or long-term capital gains income taxes on your gains, depending on how long you held the metals before selling them. Or, if you happen to have a loss when you sell your metals, you may be able to deduct the loss on your income taxes.
It’s up to you to report your capital gains or losses on your tax returns. It is not up to the broker/dealer from whom you bought the metals to report it. Since you can buy your metals from one dealer and sell to a different dealer or individual, the dealer who sold you the metals would have no knowledge of previous or future transactions. Again, you should always consult a qualified tax advisor on matters pertaining to investing and taxes.
When selling your metals, the broker/dealer who is buying the metals from you will be required to complete IRS form 1099-B for certain types and quantities of metals sold. Some Key Factors That Impact the Performance of Gold and Silver High Inflation or the Fear of High Inflation
Gold is widely known as one of the best hedges against inflation. Inflation is the loss of the currency’s purchasing power. Gold often rises as inflation rises. As inflation rises, the value and purchasing power of your paper fiat dollars go down, but the value of your gold often goes up. Many investors seek a hedge to protect them from the inflation, and often turn to gold and silver. Historically the additional demand created during inflationary times often makes metals prices go even higher.
The Federal Reserve has kept interest rates at artificially historic lows for years. Even if the next move turns out to be deflationary, many experts believe it will be short lived and that inflation will be the next big wave. To me, common sense tells you that if the Federal Reserve has kept interest rates at historic lows for this long and if there is no room for rates to go much lower, and if we know they will not stay this low forever, then it seems pretty easy to guess which way they will have to go eventually.
It would not be surprising if at some point, rates spring up rapidly and possibly over correct to the upside, as they seek market equilibrium. If this scenario were to happen, history tells us that it would be bullish for metals prices.
A Decline in the U.S. Dollar and/or Other Major World Currencies
Any educated and honest person will have to admit that at the rate we are printing greenbacks, eventually, there is no way the dollar can do anything but decline in value. Our government is clearly out of control and printing and spending money as if there were no concerns. If the dollar declines in the future, history usually dictates that gold and silver prices will eventually rise.
In modern times, we have NEVER had the world’s reserve currency hyper-inflate or collapse. If either of these scenarios were to happen, no one really knows how the global impact would play out, but some experts predict that the effects would be terrible.
Sharpening Rising Interest Rates
Similar to inflation, gold and silver prices tend to increase as interest rates rise, although not always. A popular belief among some investors is that hikes in short-term interest rates have a tendency to halt inflation. Historically this scenario has not played out. Higher interest rates are inflationary because they raise the cost of borrowing and the overall cost of living.
The Federal Reserve can’t keep interest artificially low forever, and they have no way to go but up. At some point, interest rates will have to go up and when they do, they will likely cause the metals’ prices to go up as well.
Global banks are a critical component to our world economy. Our global economy has become so connected, when a major World Bank fails, it sends shock waves throughout the world. When banks fail, people lose faith in the system and often turn to the safety and security that gold and silver offer.
What Percentage of Metals Is Right for Your Portfolio
Deciding how much of your investment portfolio to put towards precious metals is always an interesting question. It always comes down to personal preference. There is no one percentage that is right for everyone. To give you some guidelines or averages, I would say that the typical range is from 5% to 20%.
I do know some investment advisors who work with high net worth clients and lately, they have been advising clients to place as much as 40% of their assets into physical precious metals. For many, that would be somewhat extreme, but this gives you an idea of a range of investible assets that some investors are putting into precious metals.
It’s important to first know your reasons and motivations for investing in precious metals and of course, your investment timelines. Precious metals’ can experience some pretty intense price swings. I would not look at metals as a short-term investment. For most people, it would be good to have at least a 3 to 5 year planned hold time or more.
The great news is, as discussed earlier, gold and silver are very liquid so it’s easy to ramp your percentage of metal holdings up or down as needed. My suggestion is not to get hung up on the percentage you plan to invest in metals. If you don’t own any precious metals, buy some and see how it makes you feel. It’s much more important that you get started and do something; you can always adjust as you go along. Don’t get stuck with the paralysis of analysis.
As you know, investing is a very personal thing. Everyone’s needs want, investment time frame, tolerances’ for risk and price changes are different. The important thing to know is that investing in precious metals is not always a steady, smooth-sailing program. The market occasionally experiences some pretty wild price swings within relatively short periods of time. Sometimes investing in metals can be like the white-knuckle express.
Metals’ prices are driven by a large number of influences such as global usage, huge purchases and/or sales made by countries, banks, investment firms, and wealthy individuals, global unrest, world events, worry about currency stability and changes in the value of the U.S. dollar, metals’ supply forecasts, changes in government policies, interest rate changes, wars, terrorist events and much more. As you can see, most of these factors are totally unpredictable, at least in the short-term.
In my opinion, if you have somewhat of a long-term outlook, you should simply not worry about the short-term price swings. There will always be unforeseen events that will cause metals’ prices to spike one way or the other. By far, the most successful investors I know simply don’t worry about all of the “noise” of the short-term moves.
