New Tax Legislation:
Rare Coin in IRAs

Donald Doyle

New Tax Legislation Recently Introduced In The Senate Could Pour Unprecedented Amounts Of Liquidity Into Rare Coins And Revolutionize The Rare Coin Market.

That new legislation, entitled Options for Investors through United States Certified Coins Act of 2007, was introduced in the Senate on May 25, 2007. The bill proposes the amendment of the Internal Revenue Code to permit the inclusion of U.S. certified rare coins as eligible assets for acquisition by Individual Retirement Accounts (IRAs). Imagine the potential effects for the numismatic market if this legislation is passed – a hope that could become a reality as soon as the fourth quarter of 2007.

In 1974, the Employee Retirement Income Security Act was passed by Congress and signed into law by President Gerald R. Ford. This Act transformed the investment and accumulation of retirement assets through its creation of the Individual Retirement Account, or IRA. These retirement accounts give Americans an opportunity to independently save for retirement through tax-deferred accounts. Furthermore, IRAs provide a secondary benefit by giving individuals retiring or changing employment the ability to transfer existing plan balances into their IRAs in order to maintain the current asset value derived from their previous employment-sponsored retirement plans.

Since its creation in 1974, the IRA has been modified and fine-tuned to expand its eligibility and effectiveness. These changes include the creation of an IRA that permits after-tax contributions, as well as raises in individual contribution limits. Such modifications have led to the establishment of a massive pool of retirement funds that has grown from $1.4 billion in 1975 to a staggering $3.8 trillion in 2006.

The Individual Retirement Account is an integral part of the retirement saving structure, as is apparent from a recent report done by the Investment Company Institute. IRA assets represent one of every four dollars in U.S. retirement funds, making them the largest component of the $11.6 trillion retirement market. Over 40% or 45.2 million of the entire nation’s households own IRAs.

From 1976 to 1980, a broad-based index of the rare coin market went up 1,195%, driven in part by the surge in demand that came from IRAs. The relationship between IRAs and rare coins was a symbiotic one in which IRAs provided liquidity needed for the market and rare coins provided a wonderful diversification for a long-term portfolio. However, that mutually beneficial relationship was not to last.

In September 1981, Congress passed legislation that called for the exclusion of a large category of assets, including gold and legal tender coinage, from Individual Retirement Accounts. In a letter from Senator David Vitter to Chairman Charles Grassley, Senate Finance Committee, U.S. Senate, he states “Arbitrarily, two long-tested and respected investments, rare coins...and precious metals, were inappropriately included in this category, limiting investors’ freedom of choice for investments.” Although the total funds invested in IRAs grew from $38 billion to $72 billion during the twelve months following the legislation, rare coins dropped an average of 35%, virtually overnight, due to the restrictive provisions of the bill.

Total Value of IRA Market

What would happen today if this legislation became law and IRA assets could be used to buy rare coins? In 1981, when rare coins were removed from IRAs, the total assets in IRAs were only $38 billion. Today, total assets in IRAs are estimated to be around $3.8 trillion, a mind-boggling amount and one that is 100 times greater than the 1981 total. In other words, since the exclusion of rare coins from IRAs in 1981, IRAs have experienced an increase in total assets of 10,000%.

Furthermore, in 2008, limitations on IRA contributions will be changed from $4,000 to $5,000 per individual. Historically, increases in contribution limits have had a substantial impact on the expansion of IRA-based assets.

It’s Time To Do the Math

How can we best gauge the potential impact of the Senate legislation? What would happen to rare coin prices if the current bull market were exposed to an additional $3.8 trillion in potential demand? Perhaps the best way to determine the market’s reaction is by comparison to the “Wall Street Invasion” of 1989.

In 1989, $50 million of new institutional money was invested in rare coins by Kidder Peabody and Merrill Lynch. The market responded by going up more than 100% in a very short period of time. Today, with IRA assets at $3.8 trillion, how much would be invested in rare coins? What impact would that investment have on prices?

Based on historical experience, only a small fraction of the total assets of IRAs would be invested in rare coins and other tangible assets. However, even if as little as 1/10,000 of IRA funds were invested in legal tender coinage, it would be more than seven times as much as the institutional investment that propelled the market upward by more than 100% in 1989.

Will the Legislation Pass?

It should. The objective of the legislation is to restore for IRA investors the choice of investing in legal tender United States coins, thereby reinstating an option that had been previously available to them. Such legislation is consistent with Congress’ and the Administration’s desire to encourage U.S. citizens to save/invest more and to take personal responsibility for their retirement. Certified coins as qualified investments appeal to investors who want the option to diversify their investment portfolios with liquid, intrinsically valuable, tangible assets.

Certified legal tender coins are already allowed in corporate pension plans, and the American investing public should not be penalized for not having access to corporate pension options. The new legislation simply expands the menu of options for investors and allows them to diversify and stabilize their retirement portfolios with tangible assets. A study done for the Joint Committee on Taxation of the U.S. House and Senate examined the investment performance of portfolios that include and exclude rare coins and concluded that the inclusion of rare coins in a diversified portfolio of stocks and bonds increases the portfolio’s overall return at the same time that it reduces overall risk.

Moreover, unlike paper assets, rare coins are tangible investments that have a legal tender and intrinsic value. Indeed, as some stock portfolios are losing value, investors are understandably nervous about having all of their investment eggs in a volatile stock market basket.