Could You Be Making This Major IRA Mistake?
Did you know you can keep gold coins, Iraqi dinars, or other physical assets at home in your IRA?
Actually, you can’t, but I’ve had several clients tell me it’s perfectly legal. Unfortunately, it’s almost always a “prohibited transaction” – and a tax catastrophe for the IRA owner.
The effect of a prohibited transaction in an IRA is similar to the effect of the Death Star on an undefended planet. It terminates your IRA and ends all tax deferral for the funds inside it. You’ll have to pay income tax on the entire value of the untaxed portion of the IRA – generally 100% of its value. And if you’re under 59½ years old, you’ll have to pay a 10% “early distribution” penalty.
Let’s say Joe Flim-Flam, who operates www.flim-flam-IRA.com, informs you that you can store gold or other valuables in your IRA in your own home or in a safe deposit box.
It’s an attractive strategy. After all, the International Monetary Fund has concluded that major industrialized countries need to confiscate private assets to continue funding cradle-to-grave welfare states. The report proposes a “one-off capital levy” – outright confiscation – of 10% or more of private savings.
Retirement accounts like IRAs that require the services of an independent trustee to hold the assets are especially vulnerable to outright government theft.
So messages on the Internet like this one promising a way to keep your IRA out of Big Brother’s cold, greedy hands hardly come as a surprise.
Your self-directed IRA gives you total control. You’re the boss! You can even keep IRS-approved gold, silver, and platinum coins in your home safe or store them in your safety deposit box.
To use this strategy, your IRA creates a business entity that it owns – usually a limited liability company (LLC). This arrangement frees you from needing to have your IRA custodian approve every investment you make. The custodian must approve only the plan’s ownership of the LLC.
Joe tells you all you need to do is roll over the money in your traditional IRA into a self-directed IRA. The self-directed IRA then creates the LLC. You literally have checkbook control over all the assets in your IRA.
This is a perfectly legitimate arrangement, so far. Having direct control over your IRA assets feels great, but you’re playing a very dangerous game. The stakes involved become a little clearer once you read the numerous declaimers.
They read like this one:
Creating a home storage IRA is Client’s decision based on Client’s own research and advice from tax and legal professionals of Client’s choice regarding self-directed LLCs… Client acknowledges and assumes full responsibility for maintaining compliance with all IRS regulations with respect to all investment activities of the LLC.
Well, that clears things up, doesn’t it?
Since you – not the promoter – are responsible for complying with the regulations, maybe it’s time to roll up our sleeves and read what the Tax Code actually says about home storage of precious metals or other tangible assets.
Here’s the relevant section.
To summarize, all assets in an IRA must be held by a “trustee.” The trustee can be a bank “or another financial institution subject to regulation by state or federal bank regulators.” It can also be “such other person who demonstrates to the satisfaction of the [Treasury] Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.”
The “such other person” language is the only legal support that companies marketing home storage IRAs and similar flim-flam have to rely on.
How likely do you think it is the IRS will agree your home storage arrangement meets the same legal standards as a bank or trust company in the business of administering IRAs?
I’d wager it’s about as likely as the Earth surviving an attack by the Death Star. Maybe less likely.
Home storage of IRA assets is just one dangerous fallacy you’ll see promoted online. There are many others. Members of our Alert service (click here for more info) recently learned of a court decision involving an IRA owner who attempted to operate a business and pay himself a salary out of his plan for managing it.
The Tax Court concluded you can’t do that either, but that hasn’t stopped some promoters from saying you can.
The lesson here is to be extremely careful if you do anything with your checkbook IRA that isn’t “plain vanilla.” Before you invest, do your research, but bounce your investment ideas off someone who understands self-directed IRAs. Your accountant might – or might not – be the right person for that responsibility.
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