I hear a radio ad every week that says, “there is a loophole that allows you to use your IRA to buy physical gold “tax-free” and that you can EVEN store this gold in your home.” If these radio ads were on T.V., there’d probably be an image of Scrooge McDuck swimming in gold at his McMansion. These ads cause much concern as they give some misleading information. The good news is that you really can use your IRA to invest in gold. In fact, I have many clients who like to buy actual physical gold with their IRAs. And we’re not talking about gold funds or gold ETFs, but actual solid gold. You can also own silver, platinum, and palladium with your IRA so long as those metals meet certain legal requirements. Here’s the catch though and what the radio ads are missing, you can only own precious metals that meet certain legal requirements and you cannot personally store the metals. Don’t count on someone who sells precious metals to be an expert on IRA rules. They make money when you buy precious metals and they have no training or license to properly advise you, so get your legal and tax advice from a competent lawyer or tax adviser.
LEGAL RULES FOR IRA OWNED PRECIOUS METALS
Precious metals have been a popular investment for retirement plans since the financial market collapse in 2008. Most standard IRAs with financial institution custodians will typically only offer precious metals through funds or other complex structures whereby the IRA does not directly own the precious metals. A self-directed IRA can hold actual precious metals as long as those metals are not considered collectibles under law and as long as they are properly stored.
Only precious metals which meet the requirements of IRC § 408(m)(3) may be owned by an IRA. All other metals or coins are considered collectible items and cannot be held by an IRA. IRC § 408(m)(2)(C), and (D).
There are two categories of approved precious metals. The first category are specifically approved coins, such as American Gold or Silver eagles. The second category is bullion (e.g bars, or coin form bullion) that is gold, silver, platinum, or palladium, AND that meets certain purity requirements. The purity requirements are outlined below.
Gold, meeting minimum fineness requirements of 99.5%.
Silver, meeting minimum fineness requirements of 99.9%.
Platinum, meeting minimum fineness requirements of 99.95%.
Palladium, meeting minimum fineness requirements of 99.95%
Precious metals must be stored with a “bank” (eg. bank, credit union, or trust company). Personal storage of precious metals owned by an IRA is not allowed. A broker-dealer, third-party administrator, or any company not licensed as a bank, credit union, or trust company may not store precious metals owned by an IRA. IRS Private Letter Ruling 200217059.
There has been much confusion about owning precious metals with an IRA and there is confusion over some “loophole” that allows you to store them in your home. Our advice is against home storage, for tax code reasons and for security reasons. We’ve outlined the tax reasons more fully in a prior blog article you can check out here. In general though, our advice is that if your self-directed account owns metals directly through your custodian account then those metals will be stored with the custodian or with a “bank” whom the custodian uses for customers. If the metals are bought with an IRA owned LLC, then the metals of the LLC are subject to the storage rules and this can be satisfied by the LLC opening up a safe deposit box with a bank and by physically storing the metals there.
If an IRA purchases precious metals that do not meet the specific requirements of IRC § 408(m)(3), then the precious metals are deemed collectible items. As a result, they are considered distributed from the IRA at the time of purchase. IRC § 408(m)(1). Similarly, if the storage requirement is violated, then the precious metals are also deemed distributed as of the date of the storage violation. IRS Private Letter Ruling 20021705. The consequence of distribution is that the value of the amount involved is deemed distributed and is subject to the applicable taxes and penalty.
Go for the gold, or silver, or the other approved metals with your IRA. But make sure the metals meet the code requirements and that they are properly stored.
This article is an excerpt from Chapter 12: Precious Metals of The Self Directed IRA Handbook by Mat Sorensen
Precious metals have been a popular investment for retirement plans since the financial market collapse in 2008. Most standard IRAs with financial institution custodians will typically only offer precious metals through funds or other complex structures whereby the IRA does not directly own the precious metals. A self directed IRA can hold actual precious metals as long as those metals are not considered collectibles under law and as long as they are properly stored.
Only precious metals which meet the requirements of IRC § 408(m)(3) may be owned by an IRA. All other metals or coins are considered collectible items and cannot be held by an IRA. IRC § 408(m)(2)(C), and (D).
There are two categories of approved precious metals. The first category are specifically approved coins, such as American Gold or Silver eagles. The second category is bullion (e.g bars, or coin form bullion) that is gold, silver, platinum, or palladium, AND that meets certain purity requirements. The purity requirements are outlined below.
Gold, meeting minimum fineness requirements of 99.5%.