Most of them simply accumulate metals on a consistent basis. When the price drops, they use that as a buying opportunity to increase their purchases. When prices unexpectedly spike up, they often take advantage of the gift the market has handed them and at least take some profits on their windfall gains by selling a portion of their metals and then buy back in when the price takes another dip.
If you have the right mindset about it, instead of being stressed out about the short-term moves, you can actually relax and enjoy trading in and out on big market moves. It’s all in how you look at it really. However, if you have short-term investment needs or if your personality cannot deal with these types of price swings, then perhaps metals are not a good fit for you.
The last point I will make on this is if the worst-case economic scenario were to happen to our currency, our banking system, and the entire economy, there will be thousands of investors who will look back and say, “Thank God I invested in precious metals,” and it’s very likely that when looking back at those short-term price swings, they will look very minor indeed.
Gold vs. Silver - Which Is the Best Investment?
This is the classic question that always comes up, “Is gold a better investment than silver, or does silver trump gold?” As you may guess, this is a personal decision and everyone has their own preferences. To help you decide which metal is best for you, let’s take a look at some facts.
So in terms of supply and demand, silver is a better bet. In terms of storage and size, gold is a logical choice. Now, to examine this further, let’s take a look at the silver/gold ratio.
Silver / Gold Ratio
The silver/gold ratio is a great way to measure historical price differences between the two metals. Going back thousands of years, the average historical price ratio between silver and gold has been 16 to 1. (Some research shows that it is a 12 to 1 ratio if you go back far enough in history, but we will stay with the more conservative 16:1 ratio.)
What this means is that it would take 16 ounces of silver to equal the price of one ounce of gold. As I am writing this, the ratio now stands at about 58 to 1, meaning that it now takes 58 ounces of silver to equal the price of one ounce of gold. If the ratio were to get back to its historical average of 16 to 1, the price of silver would have to increase by over 360%.
Another aspect to consider is that silver is often called poor man’s gold. The reason for this is since gold costs so much more, smaller investors cannot afford to buy gold, thus they turn to the more affordable silver. There are huge numbers of these smaller investors who are now turning to silver in a big way.
Today, the government’s gold reserves would only cover a tiny fraction of the debt that they have created and they are in desperate need of huge sums of capital to maintain their power. It’s not hard to imagine that the privately held gold and silver reserves of its citizens and corporations have got to look pretty tempting to them. (Yes, some think that the capital need is so great that they would not only try to confiscate the gold but the silver as well.) After all, the laws they would need to do this are already in place.
You can draw your own assumptions about any possible confiscation that may or may not happen in the future. What we do know for sure is that the government has confiscated gold bullion in the past. There is also a precedence of the government allowing its citizens to keep their collectible coins. What may happen in the future is anybody’s guess.
Value and Appreciation of Numismatic Coins Years ago the Joint Committee on Taxation of the House and Senate commissioned a study to be conducted by Raymond E. Lombra, Professor of Economics at Penn State University. Mr. Lombra’s study was so convincing that it prompted the government to accept gold bullion as an acceptable asset in IRAs. This study also revealed that over the 33 year period that it covered, the average return on rare (high quality, graded and collectible gold coins) was 50% higher than that of bullion.
Between 1979 and 2010 higher quality collectible gold coins actually performed slightly better than stocks. However, when correlated with inflation over that same time period, high-quality collectible gold coins produced over 3 times more than stocks and more than 2.5 times more than gold bullion. The study found that with collectible coins, it’s the quality that counts.
Today, more currency can be printed in massive quantities with the push of a button. Rare, high-quality collectible coins cannot be created out of thin air; you can’t just go and make more of them. When you compare the available quantity of high quality, collectible/numismatic coins to the ever-increasing world population and the ever-increasing quantity of paper fiat dollars, it’s not farfetched to think there is a likelihood that high-quality collectible coins could continue to climb in value.
According to the CU 3000 Index (www.PCGS.com) which is considered by many to be a standard of numismatic coin performance. All investments carry risk and there is certainly no guarantee that any numismatic coin will increase in value. However, when you factor in the possibility of confiscation and then look at the historical performance of high-quality numismatic coins, it does make a pretty good case to at least consider holding a percentage of them in your precious metals portfolio.
What Are the Best Forms of Gold and/or Silver to Buy?
Be aware that this too is a very hot issue and there is no one “right” answer to the types of metals you should hold. If you ask 100 different people what you should own, you will get 100 different answers. A key determining factor is how much money you are going to invest in precious metals.
Obviously, if you can only invest a small amount, your options and ability to diversify will be limited. The more money you have to invest, the greater your options and the more you should diversify your holdings.
If you are just starting out or working to build up your metals portfolio, I don’t think you can go wrong with the American Eagle coins or the Canadian Maple Leaf coins. Both coins are available in both gold and silver. These outstanding coins are two of the most widely recognized, trusted and respected coins in the world. Both governments respectively guarantee the weight and purity of these coins. They are easy to buy and easy to sell. Both coins are approved to be held in a precious metals IRA.
