Greetings!
This week's newsletter is an informational issue to address an overwhelming number of calls, emails and poll responses we have received around two issues that have been highly publicized, and in some cases, politicized.
We will, briefly, touch on the complicated issues of the Form 1099 which requires ALL vendors to report cumulative purchases > $600 at the end of the year to the IRS starting in 2012, and the use of a Precious Metals IRA - what they are, how do they differ from ETFs and some of the pros and cons.
Both of these issues are far too complex to address in a short newsletter, and we will take some literary license to try and summarize the complex items, so if you are confused, or we create more questions than answers, please let us know and we will expand in future newsletters.
Now, down to the basics!
Impact of Form 1099 from Healthcare Law
Form 1099 is currently used to report various types of income to the IRS, including interest, dividends, pensions, housekeepers, contractors, or landscapers. The threshold was for payments > $600 and was designed to make sure that the IRS had a way to check that income was being fully reported.
The new Healthcare Law has Section 9006 which includes just a few lines buried in the 2,409-page document. It mandates that beginning in 2012 "all companies" will have to issue 1099 tax forms, not just to contract workers, but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.
Under this new law, if a freelance designer buys a new HP PC from the HP Store, they'll have to send HP a Form 1099. A car wash that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases. Coin dealers will now need to track ALL purchases, along with the necessary IRS filing details such as SS#, name, address, etc. so that purchases exceeding a cumulative of $600 can be issued a form at the end of the year.
This law expands the scope of how the IRS will use the form by tracking payments, not only for services but also for tangible goods. It also requires that 1099s be issued not just to individuals, but also to corporations. The administrative costs alone are estimated at 3% - 5% of sales for small businesses. These costs will be passed on through pricing. This also means that the government will know who has commodities, where they are, and will be able to better track the capital gains. Say goodbye to privacy!
This rule was enacted in an attempt to fund the Healthcare Law by raising an estimated $300B in revenues ($17B earmarked for Healthcare) that the IRS believes is either not reported, or the government believes it can impose as an additional tax on internet sales of goods.
The IRS has not yet announced how this law will be enacted or enforced, and there are several Bills being introduced in Congress to repeal this 1099 requirement. So, until the dust settles, specifics around computer systems re-designs, timeframes, and financial impacts will not be completely known. However, assuming that the law becomes effective January 1, 2012, there is a good argument that trading volume is likely to increase in the 4th Quarter of 2011 in an effort to rebalance portfolios prior to the reporting requirement. When volume increases under these circumstances, there is traditionally a run-up in pricing. That said, our position is that the adjustments will start well in advance to 2012, so the pricing impact should not be dramatic.
The bigger question is what happens in 2012 and can a Law such as this really be enforced. I still wrestle with the question - If I go to Starbucks 2x a week, do I need to issue a 1099? We'll see.
Back to Form 1099
Poll Results - Do you have a Precious Metals IRA?
We recently ran a poll on our website asking the simple question, "Do you have a Precious Metals IRA?" This question came about due to the unprecedented volume of people asking this question through our Customer Service Center. There have been ads that offer Precious Metals IRAs on TV, radio, newspapers, and every website you visit. While we assist our clients in establishing these accounts, and funding the accounts with the appropriate assets, we could not answer the simple question of, "How many people had one?" In addition, the follow-up question read like our FAQ page, but always came around to a couple of basic comparisons - IRAs to ETFs, Precious Metals to Equities, and Flexibility of the investment.
First of all, the results. Over 80% of the respondents in our poll do not have a Precious Metals IRA.
Keep in mind that the people coming to the site are interested in Precious Metals or rare coins. So they are acquiring these assets directly, and may be investing in other related assets such as an ETF, a mining stock, or related holdings in their 401k.
If we were polling in a "general interest" area, 20% participation would not be unusual. In a recent Federal study, only 19% of eligible employees were making active contributions to 401ks. However, with only 20% taking advantage of their own expertise through a Precious Metals IRA is a bit surprising. We pursued this with several of our existing non-IRA customers and the #1 response was, "I was going to, but I haven't had the time." Fair enough. - self-directed IRAs take some research, paperwork, and a little time to transfer cash from one account to another. But, the effort is worth it, and there are resources that can assist.
