Nov 13

How To Invest in Coins with a Self-Directed IRA LLC

The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.

The categories of transactions that are not permitted to be purchased using a Self-Directed IRA LLC can be found in Internal Revenue Code Sections 408 & 4975.

When it comes to coins or metals, Internal revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 408.

How To Invest in Coins with a Self-Directed IRA LLCInternal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31; IRC sections 5112(a), (e) and (k); the Commodity Exchange Act; and IRC section 408(m)(3).

This change, in general, resulted in a windfall for individual collectors as well as coin and precious metal dealers (all of the coins allowed must be minted by the U.S. government or the states).

The Law

Internal Revenue Code Section 408(m):

(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) 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.

Subsection (a) states:

(a) Individual retirement account

For purposes of this section, the term “individual retirement account” means a trust 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 meets the following requirements:

(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).

(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is non-forfeitable.

(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.

31 U.S.C. 5112 refers to Denominations, specifications and design of coins.

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin that is 1.043 inches in diameter.

(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.

(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.

(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.

(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.

(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.

(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) and contains one-tenth troy ounce of fine gold.

(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —

(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;

(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.

How do I hold IRS Approved Coins with a Self-Directed IRA LLC?

Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next questions becomes how can the coins be held without violating IRS rules.

Most people don’t realize that a coin can be treated as bullion. As a result, based on the language in IRC 408(m)(3)(B), all coins defined in IRC 408(m), including American Eagle and State minted coins must be held in the ‘physical possession’ of a U.S. trustee, just like all precious metals (i.e. pure gold and silver bars). Since IRS approved coins, such as American Eagle and State minted coins are considered bullion for purposes of Internal Revenue Code Section 408(m), all IRS approved coins, just like precious metals, should be held in the “physical possession” of a U.S. bank or depository.

Although, bullion may be cast into bars or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Hence, it appears that the “physical possession” requirement outlined for bullion in IRC 408(m)(3)(B) does pertain to coins, such as American Eagle coins, as defined in IRC 408(m)(3)(A), since they can be defined as bullion. That being said, it is best for retirement account holders to hold all IRS approved coins outlined in IRC 408(m) at a depository or bank safe deposit box and not in their personal possession. It is best practice to hold all IRS approved coins at a bank or depository, including the American Eagle and State minted coins.

Holding IRS Approved Coins in a Safe Deposit Box

IRC Section 408(m) clearly states that gold, silver, or palladium bullion, which includes IRS approved coins, must be held in the physical possession of a U.S. trustee, otherwise known as a U.S. bank or financial institution.

Here is the exact language from the tax code under IRC 408(m)(3)(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, U.S.C.) 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.”

The tax code clearly states that any IRS approved metals (bullion) must be held in the physical possession of a trustee, which we now know means a U.S. bank. So the question then becomes is whether holding IRS approved coins (bullion) in a safe deposit box at a U.S. bank in the name of the Self-Directed IRA LLC or Solo 401(k) plan that would be considered to be in the ‘physical possession’ of a U.S. trustee or bank and satisfy the definition under IRC 408(m)?

An argument can then be made that holding precious metals (bullion) at a U,S. bank safe deposit box would not be considered to be in the physical possession of the IRA holder since the bullion will physically be held in a safe deposit box of the bank in the name of the IRA LLC or Solo 401(k) plan. However, the safe deposit box is in the constructive control of the Self-Directed IRA LLC manager or Solo 401(k) plan trustee. That being said, the Internal Revenue Code under Section 408 clearly states ‘physical possession’ and not possession or ‘constructive control.’ From a legal standpoint, possession is not defined to represent control, meaning you can be in possession of an item but not in control or ownership of it. Therefore, many tax practitioners take the position that holding bullion in a safe deposit box in the name of the Self-Directed IRA LLC or Solo 401(k) plan would satisfy the ‘physical possession’ requirement under Internal Revenue Code Section 408(m).”

Unfortunately there is no IRS guidance on this. What is clear is that, IRS approved precious metals should not be stored in the home or personal possession of the Self-Directed IRA holder, individual Solo 401(k) plan participant, or any person that does not satisfy the definition of a trustee according to the Internal Revenue Code. It is good practice to hold IRS approved precious metals or coins owned by a retirement account at an IRS approved depository where it is clearly in the ‘physical possession’ of a US Bank (trustee as defined under IRC 408(a).

To learn more about purchasing and holding coins with a Self-Directed IRA LLC, please contact one our tax professionals at 800-472-0646.

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Sep 05

Making Investments with Your Self-Directed IRA

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The foundation of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

The following are some examples of types of investments that can be made with your Self-Directed IRA LLC

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Real Estate

The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Since you are the manager of the Self-Directed IRA LLC, making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account. The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the IRA holder turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA LLC for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Helpful Tips :

  • The deposit and purchase price for the real estate property should be paid using Self-Directed IRA LLC funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Self-Directed IRA real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Self-Directed IRA or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • With a Self-Directed IRA the use of a nonrecourse loan would be subject to tax pursuant to Internal Revenue Code Section 514, which would not be the case with a Solo 401(k) Plan. This provides a very exciting investment opportunity for a self-employed individual or small business owner who is eligible for a Solo 401(k) Plan.
  • No services should be performed by the IRA holder or “disqualified person” in connection with the real estate investment. In general, other then typical trustee type of services (necessary and required tasks in connection with the maintenance of the plan), no active services should be performed by the plan participant or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the Self-Directed IRA LLC. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC XYZ, LLC, title to real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from the Self-Directed IRA LLC real estate investment should be allocated to the IRA
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Self-Directed IRA. By using a Self-Directed IRA to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax IRA distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