Very importantly, you can buy all of the gold and silver American Eagle coins, and the silver Canadian Maple Leaf coins you want, and there is absolutely no reporting of it, neither when you buy or when you sell. The gold Canadian Maple Leaf coins, however, are reportable when you sell them in certain quantities.
If you buy from a broker/dealer who buys the coins from a trusted “mint direct” wholesaler, you are virtually guaranteed to always get excellent quality coins that come directly from the government mint and thus there’s no worry about the possibility of receiving counterfeit coins.
What is the Best Way to Buy Precious Metals?
Generally speaking, there are only a handful of different ways to purchase bullion and numismatic coins. You can buy from local shops and dealers, online broker/dealers, or from places like eBay®, Craig’s List, newspapers, flea markets, etc. While there are exceptions, here are the general pros and cons of buying from each of these various options.
Buying Locally vs. Buying Online
When buying locally you don’t have to pay the shipping and insurance fees and you don’t have to wait for your shipment to arrive. It’s general cash and carries, so it makes buying locally quick and easy. When you buy online, depending on the amount you order, you may have to pay shipping and insurance to receive your order, if you do not qualify for free shipping. If you are dealing with a reputable, fairly priced broker/dealer, you will find that in real life, the shipping and insurance fees are very reasonable and generally very small.
When you do buy online, you will have to wait for your order to arrive. The lead times vary somewhat by broker/dealer but much more significant, they vary by the current availability of the actual metals. Due to the record-breaking demand, the U.S. Mint ran out of Silver Eagle coins three times in 2013.
If the mint is on backorder, it’s hard to get your metals until the mint produces them. It’s important to note here that most experts agree that due to the relatively low supply of silver and the soaring demand, in the future we will continue to see longer and longer lead-times to receive metals and there will be continued outages and delays by the mint.
That’s just the reality of the marketplace and eventually, it will likely be reflected in higher prices. As long as you are buying from a reputable broker/dealer, you can rest assured that you will always receive your purchases. If your local dealer buys from the giant wholesalers, they too will be affected by backorders, shortages, and delays just as the online guys are.
A very important issue is, generally speaking, local dealers have a much smaller client base than most online dealers and thus they are not able to offer anywhere near the selection that online companies can. Since metals are commodities, bullion generally has a very low markup percentage, so it’s very hard for a local dealer to inventory a large variety and deep inventory something that is so expensive and carries a relatively low markup.
Often local dealers will sell you metals that they just purchased from the last guy who came in to sell his metals, so you often don’t get first quality, high-quality, mint-direct metals and you often have a very limited selection to choose from.
From a pricing standpoint, most local dealers have much higher overhead costs, a smaller customer base and a smaller volume of sales. When broker/dealers purchase from the giant mint-direct wholesalers, the wholesalers offer volume discount pricing. So the more you buy from these giant wholesalers, the lower prices you get.
Unfortunately, the little guy is always going to be at a price disadvantage to the larger, high-volume companies. It’s not unusual to find margins charged by some local dealers that are two to three times what is typically charged by online dealers. Obviously, there are exceptions and it is always wise to shop around for the best prices, terms, and service.
It’s very important to keep in mind that many broker/dealers make the majority of their profits on hidden fees and up-sales. Be aware that many of them will lure you in with very low prices on core items like Silver Eagles. The price looks great so investors are eager to jump in. The problem comes when you go to check out. All of these previously hidden fees start popping up left and right. By the time you get to the final checkout, they have deceptively added a ton of hidden fees.
Had you known that from the beginning, you probably would have never considered buying from that dealer? Now, the metals are in your shopping cart, you have locked in your price, you have jumped through all of the hoops, and many shoppers just say, “Oh the heck with it” and complete the purchase. You don’t have to settle for that. Do your homework and make sure you are aware of ALL of the fees and costs before you commit to buy.
Don’t forget about the sales tax. If you are shopping locally and if you’re located in a state that charges sales tax on precious metals, you must pay the prevailing tax percentage on your metals purchases. Sales tax rates and laws vary by state. If your state charges sales tax on metals, this can have a dramatic impact on your total cost of the metals. I would strongly urge you to shop online if your state charges sales tax. Why would you just throw that money away if you don’t have to?
Lastly, it’s important to keep this in mind. Local stores often buy from their walk-in customers and then turn around and sell those items to the next buyer who walks in. Many of the local shops do not have the instruments or the expertise to inspect and ensure the quality and authenticity of the items. Most of the time, when you buy online, you receive items that come straight from the mints, and that’s the best single way to ensure legitimacy and ensure that you are receiving the actual metal and not a counterfeit item.
As far as shopping on eBay®, Craig’s List, flea markets, etc., my suggestion is to avoid them. If you don’t receive the item you purchased, or if you receive a different item than what you thought you were purchasing, or if you were to receive a counterfeit item, you usually have little recourse and it’s a giant pain.
A big percentage of the counterfeit precious metals that are introduced into the marketplace are sold through these outlets. You often have less sophisticated shoppers who shop for metals in these ways and sellers know it is very difficult for you to track them down to recover your investment. In my opinion, these options are good for buying household items and the like, but not for something as important as investments that you will be depending on.
