A Self-Directed IRA Can Purchase Precious Metals Approved Under the Tax Code
One of the most popular alternative investments with a self-directed IRA LLC is precious metals. Just as you can own real estate in your IRA, you can also legally invest in gold, silver, platinum or palladium bullion and certain coins.
While holding gold, silver or allowed coins in your IRA can make a great investment, investors need to approach the precious metal asset class with caution.
It’s similar to playing a new game when you were a kid. You may not have had the patience for it, but somebody had to read the instructions or explain how the game was played before you started or what was the point?
Investing in precious metals with your self-directed IRA is an undertaking where you want to read the directions first and better yet, have a thorough understanding of them afterwards.
Let’s start with Internal Revenue Code Section 408(m) which lists the items that if purchased with an IRA or 401k retirement plan, it results in a taxable distribution of your retirement fund. We definitely don’t want that to happen so let’s take a look at the prohibited assets listed in IRC 408(m):
- Any work of art
- Any rug or antique
- Any metal or gem
- Any stamp or coin
- Any alcoholic beverage or
- Any other tangible personal property (e.g. antique furniture, Bulova watches, etc.)
Sorry, you cannot legally own beer in your IRA!
But Uncle Sam does carve out some exceptions to the rule (imagine that!) so we end up with “collectibles that are not defined as collectibles.” Gotta love the IRS!
The code requires that these certain coins must be issued by the federal or a state government and under section 3(b) lists gold, silver, platinum and palladium bullion as long as they have a certain fineness and they are in the physical possession of a trustee.
As far as the tax code is concerned, a Trustee can be a bank, credit union or depository - bottom line, they must be regulated.
So now that we know the IRS allows these type of investments, the question becomes how do you hold precious metals in a self-directed IRA?
Several companies use the internet and direct marketing to promote the personal possession of gold or silver in your IRA. They must construe the tax code to allow such, but that is not the case at IRAYourWay.com.
We will not hesitate to help you invest in precious metals with your self-directed IRA if that is your desire. The reasons to invest in precious metals are several as they’ve served as a currency for early civilizations for many centuries and the prices have lowered in the past few years.
So while we can’t recommend that you personally possess the assets, we do instead recommend that physical possession of the precious metals remain with an approved trustee or custodian.
Our interpretation is based on a conservative view of the tax code and we feel strongly that while the code may not be as clear on this topic as it should be, there’s just too much at stake to risk your hard earned money on a questionable interpretation.
5 Steps to Take to Invest in Precious Metals with Your Self-Directed IRA
So the steps that an investor takes to hold precious metals in a self-directed IRA are as follows:
- Fund your self-directed IRA with a passive custodian.
- Perform due diligence in finding your precious metals dealer and deciding what to purchase.
- Forward your invoice/purchase details to your custodian.
- Your custodian will make the purchase and properly title the property in the name of their bank or trust company for the benefit of (FBO) the IRA owner.
- The property is then transferred to your custodian and safely held for your IRA in their custody at an approved designation.
In the case of a checkbook IRA or IRA LLC controlled by a manager, the asset would be purchased by the IRA when the IRA owner/manager of the IRA LLC writes a check for the purchase and directs the precious metals dealer to deliver the property to his local bank where it will be kept in a safe deposit box.
It is recommended that the safe deposit box account be opened in the name of and paid with the funds from the IRA LLC.
These processes ensure that our investors are compliant with the spirit and the letter of the Internal Revenue Code. We take a conservative approach that puts the investor first and we always will.
Other helpful tips when dealing with precious metals include:
- Do not physically possess the asset – we recommend allowable precious metals and coins purchased by a self-directed IRA be placed in the custody of a trustee (a U.S. bank or depository)
- The manager of the LLC should sign a resolution detailing the purchase and acknowledging the precious metals are purchased for the benefit of the IRA LLC and not for any personal benefit.
- Always title the asset properly – in the name of the custodian FBO IRA owner or in the name of LLC if using a checkbook IRA.
- Use funds from your self-directed IRA only to purchase the precious metals; don’t use your personal funds to make any part of the purchase.
- When using a safe deposit box, put the account in the name of your LLC.
- Finally, something you’ll really enjoy doing: take pictures of your purchase and keep an inventory of the details up to date.
It starts and ends with due diligence with the precious metals asset class. First and foremost, pick a trusted and established dealer. Then, gain a thorough understanding of how the process works and how best to comply with the IRS.
Always talk to an experienced attorney and/or accountant regarding your investments and get your questions answered before you take action. Call (606) 887-9271 for your free consultation and we’ll make sure you get the information you need to make successful self-directed investments.