Month: March 2022

These days, some IRA owners and investors may be worried about being overexposed to equities. That could be you. 

But the safest fixed income investments (CDs, Treasuries, and money-market funds) are still paying microscopic interest rates.

For example, when this was written, the 10-year Treasury was yielding about 1.92 percent. Ugh! 

Meanwhile, the pandemic might or might not be coming to an end, the economy might or might not be okay, and inflation might or might not be controlled. Who knows? 

In this uncertain environment, investing some of your IRA money in gold or other precious metals such as silver and platinum may be worth considering. Ditto for holding some precious metal assets in taxable form. 

Precious Metal Assets in Your IRA

At first blush, our beloved Internal Revenue Code appears to throw cold water on the idea of holding physical precious metal assets in an IRA. 

As a general rule, a physical IRA investment in any metal or coin is treated as the acquisition of a collectible for federal income tax purposes. As such, the transaction is characterized by the tax code as a taxable distribution from your IRA to you (the IRA owner), followed by a purchase of the metal or coin by you. 

In effect, this general rule appears to prohibit you from using an IRA to invest in precious metals or coins made from precious metals. 

But there’s a great big exception to the preceding general rule. Under the exception: 

• You can use your IRA to invest in certain gold, silver, and platinum coins and in gold, silver, platinum, and palladium bars (bullion) that meet the purity standards. 
• Your IRA trustee or custodian, rather than you, must hold the coins or bullion.

These rules apply equally to traditional IRAs, Roth IRAs, SEP accounts, and SIMPLE-IRAs. 

Your IRA Can Buy Precious Metal Coins and Bullion

Thanks to the exception, IRAs can own certain precious metal coins and bullion. Examples include

• American Gold Eagle coins; 
• Canadian Gold Maple Leaf coins; 
• American Silver Eagle coins; 
• American Platinum Eagle coins; and 
• gold, silver, platinum, and palladium bullion that meets the purity standards. 

For example, gold bars must be 99.5 percent pure or better, and silver bars must be 99.9 percent pure or better. 

If you would like to discuss precious metal investments, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 20, 2022

Working at a tender age is an American tradition. What isn’t so traditional is the notion of kids contributing to their own IRA, especially a Roth IRA. But it should be a tradition, because it’s a really good idea. 

Here’s what you need to know about IRAs for kids. Let’s start with the Roth IRA option. 

Roth IRA Contribution Basics 

The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant. 

So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year. 

For both the 2021 and 2022 tax years, your working child can contribute the lesser of

• his or her earned income for the year, or 
• $6,000. 

While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids.

Key point. A contribution for your child’s 2021 tax year can be made as late as April 15, 2022. So, there’s still time for that.

Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age

By making Roth contributions for a few years during the teenage years your kid can potentially accumulate quite a bit of money by retirement age. 

But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so. 

Say the child contributes $2,500 at the end of each of the four years. Assuming a 5 percent return, the Roth account would be worth about $82,000 in 45 years. Assuming an 8 percent return, the account value jumps to a whopping $259,000. Wow! 

You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.

If you would like to discuss earned income and IRS options for your child, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 17, 2022

Do you own or lease non-residential (think commercial) real property for your business or rent non-residential real property to others? 

If so, interior improvements you make to the property may be fully deductible in a single year instead of over multiple years. 

But to be deducted instantly, the improvements must fit into the category that the tax code calls “qualified improvement property” (QIP).

What Is QIP?

Ordinarily, non-residential real property is depreciated over 39 years. And so are improvements to such real property after it is placed in service.

But Congress wants to encourage business owners to improve their properties. So, starting in 2018, the Tax Cuts and Jobs Act (TCJA) established a new category of depreciable real property: QIP, which has a much shorter recovery period than regular commercial property—15 years. But even better, for tax years 2021 and 2022, QIP can qualify for that immediate 100 percent bonus depreciation deduction. 

QIP consists of improvements, other than personal property, made by the taxpayer to the interior of non-residential real property after the date the building was first placed in service. For example, QIP includes interior improvements or renovations to any of the following:

• Office building (or single offices)
• Restaurant or bar
• Store
• Strip mall
• Motel or hotel
• Warehouse
• Factory

Since QIP applies only to non-residential property, improvements to residential rental property such as an apartment building are not QIP. 

Transient Property

Airbnb and similar short-term residential rentals also qualify as non-residential property if they are rented on a transient basis—that is, over half of the rental use is by a series of tenants who occupy the unit for less than 30 days per rental. 

QIP Examples

Examples of interior improvements that can receive QIP treatment include the following:

• Drywall
• Ceilings
• Interior doors
• Modifications to tenant spaces (if the interior walls are not load-bearing)
• Fire protection
• Mechanical
• Electrical
• Plumbing
• Heating and air interior equipment and ductwork
• Security equipment

QIP does not include improvements related to the enlargement of a building, an elevator or escalator, or the internal structural framework of a building. Structural framework includes “all load-bearing internal walls and any other internal structural supports.”

Placed in Service

QIP consists only of improvements made after the building was placed in service. But for these purposes, “placed in service” means the first time the building is placed in service by any person. By reason of this rule, you can purchase an existing property that was placed in service by an owner anytime in the past, renovate it before you place it in service, and still get QIP treatment.

But you have to make the improvements. You can’t acquire a building and treat improvements made by a previous owner as QIP.

How to Deduct Qualified Improvement Property

You may deduct the cost of QIP in one of three ways:

• use first-year bonus depreciation,
• use IRC Section 179 expensing, or
• depreciate the cost over 15 years using straight-line depreciation.

As mentioned earlier, QIP placed in service in 2021 and 2022 is eligible for 100 percent bonus depreciation. That is, you can deduct the entire cost in one year, without limit. 

Starting in 2023, the tax code reduces bonus depreciation by 20 percent per year until it is completely phased out for property placed in service in 2027.

If you would like to discuss QIP, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 15, 2022