Dollar Cost Averaging
Several times a month I receive calls from people who are ready to ‘go all in’ on gold and silver. The stories are always very similar. They just discovered for the first time what’s going on with the devaluation of the dollar and the light bulb in their head just came on about gold and silver.
They are tremendously excited about it, and want to buy all they can right now! While I applaud the fact that they did finally realize the game that’s being played and the importance of owning some physical gold and silver, I usually suggest that they relax and use the tried and true method of dollar cost averaging, just like you would do when investing in traditional “paper” investments.
The concept is solid. No one in the world can accurately predict the short-term price moves of the metals. Even if you did a complete study of the fundamentals, trends, supply/demand analysis and any other methodology you could imagine, the market is always subject to manipulation by the big players so they can always affect the short-term moves. So if you were to try and guess the perfect day and time to ‘go all in’ and make your big purchase, the odds are astronomical that you would pick the perfect time.
I always suggest that investors determine the amount they want to invest in metals and decide on a general phase-in time period that works for them. Then, you can generally divide your purchases up and make them over a period of time, thereby buying some at higher prices and some at lower prices. In most cases, this strategy will beat the ‘go all in right now strategy’. The smart way to do it is to keep a keen eye on the markets.
Be willing to adjust your estimated purchase time periods and amounts slightly, depending on the current price trends. If you look at a chart and silver has been in a downward trend, you may want to watch it and see if it starts to bottom out or reverse its trend and then make your next purchase.
Of course, you won’t always be right, but if you space out your purchases and make minor-buy timing adjustments along the way as the market swings up or down, you should increase your odds of having an overall lower cost per ounce than you would by making one big purchase.
Keep in mind that occasionally there will be some rather dramatic market moves where it may become pretty obvious that it is a great time to step up your buy or sell amounts. Sometimes the market hands you a gift and it becomes clear that it is an exceptional time to buy or sell.
You still may not want to go all in at one time, but just increase your purchase amounts from your previously planned amounts. This is also a wise method to use when selling your metals. You do the exact same thing, for the exact same reasons, but you are looking for price up-ticks to sell on.
Also, sometimes the market will run up substantially and present a great time to sell and take some short-term profits, and then buy back in again after the market finds its base. Many people find it fun and interesting to watch the markets and look for great opportunities as they present themselves.
However, if this is not your thing, you can be sure that there are many, many buy-and-hold metals investors out there and that’s a perfectly fine way to go if it works for you. I believe it’s more important that you make the wise decision to own some physical metals than it is that you timed your purchases correctly.
Here’s the really important thing to keep in mind. If several years from now gold and silver reach the price targets that many forecasters are predicting, you will look back and many of the price movements today will look insignificant. So while we can’t predict the short-term price changes, it’s not unlikely to assume that the metals will continue to increase in value as the dollar continues to decline in value.
Precious Metals for IRAs and 401Ks
It’s amazing that there are still so many people who have no idea that they can put physical gold and silver into their IRA, SEP, Roth and/or 401k. It’s true. This is perfectly legal and allowed in the United States IF you do it correctly. However, it needs to be a special kind of IRA. If your IRA or 401K is with any of the giant, main-stream brokerage companies, they are not set up for this and do not allow you to invest in physical precious metals. It’s simply not possible to set it up through them.
If you call up your IRA custodian or the company who maintains your IRA and/or 401k and tell them you want to buy physical precious metals with your investment funds, they will most likely do everything they can to talk you out of it. They will likely tell you that you can “achieve the same thing” by simply investing in precious metals ETFs, mutual funds, stocks, etc.
Do you know why they will tell you that? I bet you do. Actually, there are two reasons. The first reason is they do not have the ability to sell your physical precious metals and if you end up buying precious metals, they will not make any money on them. Reason two is if you buy their “paper” forms of gold and silver, they will make money on those when you buy and sell them. It’s really that simple. Follow the money; it leads you to the motivations.
Please keep this in mind. You MUST do this correctly in order to avoid finding yourself in a big mess with the IRS and possibly losing your IRA tax-exempt status and having to pay all kinds of fees and penalties. First off, you need to find an IRA custodian who handles investments in physical precious metals, and there are not a lot of them.
In most cases, you will have to open a separate IRA for your precious metals, fill out a lot of forms, pay some fees, etc. The IRS will not allow you to move metals that you already own into your new precious metals IRA, so you will need to make new metals purchases for this. Also, you are not allowed to have physical possession of most types of metals that can be held in your IRA account. Most metals are typically held by a custodian or a depository - more on this in a moment.
Mainly there are two different types of self-directed IRA platforms, the Trust model and the Self-Managed model. The huge majority of “gold IRA” programs that you see advertised are based on the Trust model. I’m sure you already guessed the reason why these guys spend so much on advertising. You got it... it’s because they are very profitable to them.
