I have a Website where subscribers can ask questions on various forums. The site is actually called "Gary North's Specific Answers." My answers are very specific. So are other subscribers' answers.
One of the categories is "retirement." There is a lot of interest in retirement issues. One of them is what assets should go into an IRA.
I say "None." This is not a popular answer. I add, "especially gold." This is also unpopular.
Over the years, I have published articles on my site explaining these answers. But some subscribers do not use the search engine to locate these articles. Others do not believe me. Still others talk it over with their accountants. Their accountants offer rival views. Then they post a question that reflects their accountants' views.
I have no objection to someone going to his CPA for advice. In fact, I recommend it. That's what CPAs are supposed to do: offer advice.
But there is a problem. CPAs are inside the tax system. They give advice as agents of the system. They are licensed by the profession, which has been granted an occupational monopoly by agencies of government.
I used to have an accountant who had been a CPA, but he resigned. He turned in his CPA license. Here was his logic. "I take extreme positions on interpreting the tax code, to enable my clients to pay minimal taxes. At some point, I argue very strongly in tax court. I could have been threatened by the IRS to have my CPA license revoked. To remove this threat, I send back my license." This man no longer takes clients with less than $1,000,000 income per year. Note: he is also a semi-pro poker player in Las Vegas. His moniker at the table would tell all but a professional to stay out of the game. He likes risk.
Most CPAs don't like risk.
I am always looking for ways to get my ideas across. So, I have decided to get across my position on gold in IRAs by creating a hypothetical document: a letter from a CPA. In it, I set forth the accountants' case for IRAs. This case is detailed. It spells out the implications behind the recommendation.
Dear Dr. North:
One of my clients is a subscriber to your Website. He asked a question regarding the wisdom of putting gold into his IRA. You replied that IRAs are a bad idea. You also replied that gold should not be in an IRA, assuming someone is unwise enough to set up an IRA.
I recommended that he set up an IRA several years ago. While I have counseled him not to buy gold, which is overpriced, I see no good reason not to put gold into an IRA. It can be done under certain circumstances, although it is not easy to do this with gold coins, which is what you recommend.
I want to spell out my reasons for using the IRA as a tax-reduction tool.
1. FREE MONEY FROM CONGRESS
The members of Congress have always had one overriding goal in life: to defend the interests of the people of the United States. These people – many of them are lawyers – have spent their careers finding ways to enable the common man to escape the burdens of government. Where these burdens have come from remains a long-term mystery, but Congress is adamant that these burdens are too heavy. So, members of Congress are constantly finding ways to enable their constituents to get out from under these burdens.
One of the most creative ways that Congress has come up with to lighten the tax burden is the Individual Retirement Account. These come in two forms: the standard IRA and the Roth IRA.
A Roth IRA requires the taxpayer to pay income taxes on his salary. He can then put some of this money into a Roth IRA. Any money taken out of a Roth IRA at retirement will be income tax-free. Only if Congress and the President were to change this law would any of this money be taxable.
As an accountant and a professional, I have assured my client that such a reversal would be unthinkable, no matter what the situation. While the government has the right to change existing laws at any time, I think we can and should rely on Congress to keep its collective word.
A standard IRA allows a taxpayer to deduct up to a specific limit allowed from his gross income by placing this money into a specialized retirement account. He pays no income tax on this money until he retires at age 59 1/2 up to age 70. At age 70, he must draw down his account.
He will of course be taxed on any money that he takes out of his account. While it is conceivable that a future Congress will decide to raise taxes, thereby taxing his income when he is most vulnerable – old age – we in the CPA industry regard this as an extremely remote possibility.
Why is this possibility remote? Because this would be a breach of trust on the part of Congress. It would be an announcement of deception on a massive scale. "You put your money into your IRA to save taxes. Suckers! Now that you are too old to do anything about it, we're going to tax you at a higher tax bracket rate than when you got into this deal."
Our industry regards this as inconceivable. No matter what happens, no matter how large the federal deficit gets, not matter how much pressure Congress is feeling from workers who are still paying taxes, Congress would not do such a thing. There is an honor code that governs Congress. Congress will never raise taxes on retirees.
Congress has wisely offered a way for taxpayers to defer taxes. I see no reason not to take advantage of this. It is free money from Congress. There are no strings attached. Well, hardly any.
