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IRA-Owned LLC Buying Gold: The Ultimate in Self-Direction or Disaster Waiting to Happen?

April 6, 2016

Guest post by Jeff Watson:

On multiple occasions I have been asked to share my thoughts regarding self-directed IRAs establishing limited liability companies so that the account holder can use that LLC to purchase precious metals and store them in a safe in the account holder’s own dwelling. I recently heard one radio advertisement for a company promoting and advocating just such a thing, and the energetic sales voice even offered to waive the initial $500 setup fee if callers would quickly take action and dial the toll-free 800 number.

When you consider investing your retirement dollars, specifically your IRA, it is wise to begin at the beginning. IRAs were established pursuant to 26 U.S.C. 408 which states in part, “For purposes of this section, the term ‘individual retirement account’ means a trust [emphasis added] created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust [emphasis added] meets the following requirements…” The statute goes on to list a long litany of requirements. I believe the usage of the word “trust” twice in that opening sentence has some significance.

By way of background, a trust requires the interaction of multiple parties and items: the Grantor/Settlor, the Trustee, the Beneficiaries, and most importantly, the assets. If a person is both the Grantor and Trustee, and also the Beneficiary (holding assets for his or her own benefit), the trust is defective and invalid. More on this later.

In 26 U.S.C. 408(m)(1), it states, “The acquisition [purchase] by an individual retirement account…of any collectible shall be treated…as a distribution from such account in an amount equal to the cost to such account of such collectible.” The statute then goes on to define “collectible,” and in §(2)(C) and §(2)(D), the list includes “any metal or gem” and “any stamp or coin [emphasis added].”
Exceptions for certain coins and bullion are given in §(3)(A) and §(3)(B) which are stated as follows:
For purposes of this subsection, the term “collectible” shall not include –

(A) any coin which is –

(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112(a) of title 31, United States Code,

(ii) a silver coin described in section 5112(e) of title 31, United States Code,

(iii) a platinum coin described in section 5112(k) of title 31 United States Code, or

(iv) a coin issued under the laws of any State, or

(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness…if such bullion is in the physical possession of a trustee described under subsection (a) of this section [emphasis added].

To recap, the statute authorizing the creation of the trusts known as individual retirement accounts (IRAs) states that an investment in collectibles shall be considered to be a distribution (taxable event) from the account in the same amount as the purchase price of the collectible, except when the IRA purchases certain types of gold, silver or platinum coins, or certain types of precious metals of a requisite fineness.

As you look deeper into 26 U.S.C. 408(m)(3), you will notice a distinction. When you compare 408(m)(3)(A) to 408(m)(3)(B), you will notice that (3)(B), which specifically deals with bullion, says the bullion must be in the physical possession of a trustee. That requirement is not set forth in 3(A) regarding certain coins. Right there, various proponents of an IRA-owned LLC buying gold coins and storing them in a vault in the basement of their own home feel like they are safe. Not so fast, my friend!

You must remember that the purpose of an IRA is a trust. Remember the necessary elements of a trust? You must also remember that just because the code doesn’t say “physical possession of a trustee” in the coin section does not mean the IRS won’t try to enforce it. For those who would doubt the accuracy of the preceding statement, please consider the actions of the IRS itself, how it contradicted its own Publication 590 as it related to the 60-day rollover rule just a few years ago. Unless the code is crystal clear, the IRS rules and regulations are whatever the IRS wants them to be.

For the sake of argument, let’s go along with those who advocate storing gold coins owned by your IRA in a safe in your own home. First of all, it has to be a coin of a certain degree of fineness which is purchased with IRA dollars. This immediately exposes the account holder to an extremely onerous transaction as far as markups, commissions, fees and shipping when buying such “coins.” Such assets are not sold at or near spot or melt value.

Furthermore, the IRS code uses the word “State” with a capital “S”. Some individuals may choose to read the term “any State” to mean only a U.S. state, not any foreign state (country). The argument that Canadian maple leafs are included under this expanded interpretation of “State” quickly goes away. For those who might argue to the counter and indicate that coins of other foreign states are implicitly included in the word “State” in this section of the code, allow me to remind you of the ill fate of the Krugerrand. Not only did it lack the requisite fineness level, but it became politically disfavored. Those who need a crash course on that politically incorrect form of gold need only watch one of the Lethal Weapon movies made by Mel Gibson and Danny Glover to quickly see how gold in that form can become ostracized and politically toxic.

Back at the beginning of 26 U.S.C. 408, in §(a)(2), it describes the trustee as “a bank…or such other person who demonstrates to the satisfaction of the Secretary [of the Treasury] that the manner in which such other person will administer the trust will be consistent with the requirements of this section.” It is clear that the legislative intent imposed by Congress through this statute indicates that not every Tom, Dick or Harriett should have free access to his or her own IRA funds. Just think of all the potential fraud and abuse that could occur. How would you be able to fairly and accurately track the value? What would prevent an account holder from pledging the gold or silver coins owned by his or her IRA as collateral for a personal loan, or taking and liquidating them at a coin shop or pawn broker?

My commentary to anyone who wants to proceed with this line of investment is to be very careful and educate yourself thoroughly. Get an opinion letter, not from the representative of a company trying to sell you on setting up an IRA-owned LLC that will buy overpriced gold or silver coins for your home storage, but from a disinterested, non-affiliated third party who has the appropriate qualifications to render such an opinion so that if, and when, you should receive an unfavorable ruling from the IRS, you at least have some credible source to rely on in an effort to minimize your negligence penalties.

Jeff Watson is an attorney at Jeffery S. Watson Law Firm Ltd. The views expressed in this article are solely those of the author and do not necessarily reflect the opinions of NuView IRA or its employees.