Some of you may be saying, “But how can they make any money on this because many of them offer to set up a gold IRA for you for $50 to several hundred dollars and yes, some are even offering to do this for free. Why would they spend so much money advertising if they hardly make any money on it?” Well, the Trust model allows the companies to charge fees. Here are some examples: managerial fees, transaction fees, annual asset fees, wire fees, entrance, and exit fees, purchase and sell fees, holding fees and much more.
It’s not uncommon to have to pay thousands of dollars in fees, PER YEAR, on your “free” gold IRA. Plus, in addition to that, many of these Trust model companies dictate where you buy your metals from and dictate where you store your metals. Guess what? They often earn fees when you buy your metals and every month when you store your metals. If you like paying never-ending fees, you will love the Trust model.
The Self-Directed IRA based on the Self-Managed model offers much, much more flexibility. Plus, there are no managerial or transaction fees. This model allows you to purchase your metals from anyone you choose and you can store your metals at any licensed depository you wish. This allows you the option to shop around and hopefully find lower prices. You can set up a Self-Managed model IRA yourself, but there’s lots of paperwork and it is pretty complicated. Unless you are an expert in this area, I would not recommend trying to go it alone.
Most investors opt to find a company who specializes in this, and who knows the forms, the laws, and all of the dos and don’ts, inside and out. It’s not unusual to spend several thousand dollars to get a Self-Managed IRA set up correctly. However, I have found that most investors end up paying more in fees the first year, or in the first few years of a Trust model IRA than they will spend getting a Self-Managed IRA set up.
After the Self-Managed IRA is set up...the ongoing fees are very, very small. Plus, you can take the fees to set up your Self-Managed IRA out of your IRA funds if you wish, so that your out-of-pocket funds are minimal. Or, there is also an option to pay the fees out-of-pocket so you do not deplete funds from your IRA.
Another thing I totally love about the Self-Managed IRA model is the tremendous flexibility it offers. After you buy as much gold and silver as you believe complete your portfolio, this model allows you to invest in things like residential and commercial real estate, raw land, trust deeds, mortgages, private notes and placements, LLCs, foreclosure property, receivables, stocks, bonds, mutual funds, currency, futures, commercial paper and much, much more.
This puts the power and flexibility into your hands and allows you to invest in the best opportunities and in what you know best. You can’t believe how easy it is. When you want to buy an approved asset in your IRA, you simply write a check. That’s it. With a Self-Managed IRA, you can manage it yourself.
If you become a member of the Investor Advisory Network, you will have direct access to some of the best and most diverse investment options and advisors available. The beautiful part is, if you set up a Self-Managed IRA, you will be able to easily use your IRA funds for the majority of the investment options available on their website.
Many investors these days want to invest in gold and silver but they are cash poor. They don’t have a lot of liquid money sitting around to buy many metals with. However, most people do have a sizable IRA and/or 401k that they could buy the precious metals they want, if they structure a new precious metals IRA correctly.
What Types of Precious Metals Are Allowed In a Self-Directed IRA?
The current laws dictate that the gold must be .9950% pure gold and the silver must be .9990% pure silver, and both platinum and palladium must be .9995 pure to qualify. If you prefer to buy bullion bars they must be fabricated by COMEX, NYMEX, or ISO 9000-approved refiners.
Some examples of acceptable forms of gold that’s allowed to be held in an IRA are: American Eagle coins, Australian Kangaroo or Nugget coins, Australian Luna series coins, Austrian Philharmonic coins, British Britannia (2013 and newer), Canadian Maple Leaf coins, Chinese Panda coins, Credit Suisse and PAMP Suisse bars, U.S. Buffalo bullion coins, and various bars and rounds that are .995 pure or more.
Some examples of acceptable forms of silver that is allowed to be held in an IRA are: American Eagle coins, America The Beautiful coins, Australian Kookaburra coins, Austrian Vienna Philharmonic coins, British Britannia coins (2013 and newer), Canadian Maple leaf coins, Chinese Panda coins, Mexican Libertad coins, and various bars and rounds that are .999 pure or more.
For Platinum, American Eagle coins, Australian Koala coins, Canadian Maple Leaf coins and various bars of .9995% purity are acceptable. For Palladium, Canadian Maple Leaf coins and various bars of .9995% purity are acceptable.
Can You Really Store Your IRA Gold and Silver At Home?
There seems to be quite a bit of confusion over this question; “Does the government really allow individuals to store the metals in their own Self-Managed IRA at their home or any place they choose?” This question is addressed in Section 408(m) (3) (B) of the U.S. Tax code. The code makes a distinction between what they term bullion and coins. For bullion, it must have a fineness level of .9950% for gold and .9990% for silver and the bullion must come from a COMEX, NYMEX or an approved refiner.
Section 408(m) (3) (A) contains the rules for coins. It says that most governments manufactured gold and silver coins are acceptable. Popular examples include American Eagles, Canadian Maple Leafs, and Australian Nuggets. Section 408(m) (3) (B) of the Tax Code states that bullion must be held “in the physical possession of a trustee”.
This is usually a specialized custodian and/or depository. For coins, the tax code has no such requirements. The code does not place any restrictions whatsoever on the storage requirements for gold and silver coins. Based on the U.S. tax law, your IRA can purchase gold and silver coins and you can personally store them anywhere you wish.