2. EMOTIONALLY LOCKED IN
You have argued that Congress has baited up a lobster trap with the promise of temporarily deferred income taxes. You say this: Because IRA owners know that they will be taxed on this IRA money if they withdraw the money before reaching age 59 1/2, they will never withdraw it to buy assets that they prefer to buy in a more private way – assets that are not regulated by agencies of the U.S. government. You have said that this tax threat, plus a 10% withdrawal penalty, will keep people from getting out while they still can.
This is silly. Every taxpayer knows that he will have to pay taxes on a non-Roth IRA. You are saying that taxpayers are so present-oriented that they have emotionally suppressed the obvious fact that they will eventually have to pay the income taxes on their money. You say that they are so sensitive to paying taxes now that they will refuse to cash in an IRA for any reason, just to save on taxes to be paid immediately. I cannot imagine any taxpayer who could not see through this arrangement. At any time, a taxpayer could think this:
I will have to pay the tax at some point. Better now than later. I know what I am facing now. It could be worse later. Knowing Congress, it will be worse later. I will cash out the IRA, pay the tax, pay the penalty, and do whatever I want with my money, without being limited by whatever my retirement fund lets me buy.
I want to make my position clear. I regard such a view as paranoid. I have counseled my client as follows:
You will have to pay the tax at some point. Better later than now. You know what you are facing now: a guaranteed payment. It could be much better later. Knowing Congress, it will be better. Do not cash out the IRA, do not pay the tax, do not pay the penalty, and stick with whatever your retirement fund lets you buy.
This is the safe and secure way to think about investing for retirement. This is what accountants recommend. They follow their own advice.
3. PRICE INFLATION
You warned my client about the possibility of price inflation in the future. I understand it, you do not trust the Federal Reserve System to maintain the purchasing power of the dollar.
Let me remind you that the Federal Reserve is legally bound to pursue two policies: (1) full employment and (2) stable prices. While it is true that the law does not specify a numeric standard for either of these goals, the Federal Reserve has been careful to balance these two goals.
Today, "full employment" is defined by the Federal Reserve as "no more than 8.3% unemployment." In 2009, it was defined as "no more than 9% unemployment." The Federal Reserve's policy-makers remain flexible. Surely, we do not want a narrow-minded ideology to govern the nation's most important policy-making economic institution.
As for price inflation, the Federal Reserve has kept it in the range of 2%. Chairman Bernanke has stated that 2% price inflation meets the law's definition of stable money.
According to the so-called "law of 70," we divide 70 by a constant rate of increase in order to discover the doubling date. So, at 2% per year, consumer prices will double every 35 years, which is certainly within the range of "stable prices" in my book.
The fact that a person sets up an IRA at the age of 30 and will pay twice as much for everything he buys when he retires at age 65 seems reasonable to members of my profession. I do not understand your objection.
Yes, in theory it is possible that price inflation could rise to 12% per year. It did in the late 1970s. But this was an anomaly. The Federal Reserve reversed course in August of 1979. It reduced the rate of monetary inflation. That reduced price inflation by 1985.
True, there was the unpleasant side effect of a recession in 1980, which cost President Carter his re-election bid, followed by the worst recession from 1940 until 2008 under President Reagan. But members of my profession think that the Federal Reserve will never again adopt policies that could produce price inflation as high as 12% a year.
It is true that the increase of the monetary base from late 2008 to mid-2011 took the base from $900 billion to $2.9 trillion. Technically speaking, this was a tripling of the monetary base. While it is technically possible for this increase to be translated into a tripling of prices, this would take the willingness of the nation's commercial bankers to start making loans to the public again.
We think this is highly unlikely. Commercial banks are sitting on top of $1.7 trillion in excess reserves at the Federal Reserve. These earn a safe 0.25% per annum. While it is true that this rate of return does not cover the costs of keeping the banks' doors open, we see no reason for the bankers to start lending to the public again. The risk of lending to anyone in this economy, or any foreseeable economy, is far too great.
If, under some hypothesis of a wild thirst for income from loans sufficient to enable banks to pay interest to depositors, bankers actually do start lending, the Federal Reserve has a plan to exit from its portfolio of government IOUs, including Fannie Mae and Freddie Mac bonds. The Federal Reserve will sell these assets to the general public.
There is a huge appetite from investors to purchase Fannie Mae and Freddy Mac bonds, since they are issued by two agencies that were nationalized by the government in September 2008. There is virtually no risk that the sale of these highly desirable assets to the public will be at prices less than face value. The Federal Reserve will therefore not suffer massive losses in its portfolio.
Even if massive losses should be imposed, the Federal Reserve will suffer no loss. According to new rules issued by the Federal Reserve on its own authority, the Federal Reserve will compensate itself by writing a check to itself to cover this loss. It will get this money out of the funds that it would otherwise have turned over to the Treasury at the end of the fiscal year.
