We have previously talked about buying nontraditional
assets in an IRA. We have talked about starting a business with IRA monies
(these are the “ROBS”) as well as buying real estate.
Just this week someone reached out to me about buying
real estate through their Roth. It would be a vacation home. Mind you, they
might never vacation there themselves, but you and I would refer to it
generically as a vacation home.
I am not a fan, and I have no hesitation saying so.
Put an asset in an IRA that is susceptible to personal
use, and you are courting danger. Talk
to me about a commercial strip mall, and I might be OK with it. Talk to me
about a vacation home, and I will (almost) always advise against it. There are
a million-and-one alternate investments you can consider. It is not worth it.
I am looking at a case about another category of investments
that can go south inside an IRA.
Gold and silver coins and bullion.
Let’s set this up:
(1) IRAs are not allowed to own collectibles.
(2) Precious metals are normally considered to be
collectibles.
(3) Therefore we do not expect to see precious
metals in an IRA, except that …
(4) Someone must have had a great lobbyist, as
there is an exception for
a. Selected
coins with a 99.5% fineness level
b. Selected
bullion with a 99.9% fineness level
You may have heard the radio commercials for American
Gold Eagle and American Silver Eagle coins as a way “to hedge inflation” within
your IRA, for example.
Mind you, I have no problem if you wish to own gold,
silver, platinum or palladium. You can even own them in your IRA, but you have
to respect the separation of powers that the tax Code expects in an IRA.
(1) The
IRA is a trust. When you open an IRA, you are actually creating a self-funded
trust. This means that it has a trustee. It will also have a custodian and a beneficiary.
a. You
open an IRA with Fidelity. Fidelity is the trustee.
b. Someone
has to hold the assets, probably stocks and mutual funds. This would be the custodian.
c. Someone
has to prepare the paperwork, including IRS filings such as a Form 5498 for funding
the IRA. This can be either the trustee
or custodian. In our example, Fidelity is so huge they are probably both the
trustee and custodian, making the two roles seamless and invisible to the
average person.
d. You
are the beneficiary.
i. Well,
until you die. Then someone else is the beneficiary.
There is one more thing the tax Code wants: the
beneficiary may not take actual and unfettered possession of IRA assets. More
accurately, the beneficiary can take possession, but taking possession has a
name: “distribution.” A distribution - barring a Roth or a 60-day rollover – is
taxable.
Possession is not an issue for the vast majority of
us. If you want your IRA monies, you have to contact Fidelity, Vanguard, T. Rowe
Price or whoever. You do not have possession until they distribute the money to
you.
How does it work with coins?
Let’s look at the NcNulty case.
Andrew and Donna McNulty decided to establish
self-directed IRAs. The IRAs, in turn, created single-member LLC’s. These
entities, while existing for legal purposes, were disregarded for tax purposes.
The purpose of the LLCs was to buy gold and silver coins.
Over the course of two years, they transferred almost $750
grand to the IRAs.
The IRAs bought coins.
The coins were shipped to the McNulty’s residence.
Where they were stored in a safe.
With other coins not belonging to an IRA.
But do not fear, the IRA coins were marked as
belonging to an IRA.
Good grief.
Where was the CPA during this?
Petitioners did not seek or receive advice from the CPA about tax reporting with respect to their self-directed IRAs or the physical possession of AE coins purchased using funds from their IRAs …. Nor did they disclose to their CPA that they had physical possession of the AE coins at their residence."
The Court decided that mailing the coins to their
house was tantamount to a distribution. A beneficiary cannot – repeat, cannot –
have unfettered access to IRA assets. There was tax. There were penalties. There
was interest. It was a worst-case scenario.
Why did the McNulty’s think they could get away with
taking physical possession of the coins?
There were a couple of reasons. One was that merely labelling
them as IRA assets was sufficient even if the coins were thrown in a safe with
other coins and other stuff that did not belong to the IRA.
Let’s admit, that reason is lame.
The second reason is not as lame – at least on its
face.
Remember that IRAs are not allowed to own
collectibles. The tax Code includes an exception to the definition of
collectibles to allow an IRA to own coins and bullion.
There are people out there who took that exception and
tried to graft it to the requirement to have independent custody of IRA assets.
Their reasoning was:
The same exception to collectibles status applies to custody, meaning that you are permitted to keep coins at your house, maybe next to your sock drawer for safekeeping.
No, you are not. These people are trying to sell you
something. They are not your friends. Review this with an experienced tax
advisor before you drop three quarters of a million dollars on a pitch.
So, can an IRA own gold?
Of course, but somebody is going to store it for you
somewhere. You will not have it in your possession. This means that you will
have to pay for its storage, but that is an unavoidable cost if you want to own
physical gold in your IRA. Perhaps you can visit one or twice a year and do a
Scrooge McDuck in the vault storing the gold. I will leave that to you and your
custodian.
Or you could just own a gold or silver ETF and skip physical ownership.
Our case this time was McNulty v Commissioner,
157 TC 10 11.18.21.