Another really important benefit that you get when using the Self-Managed IRA model is that there is NO REPORTING when you buy precious metals. Plus, all your custodian has to do is annually report the value of your IRA (that you report to them), but they DO NOT REPORT what types of assets you have in your self-managed IRA nor where they are stored. These days many people find this to be a gigantic plus because you can now have a totally private precious metals IRA.
How to Choose the Best Company to Set Up Your Precious Metals IRA?
As with everything, it always pays to shop around and do your research to find the company that is right for you. Just like we have said so many times before, always remember to get all of your questions answered upfront. Unfortunately, as many companies do not tell you about all of their fees if you don’t ask, you will likely find out the hard way.
Often I get asked who I used to set up my self-directed checkblog control IRA. As you may imagine, I did tons and tons of research before I finally decided on the company to use, and ended up getting a really good education in the process. The company I chose and whom I am delighted with, is Easy IRA Solutions. Not surprisingly, they are an IAN Prime Advisor, and you can find out more about them in this blog. I trust my IRA to them and I wholeheartedly recommend them.
Pitfalls to Avoid When Buying Gold and Silver
Below are some of the most common pitfalls to avoid when investing in gold and silver.
a) Buying from dishonest dealers. You may have heard the expression, “You can’t make a good deal with a bad person.” This is very true when buying metals. It’s estimated that there are over 10,000 metals broker-dealers in the U.S. alone. The majority of them are very reputable and honest people, however; rest assured that there are still quite a few ‘wolves in sheep’s clothing’ dealers out there. They target new and inexperienced investors and take advantage of their inexperience.
There is practically an unlimited number of games that dealers can play to ensure that they win and you don’t. The best way to overcome this is to educate yourself, just like you are doing right now by reading this blog. The more you know about gold and silver, the smarter shopper and buyer you will become.
That’s why the Investor Advisory Network is such an excellent resource for investors. I truly wish IAN was available when I starting investing. I could have saved myself many tens of thousands of dollars and a great deal of heartache and stress.
b) If the price seems too good to be true, then you can be sure that it is! The metals market is global. These days anyone can check the spot price of gold and silver from a smartphone, computer, TV or just about anywhere. Since the beginning of time, humans have always been easy to fool when it comes to amazing deals. They seem to fall for the same scams century after century. As liquid as the metals market is, there is absolutely no reason for anyone to have to sell your metals at way below market prices... none!
The scammers always have a compelling story to justify why their super-low price is available right now, and only for you, if you are lucky enough and can act fast. Trust me on this. This kind of deal does not exist. Of course, you can find an occasional seller on eBay® or Craig’s List who does not know the value of what they have and/or they are in a financial crisis and are offering their metals at lower prices.
These opportunities are few and far between and certainly not worth most people’s time to seek out unless it’s a hobby for you. Plus, your odds of buying counterfeit items are much higher when buying from these sources. Just remember this; if a gold and silver deal seems too good to be true... it is.
c) Counterfeit metals. Reports of counterfeit precious metals have increased over 2,000% in just the past two years. There are two main reasons for this. As metals prices rise, it becomes more profitable for counterfeiters to enter the marketplace. In addition to that, the technology has evolved to the point where they now have machines that can do almost perfect jobs counterfeiting metals.
It used to be that most of the counterfeit items were poor quality and was limited to most bars, because it was much easier to hollow them out, fill them with inferior metals and then cover up the holes with the real metal. Now, the machines are so precise that they do an incredible job of counterfeiting gold and silver coins, bars and anything you can imagine. In fact, some of them are now starting to counterfeit numismatic coins. They are so good that these days even some of the experts are fooled.
For the average person, it is not feasible to have all the instruments and the specialized knowledge to be able to tell the difference between the real thing and a counterfeit. So, what should the average person do to avoid spending their hard-earned money on worthless counterfeit metals?
The easiest way to do this is to simply purchase from reputable dealers, who buy from mint-direct wholesales. That means the mints manufacture the items, they either sell directly to the broker/dealer, or they sell to a handful of giant mint-direct wholesalers, who sell directly to the broker/dealer. When purchasing this way, counterfeit items cannot be introduced into the supply chain.
The majority of counterfeit metals now comes from China and they are often found at flea markets, Craig’s List, eBay®, etc. Often they are small sellers who are offering a below-market price, and unsuspecting buyers jump at the opportunity to get a great deal. These sellers can disappear in a moment’s notice and that’s how they usually avoid getting caught. As they say, everything that glitters isn’t gold. Use your good common sense and only buy from trusted dealers.
d) Another pitfall to avoid is buying commemorative coins from private mints. Commemorative coins from private mints are often the coins you see advertised on TV or in magazines that have various images on them that commemorate an event or famous person. The problem is they usually are filled with inferior metals and only have an ultra-thin coating of actual gold or silver on the surface.
