Fact Library ~ Self-directed IRAs

imgres

This page is meant to offer the black and the white as it pertains to IRAs, their investment options, and limitations. Here we lay out the framework highlighting the legalities of taking physical possession of Gold, Silver, or Platinum Eagle Coins purchased with IRA funds. We also cover other IRA investment options like real estate and what the IRS says you can and cannot do to avoid early taxes and penalties.

No Penalties, No Taxes, No Depositories ~ If you don’t hold it you don’t own it

Tax Code Analysis:

Here we discuss and link to Internal Revenue Code 408(m)(3)(A) which directly references the exempt coins. The language regarding trustee possession only applies to ‘bullion’ in 408(m)(3)(B) not ‘coins’ as referenced in Code 408(m)(3)(A).

From 26 U.S. Code § 408 – Individual retirement accounts

(m) Investment in collectibles treated as distributions
(1) In general
The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402) as a distribution from such account in an amount equal to the cost to such account of such collectible.
(2) Collectible defined
For purposes of this subsection, the term “collectible” means—
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by the Secretary for purposes of this subsection.

(3) Exception for certain coins and bullion
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 that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) [2] requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section.

Section 5112 of title 31 (The gold, silver, and platinum coins referenced above in A):

5112 (a)
(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.
(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.
(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.
(10) A five dollar gold coin that is 16.5 millimeters in diameter, weighs 3.393 grams, and contains one-tenth troy ounce of fine gold.

5112 (e)
(1) are 40.6 millimeters in diameter and weigh 31.103 grams;
(2) contain .999 fine silver;
(3) have a design—
(A) symbolic of Liberty on the obverse side; and
(B) of an eagle on the reverse side;
(4) have inscriptions of the year of minting or issuance, and the words “Liberty”, “In God We Trust”, “United States of America”, “1 Oz. Fine Silver”, “E Pluribus Unum”, and “One Dollar”; and
(5) have reeded edges.

5112 (k)
(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

images

imgres

Court Cases & IRS Field Advisory Statement:

In Swanson v. Commissioner, 106 T.C. 76 (1996), the Tax Court ruled against the IRS and found that the formation of a new entity, such as an LLC, which is funded by a self-directed IRA, is not a “prohibited transaction”. The Tax Court in Hellweg v. Commissioner affirmed this holding again a few years later in 2011, 2011-58 (T.C.M, 3-9-2011).

There was an IRS Field Service Advisory Statement #200128011 (April 6, 2001) where the IRS
acknowledged that its challenge was unsuccessful and stated that they will no longer argue or
“maintain” that the purchase of original “stock” (equivalent to Membership Interest in an LLC)
by an IRA is a prohibited transaction under Section 4975(c)(1)(D) of the Internal Revenue Code.

images

Items You Need to Know ~ Rules & Regulations:

Prohibited parties are you, and direct family members like a spouse, children, and parents. These parties cannot transact business with the LLC IRA. These parties cannot personally benefit from LLC IRA assets or function and vice versa.

The LLC IRA needs its own separate bank account to be used for making investments. This LLC IRA account should be kept separate of any personal assets or accounts. You cannot withdraw money personally from the bank account. All personal distributions should be made from the custodian.

Personal compensation is prohibited. You should not pay yourself, nor any prohibited party any compensation for management duties of the LLC IRA.

If the LLC IRA has more than one member, all members must maintain equal percentage ownership. All contributions and distributions must be pro rata matching the exact percentage for each member/ owner.

If your LLC IRA has only one member, it is disregarded by the IRS and does not need to file an annual tax return. If the LLC IRA has more than one member/ owner it must file an annual tax return with the IRS.

If you are the IRA account beneficiary and acting as manager of the LLC IRA funds your activities must be limited to only administrative and investment duties. Acceptable activities include: signing contracts and checks, receiving income, paying expenses, and directing investments.

It is important to maintain registration of your LLC in the state in which it is registered. This usually entails an annual report and payment of fee.

A year end valuation needs to be reported to the self directed custodian each year. Typically this is a simple one line item dollar amount reported online.

It is important to maintain proper records of LLC investments, activities, and purchase or sell receipts. These should be kept on file by the LLC manager.

If the LLC activities range beyond simple investment holding, advanced planning from professionals may be required.

If the LLC engages in active business operations it may need a business license from a local governmental district. Check with your secretary of state, department of revenue, or other state or local administration for clarity.

You cannot benefit from LLC assets, and they may not benefit from you.

If real estate is an investment you must be careful to not provide sweat equity in the property. This is considered adding value to the entity. Such activities should be hired out to a third party. You must also not stay in, reside in, or live on the property. These rules apply to all prohibited parties.

You may not lend cash or assets to yourself or prohibited parties.

Do not allow your name to be on any contract for which the LLC is transacting business. All contracts must be in the name of the LLC. You are a signing manager of the LLC, but all assets and operations are to be under the LLC’s name.

All bank accounts and brokerage accounts must be in the name of the LLC. Likewise all assets and property should be titled in the LLC’s name.

Do not sign a personal guarantee or extend personal credit for any LLC operation. Do not allow your personal SSN be used for a margin account with a trading brokerage.

You should not take retirement distributions direct from your LLC. Distributions should be administered from the client’s custodial cash account. Typically the LLC would write a check to the custodial IRA cash account and the individual then request the retirement cash distribution from the custodian.

Do not transfer ownership in the LLC to yourself or a prohibited party.

Do not use LLC monies to invest in or loan money to other companies or other assets in which you have an interest.

Do not use LLC monies for personal expenses even if incurred doing managerial duties.

new logo banner 1

2 thoughts on “Fact Library ~ Self-directed IRAs

Leave a Reply