Silver, meeting minimum fineness requirements of 99.9%.
Platinum, meeting minimum fineness requirements of 99.95%.
Palladium, meeting minimum fineness requirements of 99.95%
Precious metals must be stored with a licensed financial institution or trust company. Personal storage of precious metals owned by an IRA is not allowed. A broker-dealer, third-party administrator, or any company not licensed as a bank, credit union, or trust company may not store precious metals owned by an IRA. IRS Private Letter Ruling 200217059.
If an IRA purchases precious metals that do not meet the specific requirements of IRC § 408(m)(3), then the precious metals are deemed collectible items. As a result, they are considered distributed from the IRA at the time of purchase. IRC § 408(m)(1). Similarly, if the storage requirement is violated, then the precious metals are also deemed distributed as of the date of the storage violation. IRS Private Letter Ruling 20021705. The consequence of distribution is that the value of the amount involved is deemed distributed and is subject to the applicable taxes and penalty.
By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook
This article is an excerpt from Chapter 12: Precious Metals of The Self Directed IRA Handbook by Mat Sorensen
A Self-Directed IRA is an IRA (Roth, Traditional, SEP, Inherited IRA, SIMPLE) where the custodian of the account allows the IRA to invest into any investment allowed by law. These investments typically include; real estate, promissory notes, precious metals, and private company stock. The typical reaction I hear from investors is: “Why haven’t I ever heard of self-directed IRAs before, and why can I only invest my current retirement plan into mutual funds or stocks?” The reason is that the large financial institutions that administer most U.S. retirement accounts don’t find it administratively feasible to hold real estate or non-publicly traded assets in retirement plans.
What Can a Self-Directed IRA Invest Into?
Under current law, a retirement account is only restricted from investing in the following:
Collectibles such as art, stamps, coins, alcoholic beverages, or antiques IRC 408(m);
And, any investment that constitutes a prohibited transaction pursuant to ERISA and/or IRC 4975 (e.g. purchase of any investment from a disqualified person such as a close family member to the retirement account owner).
The most popular self-directed retirement account investments include; rental real estate, secured loans to others for real estate, small business stock or LLC interest, and precious metals such as gold or silver. These investments are all allowed by law and can be great assets for investors with experience in these areas.
When self-directing your retirement account you must be aware of the prohibited transaction rules found in IRC 4975. These rules don’t restrict what your account can invest in, but rather, whom your IRA may transact with. In short, the prohibited transaction rules restrict your retirement account from engaging in a transaction with someone who is a disqualified person to your account. A disqualified person to a retirement account includes the account owner, their spouse, children, parents, and certain business partners. So, for example, your retirement account could not buy a rental property that is owned by your father since a purchase of the property would be a transaction with someone who is disqualified to the retirement account (e.g. father). On the other hand, your retirement account could buy a rental property from your cousin, friend, sister, or a random third-party, as these parties are not disqualified persons under the rules.
The rationale behind the prohibited transaction rules is that the federal government doesn’t want tax advantaged accounts conducting transactions between parties who are close enough to the account owner that there could be a transaction designed to avoid or un-fairly minimize tax by altering the true fair market value/price of the investment. The consequence of a prohibited transaction is disqualification of the retirement account as of January 1 of the year the prohibited transaction occurred. In a typical self-directed IRA investment, your IRA custodian holds your investment in their company name for your IRAs benefit (e.g. property is owned as ABC Trust Company FBO John Smith IRA) and receives the income and pays the expenses for the investment at the account owner’s direction and instruction.
What is an IRA/LLC?
Many self-directed retirement account owners, particularly those buying real estate, use an IRA/LLC as the vehicle to hold their retirement account assets. An IRA/LLC is a special type of LLC, which consists of an IRA (or other retirement account) investing its cash into a newly created LLC. The IRA/LLC is managed by the IRA owner and the IRA owner then directs the LLC investments and the LLC takes title to the assets, pays the expenses to the investment, and receives the income from the investment. There are many restrictions to the IRA owner being a manager (such as not receiving compensation or personal benefit) and many laws to consider so please ensure you consult an attorney before establishing an IRA/LLC. For more details on the IRA/LLC structure, the cases, and the structuring options, please refer to my prior blog post here.
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Pamela Constantino
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"Mat is an excellent attorney, well versed in the Self-Directed IRA market...His ability to distill the complexities of the Self-Directed IRA so that the average person can understand them, and ensure that they don't get "tripped up" is second to none.
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Founder and Retired CEO, PENSCO Trust Company
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Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs.