The advertisers are brilliant in knowing exactly what to legally say and what not to say. They say it in a way that most non-experienced shoppers are confused and often assume the coins are solid gold or silver. While some of these coins may be beautiful, they usually make lousy investments and cost way more than they are worth.
e) Most experienced metals investors will tell you, “If you can’t hold it in your hand, you don’t own it.” Another popular saying is, “If your name is not on the title to it, you don’t own it.” The problem is thousands of individual and institutional investors believe that since they have a piece of paper saying they own metals, that they do own metals and that they can get them anytime you wish. Unfortunately, this is often not the case with gold and silver.
How to Sell Your Precious Metals
Most likely there will come a time when you will want to sell some or all of your gold and silver. You may want to take some profits along the way, you may need to raise some cash, or you may choose to cash out at the top. It’s actually pretty simple to sell your metals and it’s kind of like buying in reverse.
Just like you shop around for the best price when you buy metals, you should shop around for the best price when you want to sell your metals. You do not have to sell them back to the broker/dealer from whom you purchased them. You can sell them to an individual, a local metals shop or sell them back to an online metals company.
If you sell them back to a local shop, you will not have to incur shipping and insurance fees. When you sell locally, you and the dealer agree on a price and you get paid for your metals at the time of the transaction. However, as discussed above, local shops often have higher overhead and will usually offer you a lower price than a higher volume online company will.
To ship metals to an online broker/dealer, most people just put them in a FedEx box, and ship them insured to the dealer. Often the additional amount they get from the sale of the coins more than makes up for the small shipping/insurance fee. Most brokers will then either mail you a check or wire the funds directly to your bank. People do this all day long and the process is actually quite simple.
If you stick with government issued coins and/or name brand bars, you will most likely find them much easier to sell. Otherwise, if you buy some unusual, uncommon metals and then call up a broker/dealer to sell them, they will usually need to see them before they commit to buying them and decide on a price that they will pay for them.
It’s amazingly simple to pick up the phone, call a broker/dealer and tell them you have a monster box of 500 American Silver Eagles coins that you want to sell. That is a no-brainer. On the other hand, if you tell them you have some generic silver coins with an image of Santa Claus on them and you are not sure who minted them, you will likely find them harder to sell, and will probably get less for them, even if they are actual 1oz silver coins. This is pretty much common sense, really. Selling a name-brand anything is usually easier than selling something generic.
Keep in mind that in most cases, when you purchase you will pay some amount above the spot price and when you sell, you will likely receive an amount below the spot price. Similar to stockbrokers, the dealers must make a profit in order to stay in business. The difference between what they pay for the metals and what they sell them for is their spread and it’s how they make their profits.
Where to Store Your Precious Metals
Where to store your metals is always an important question that comes up. After all, you invest a lot of money into your metals, so making sure that you keep them safe is vital. This is a very deep and broad subject with lots of variables, but we will hit the high points here. You can find more information about this important subject on our website.
The single most important factor in storing your metals is to diversify. Don’t put all of your metals in one place. If something unexpected happens, then you will lose everything. Your core options are to store them yourself or have a third party store them for you. Everyone’s personal situation is different, so there is no one right way to do this.
You should evaluate your own situation and make the decisions that best suit your needs. Each option has its own pros and cons. Evaluate your options and choose the ones that work best for you. It goes without saying but always keeps your personal and family safety foremost in mind.
One thing I always suggest to everyone is to at least have a number of your metals where you can get your hands on them within the very short notice. You’ve probably heard of a “Go Bag”. It’s a survival preparedness bag that you keep critical items in, and keep it readily accessible. If a disaster were to strike, you simply grab your Go Bag and head out.
I don’t suggest you keep your metals in your Go Bag, but I do suggest that you at least keep a small number of your metals around your home or office so that you can grab them at a moment’s notice simply because, you never know what tomorrow may bring. Precious metals can come in pretty handy in uncertain times.
Personal Storage Many investors choose to store their metals in a safe, located in their home or office. For many people, this is a great option. Be sure and purchase a very high quality safe. Cheap safes are a complete waste of money and should be totally avoided. When it comes to choosing a safe, there are an almost unlimited number of different types to choose from. They come in many different sizes, shapes and price ranges.
The most important ratings to keep in mind are the fire and burglary ratings. Think about the items you plan to store in your safe and choose the safe that has the right ratings for your needs. You really want to find a way to either bolt your safe to the floor or even cement it in if possible. Try to find a way to hide your safe. If they can’t find your safe, they can’t get to it.
Here’s a great tip for choosing a safe. Call a local safecracker who has been in business for a long time and ask him/her. They have seen it all and they know which safes are high quality and which ones are junk. When you want to know which safes will hold up the best, ask the guy who breaks into them for a living.
Another option that may sound strange to you at first is to bury your metals. You would be shocked to know how many wealthy people have millions of dollars’ worth of metals buried in secret locations. Most people use larger size PVC pipes, and glue the caps onto each end to keep moisture and air out. Bury them at least four feet deep to avoid detection by a metal detector. Bury decoy pieces of scrap metals above and around the location to avoid detection. This concept has worked for thousands of years and it still works just as well today.