It is true that the federal debt would rise by this amount of money, but as we CPAs say, federal deficits don't matter. Private deficits do matter, of course, but not federal deficits.
It is true that Chairman Bernanke has not revealed exactly what the Federal Reserve will do to exit from its tripled monetary base if commercial banks ever start lending their excess reserves, but he has assured the public and Congress on numerous occasions that there is such a plan, and it will work.
So, I regard as poor advice any suggestion that the purchasing power of money invested in an IRA will depreciate at anything over 50% after 35 years, and therefore it is unwise to stick with an IRA. It is relatively easy to earn 2% per year in an IRA account.
It is true that the Standard & Poor's 500 index was over 1500 in the year 2000, and that it is 1400 today. It is also true that the dollar's purchasing power has fallen by 30% since 2000. Nevertheless, I regard this as a 12-year temporary anomaly.
It is also true that putting the money in a bank account today does not return 2% per annum. This is another anomaly.
He can buy corporate bonds. Of course, if long-term rates rise, the market value of these bonds will fall. But I do not expect long-term rates to rise. Yes, under price inflation, long-term rates rise and bond prices fall, but as I have made clear, there is no good reason to expect price inflation above a mild 2% per year, which the Federal Reserve and the accounting profession believe constitutes stable prices.
4. PRIVACY
You have raised the issue of privacy. You have argued that the government finds it far easier to monitor whatever assets people own when these assets are in a special tax-deferred retirement account. You argue that the taxpayer must send this information to the Internal Revenue Service every year. All this is true, but it is irrelevant.
The fact that the U.S. government and the IRS know where all this money is should be no cause of alarm.
The fact that the government sets rules regarding what may or may not be purchased as eligible assets is also of minor concern.
The government is committed to making available a safe, reasonably secure retirement investment program for all Americans. The various agencies charged by Congress to monitor capital markets have a responsibility of assessing the safety of various classes of investment-grade assets. Your suggestion that the officials employed by these agencies are not capable of making such an assessment with any degree of accuracy is simply unacceptable.
Furthermore, you point to the failure of regulation prior to the meltdown of 2008 and 2009 as an example of their incompetence. I say this is cherry-picking data. One brief interlude of confusion on the part of the regulators does not constitute a valid indictment of the regulatory system as a whole. The federal government has assured us that steps have been taken to see to it that nothing like this ever happens again.
Your suggestion that it is better to buy gold coins, which leave few records implies that the United States government poses a threat to the capital of Americans. It suggests that privacy in a digital age requires secrecy.
Those of us in the accounting profession take a dim view of secrecy. We believe that full disclosure is always best. Congress sets the example here. So does the President. So does the Federal Reserve, which is committed to transparency, except in Fort Knox, Kentucky, which does not really count.
5. A FREEZE ON IRA ACCOUNTS
Suggesting that the President of the United States might issue an executive order, without warning, freezing all retirement accounts because of a national emergency, I regard as fear-mongering. Yes, the President in theory could do this. I assume that everyone knows this. Therefore, raising this issue publicly makes little sense. Why harp on this?
Such a scenario makes little sense, apart from some wild-eyed scenario, such as an international banking crisis or a biological weapon attack on some Western city or cities. I mean, what are the odds of this? Infinitesimal.
6. GOLD IN AN IRA
You have written that anyone investing in gold should begin by purchasing bullion gold coins, preferably American eagle coins.
This is very difficult to do in an IRA, as you know. A person must set up an independently managed IRA. He must then find a firm that will take responsibility for overseeing the investments. Most trustee firms do not have ways of monitoring the whereabouts of gold coins.
I think that gold is overpriced today, just as I did when it was $257 an ounce. I told those few clients who were interested in buying gold in 2001 that gold is a volatile investment that does not belong in any retirement account, or any account at all. I still believe this.
A person's IRA trustee can buy gold mining stocks. He can also buy ETFs, although they own no gold, but merely own unsecured promises from third parties to pay paper money equal to the price of gold. That is as good as gold in my book.The fact that it is difficult to buy gold for an IRA is one of the great advantages of owning an IRA. The IRA benefits from the good judgment of asset managers who have graduated from accredited universities, accredited business schools, and especially accredited law schools. These people are familiar with basic economics, especially the economics taught in Ben Bernanke's textbook.
CONCLUSION
I hope I have made my position clear. I think my views are representative of the vast majority of Certified Public Accountants.
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