There are a number of considerations to look at when determining whether a Self-directed IRA funded with Precious Metals is right for you.
ETFs were established several years ago, GLD being a very popular Gold Fund that mimics the Spot Gold market. ETFs are an efficient way to participate and offer the flexibility to quickly buy and sell. ETFs are also inexpensive (most have < 1% management fees) compared to Stocks or Mutual Funds.
The ability to trade ETFs like a stock gives flexibility when markets are volatile, to get in and out quickly. While day trading in commodities is a whole different animal, it offers an "out" that makes many investors comfortable. Self-directed IRAs. on the other hand, can take up to a month to get funds transferred from one fund to another, payments disbursed, and items shipped, logged, and confirmed by the depository. A month is not a long time when considering the longer term time horizon of 3 - 5 years, which is the recommended timeframe for precious metals and rare coins.
ETFs do have a couple of unintended consequences that should be considered when determining the types of investments for your retirement fund and the balance of investment types. ETFs are valued by taking the total value in the Fund divided by the total outstanding shares. There are several factors may affect ETFs disproportionately to the change in the underlying commodity. For example: Global supply and demand, which is influenced by such factors as forward selling by producers, purchases made by producers to unwind hedge positions, central bank purchases and sales, and production and cost levels in major producing countries could cause a significant decrease (usually) far in excess of the drop in commodity price; inability of producer to deliver promised commodity due to financial conditions, politics, or economic conditions; and dramatic changes in exchange rates.
Those investors that are seeking gold as a safe haven for political unrest, security against monetary destabilization, or a replacement currency would not find protection of these risks in an ETF. The unwinding of hedge positions alone on the price of ETFs could be catastrophic in a global financial collapse or adjustment.
The other significant difference between ETFs and Self-directed IRAs is the inability to hold specifically identified precious metals or certain bullion coins. ETFs allow a share to be purchased for an equivalent amount of underlying bullion. You cannot take possession of the bullion and you cannot put a piece in and get the exact same piece out.
Precious metal IRAs have limitations imposed by the IRS, such as rare coins are not permitted, and you cannot hold the metals yourself. However, Brandon's Coins has found some middle ground that allows you to either convert some of your modern collection, or select allowable coins that are likely to grade out with numismatic value when you take them out in the future.
We use our Self-directed IRA Exchange Program© for allowable coins where we will buy your collection, then sell it to your IRA using our IRA Cost Plus Program© for a pre-determined price. They are the exact coins and the depository is set up to segregate your items so what you put in is exactly what you get out.
Self-directed IRAs have upfront set-up fees (depending on the Custodian) ranging from $50 - $150 and there is a .8% to 1% annual storage fee with most depositories. While these are comparable with ETF's management fees, there are 2 other factors to consider. ETFs underperform the Gold Market, annually, by about 2.9%. Otherwise they are very tightly correlated. This is most likely due to the management fee and cost of acquisition of gold bullion. The Self-directed IRA has the fee a dealer charges to acquire the assets which varies depending on the item and services included. These can vary from 3% to 10%, but are a 1x fee. The ETF fees are annual.
The one question that continually comes up is the return on ETFs (bullion) vs. Collectible Coins (allowable) vs. DJIA. In a study done in 2008, an equal $1,000 applied in 1970 into the three asset categories shows that Mint State Numismatic Rare Gold Coins have outperformed the DJIA close to 11 to 1 and gold bullion close to 4 to 1.
As always, it is up to each investor to decide how much of their portfolio should reside in Precious Metals. Conventionally, it was 5% - 10% of the portfolio. Those numbers have been increasing, how high depends on your philosophy and risk threshold.
The newer question is how that % should be allocated among the Precious Metals Sector. As mentioned, there are mining stocks, ETFs, rare coins and self-directed IRAs. Looking at your short and long term needs, heavily corresponded to the risks you are trying to mitigate, and balanced with your return expectations will help you get to the right answer.
Setting up and funding an IRA does not mean the cash has to be used to purchase precious metals. But having the account established gives you the flexibility to act when the time is right.
Check out the Fund Your IRA link at Brandon's Coins for additional information on self-directed IRAs, our Self-directed IRA Exchange Program©, IRA Cost Plus Program© , and get started today!
Back to Poll Results
