The Tax Court recently warned that although there are exceptions for when a traditional IRA can invest in gold, those that do best meet the requirements spelled out by the IRS.
Basic rules: When you set up an IRA, the funds are handled by a custodian that oversees the investments. Typically, you can spread out the investments among securities like stocks, bonds and mutual funds and cash. Depending on the custodian, investments in real estate are allowed. However, investing the IRA funds in collectibles, including most forms of precious metals, is a prohibited transaction.
The tax law only allows limited exceptions for investments in gold. For instance, you may have the IRA invest in American Eagles and Canadian Maple Leafs coins, but not South African Krugerrands. Similarly, there are technical exceptions for certain bullion bars of gold and silver.
Because most IRA custodians won’t get involved with gold investments, you may have to find one that offers self-directed IRAs. You may see these options advertised in several forums. Some are reputable but others are not.
One popular idea is to establish a self-directed IRA that operates as a limited liability company (LLC). This is generally easier to manage and costs less than other self-directed IRAs. But the LLC structure creates other potential tax problem.
Case in point: The taxpayer in the new Tax Court decision, a nurse in Rhode Island, set up a self-directed IRA through an LLC. Then she instructed the IRA custodian to have the LLC buy gold and silver American Eagle coins. However, as part of the deal, the coins were transferred into the taxpayer’s possession in her home.
This is a fatal flaw in the arrangement. The IRS strictly adheres to the rule that precious metals must be in the custodian’s possession to qualify under the special exception. Otherwise, the transaction constitutes a taxable event.
As a result, the Tax Court agreed with the IRS’ contention that the transfer triggered tax on the entire value of the coins. What’s more, to add insult to injury, the Court tacked on an accuracy-related penalty because the taxpayer relied on the information presented on the custodian’s website rather than seeking competent advice from a tax professional.
Note that these rule for traditional IRAs also extend to Roth IRAs. Be wary of deals that sound too good to be true.
Final words: Advise your clients to be extremely careful when investing in gold or other precious metals through an IRA and provide whatever assistance they need.