Some people choose to find little hiding places around their home or office to hide their metals. Places where no one would ever think to look. You can also search online and find many everyday items that have hidden compartments for storing valuables. Just be sure to use your creativity and imagination.
Try to think like a thief would think. Again, don’t put it all in one location. Spread it out in many different locations to diversify your odds. Be sure to have a system to keep track of where your metals are stored, and be sure to carefully hide or code your treasure map so that others cannot find it.
Third Party Storage Vaults There are many different vault storage facilities around the world. This can be a great option if you have a fairly large amount of metals. These are not inexpensive options but they can be one of the safest ways to store your metals. You should really do your homework when choosing the facility that’s right for you.
There are many different types of fees and storage options and it’s important that you understand them up front. The most basic options are Segregated or Allocated vault storage. Segregated is the most expensive but it can also be the most preferred method. The segregated storage means that they store your exact metals individually for you. When you go to sell them or have them shipped, they will be the exact same metals that you had shipped to the vault. What you put in, is what you get out.
The other method is the Allocated method. The allocated storage means that you will have the exact same number of ounces of metals that you put in, but it will not necessarily be the same metals you had shipped to them or in the same form. They often use very large gold and silver bars because they are easier to store and more cost-efficient.
You may have shipped them 1,000 Silver Eagle coins, but when you request that your metals be shipped out, you may receive it in the form of a single 1,000-ounce silver bar. This option is a bit less expensive, but you must be sure that you are dealing with a reputable company and that you actually maintain title to your quantity of metals. Make sure that your facility has all of the right insurance and coverages in place.
Bank Safe Deposit Boxes Lots of investors want to keep it simple and just put their metals in a bank safe deposit box. Most people are totally unaware that this option does have risks. If your bank were to close or go out of business, or if there is a national emergency, you might not be able to access your metals for a period of time.
Also, the contents of your safe deposit box are not insured by FDIC insurance. If your bank were to get robbed or destroyed in a disaster, you would not be reimbursed for your losses. Lastly, most people have no idea of the new Department of Homeland Security (DHS) laws that have been passed.
DHS now has the power to inspect safe deposit boxes without a warrant and seize any gold, silver, guns, etc. that they find. They don’t even have to notify you. My advice is if you want to use your safe deposit box, don’t put everything you have in it. Diversify the storage of your holdings in different places so you limit your risks.
Lastly, I hesitate to mention this as some may think this is ‘crazy talk’. If at some time in the future, the government were to declare a national emergency and decide they need to seize all gold and silver to keep the country going, the very first place they will likely go is to the vaults and banks, because that is where much of the metals are. It’s their easiest option for getting the most metals with the least effort. So, if this is a concern of yours, then choose your storage locations carefully.
Keep Your Mouth Shut
You can do a fantastic job of diversifying the storage of your metals’ holdings and still lose them all in a flash. There’s something about human nature that compels people to want to talk about what they have and what they did. My strong advice here is to discipline yourself and tell no one where your metals are stored.
If you feel compelled to tell your spouse or significant other, then that’s your call. It’s just a fact that the more people you tell, the greater the odds of something unforeseen going wrong. One of the greatest things about gold and silver is that they are one of the most private investments you can make. I encourage you to keep them private and keep them safe by keeping it to yourself. It’s no one’s business but yours.
How to Track Your Precious Metals Performance
Of course, there are many people who simply collect, buy-and-hold metals, and have no intention of ever selling them, and that’s fine. However, many people like to keep up with the performance of their metals’ portfolio and track its progress. When you stay on top of your metals performance, it’s much easier to take advantage of buy and sell opportunities that the market presents. Plus, when you sell your metals, you will need a record of when you bought them and what you paid for them, so you can claim a short-term or long-term capital gains profit or loss on your tax returns.
There are hundreds of websites that will show you the real-time spot prices of precious metals. Simply Google precious metals spot price and you will find a huge number of sites where you can check the current spot prices. To really keep up with the entire performance of your metals portfolio requires a lot of time and manual effort unless you have a system designed to do this for you.
As one of the benefits of joining the Investor Advisory Network, you may have the option to get a trial version of the Wealth Watchmen. We believe it is the world’s most advanced precious metals tracking system. You simply plug in your metals holdings and any future purchases or sales, and the system does an amazing job of keeping you completely up to date with everything you need to know.
It will even send text and email alerts to you notifying you of key indicators that you set for your portfolio. This is an invaluable service and just one of the many benefits that you get when you join the Investor Advisory Network.
Thanks for your interest in precious metals. I sincerely hope you found this information helpful and beneficial. In the beginning, we mentioned that only about 2% to 3% of all Americans own some form of physical gold and silver. As has been the case throughout history, the masses have usually been wrong.
They practice herd mentality and seem to do exactly what the majority do, and most of the time, that renders the worst results. We believe that a great transfer of wealth is coming. The majority doesn’t see it coming and they are certainly not preparing for it. We are not driven by fear of what’s to come, but by the massive opportunities, we see ahead. Without a doubt, we believe that precious metals have a place in every prudent investor’s portfolio.