Saturday, September 3, 2011

Q&A With The Doc: Should I Take the Tax Hit & Cash Out of My Retirements Funds for PHYZZ?

Peter writes:

Hi Doc
Just wanted to let you know (I'm sure I'm one of many lately) that along with Harvey Organ you have the best silver related commentary blog on the net bar none. Great work, keep it up.
Ive been building my position in physical silver since 2008 and at the current rate of growth, I anticipate another year and I can be in a position to retire at 54yrs old.
Last year I switched all my Real estate retirement portfolio: RRSP (Canadian version of 410k) holdings to Precious metals mining stocks 100%
So far Ive seen in the last year and half a 40% growth rate in the aforementioned fund.
Its people like yourself and others that prompted me to take this high risk transformation.Thank you.
My Question.
I'm thinking of cashing out all my RRSPs ..taking the tax hit of 40% (my tax rate) and reinvesting in physical Silver and some gold. Do you think it's a good idea or bad idea? Do you think it is worth taking that premature tax hit at 40%? Do you think in the long run I'll recoup this or should I just stay positioned in my current precious metals (senior miners) fund and hope that the miners continue to perform well?I'm worried if the market takes a big dump this year my RRSP portfolio fund will lose value big time. This would of course be exacerbated by a major decline in the market.
Bottom line something inside tells me physical is better than paper: no counter-party risk-especially in this corrupted so called free market.

Hi Peter,

The Doc is not a licensed investment adviser so I can't give you "investment advice"...but I can tell you what I've done and what I would do with my money.
I have removed every last dime from 401k type retirement funds, and no longer contribute, even though my employer offers a full match up to 7% of income.
Yes, there is a tax hit to withdraw the money...but there will be a tax hit whenever you withdraw the funds. 
If you withdraw the funds now, you will be taxed on a smaller net amount, and if you roll the proceeds into bullion- you have the opportunity to avoid taxes on your gains by using your bullion as an asset to PURCHASE other assets in the future. 
If you SELL your silver or gold for fiat currency (US or Canadian dollars) this is a taxable event.
As to your return of 40% in the last 18 months- this is an excellent return, but physical silver's return over the past 18 months dwarfs 40%.
18 months ago, silver was approximately $15.50/oz.
Silver closed access market trading yesterday at $43.35, roughly a gain of $28...or approximately an 181% gain over the past 18 months.
Lets say you had $100,000 18 months ago that you took out at a 40% hit due to taxes.  So say you had invested the $60,000 after taxes into physical silver.  Today that silver would be worth $108,387.

Left in your RRSP account, your $100,000 would have increased by 40% to $140,000.  However, in order to use the funds you would take the tax hit of 40% on the total, leaving you with $84,000.

Obviously this analysis is only fully valid if the physical gold/silver is eventually used as an asset to PURCHASE/ trade for another physical asset such as bread, milk, land, etc.  If it is "sold" back for fiat currency, fiat currency gains obviously apply.

This analysis doesn't even get in to the counter-party risk you mentioned such as nationalization, 401k/ RRSP confiscation, mining company management risks, financial market panic/collapses etc.

In the end, its up to you to make your own educated decision on the best way to use/invest/save your retirement funds.

Best of luck, and thanks for the kind words.