More importantly, with a Self-Directed IRA, you, as manager of the Self-Directed IRA LLC, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Helpful Tips :

  • The deposit and purchase price for the tax lien should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • A check from the Self-Directed IRA account should be taking to auction or used for the tax lien purchase – no personal check or cash should be used
  • No credit card should be applied for in the name of the Self-Directed IRA as that would violate the IRS prohibited transaction rules. A pure debit card is allowable
  • All income, gains or losses from tax lien investments should be allocated to the Solo 401(K) Plan

Loans & Notes

The IRS permits using IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax IRA) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you used a Self-Directed IRA to loan money to a friend, all interest received would flow back into your Self-Directed IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Helpful Tips :

  • The loan or note amount should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used in the loan transaction
  • The loan or note should not involve a “disqualified person” directly or indirectly
  • The loan or note should have a stated interest rate of at least Prime as per the Wall Street Journal (4.25% as of 6/23/17)
  • All interest and principal associated with the loan or note should be allocated to the Self-Directed IRA
  • It is good practice to have the loan terms documented in a promissory note or loan agreement
  • If you will be acting as the lender, consider securing the loan with an interest or lien in an asset owned by the borrower
  • Make sure you will not be engaging in any self-dealing loan transaction which would involve a loan or note that will personally benefit you or a “disqualified person”

Private Businesses

With a Self-Directed IRA you are permitted to purchase an interest in a privately held business. The business to be purchased can be any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Helpful Tips :

  • The deposit and purchase price for the business should be paid using Self-Directed IRA or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used to purchase the business
  • The purchase of the stock or assets of the business should not directly or indirectly benefit the plan participant personally or any “disqualified person”
  • The purchase of a business operated via an LLC or partnership will potentially trigger the Unrelated Business Taxable Income rules under IRC 512 and a corresponding tax of approximately 40% for 2017 would be applied
  • Stock of an S Corporation should not be purchased with retirement funds as the S corporation rules only allow individuals to be S Corporation shareholders
  • The purchase of stock of a C Corporation would not trigger the application of the Unrelated Business Taxable Income rules under IRC 512
  • All income, gains or losses from the purchased business should be allocated to the Self-Directed IRA
  • The plan participant or any “disqualified person” should not have any ownership in the business being purchased and should not directly or indirectly personally benefit from the acquisition
  • Make sure to perform adequate diligence on the business you will be purchasing or investing in especially if you will be buying the stock/interests and not the assets
  • Make sure you will not be engaging in any business acquisition transaction which would involve buying or selling a business that will personally benefit you or a “disqualified person”

Precious Metals & Coins

The Self-Directed IRA structure allows for investments into precious metals and certain coins. The advantage of using a Self-Directed IRA to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, IRS approved metals or coins, as defined under Internal Revenue Code Section 408(m) should be held an an approved depository or U.S. Bank.

Helpful Tips :

  • Only IRS approved metals or coins (bullion) may be purchases as per Internal Revenue Code Section 408(m)
  • The IRS approved precious metals or coins being purchased by the plan should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • With respect to IRS approved precious metals or coins(bullion), the metals or coins should not be held in the personal possession of any individual
  • With respect to the IRS approved precious metals or coins outlined in Internal Revenue Code Section 408(m), the bullion must be held in the “physical possession” of a U.S. depository or at a U.S. bank
  • An affidavit signed by the trustee of the plan confirming that the IRS approved precious metals or coins are being purchased and being held in the sole interest of the retirement account is good practice
  • All income, gains or losses from the purchased precious metals or coins should be allocated to the Self-Directed IRA
  • IRS approved precious metals or coins should not be held at a bank outside the United States
  • Perform adequate diligence on the dealer with which you will be transacting with for the purchase of IRS approved metals or coins

Foreign Currencies

The IRS does not prevent the use of IRA funds to purchase foreign currencies, including Iraqi Dinars. In fact, the Self-Directed IRA Plan structure permits the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Self-Directed IRA to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax IRA distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

Helpful Tips :

  • Make sure you have a solid background in trading currencies – high volatile and significant risk
  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade foreign currencies and all his/her securities licenses are in good standing.
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • All income, gains or losses from the foreign currency transactions should be allocated to the Self-Directed IRA

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Self-Directed IRA may purchase stock, bonds, mutual funds, and CDs. The advantage of using a self-directed IRA is that you are not limited to just making these types of investments. With a Self-Directed IRA with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless! When purchasing stocks or securities with a Self-Directed IRA, all income and gains, including dividends, would flow back to the plan without tax. With a Roth Self-Directed, all gains are tax-free. Whereas, if you purchased stocks with personal funds, all income and gains would be subject to federal and in most cases state income tax would be subject to federal and in most cases state income tax.

Helpful Tips :

  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade stocks or securities and all his/her securities licenses are in good standing.
  • Beware of promoters who are promising high returns and that do not work at reputable financial institutions – high likelihood of fraud
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • Open up a brokerage account in the name of the Self-Directed IRA – not a personal account
  • All income, gains or losses from the stock investments should be allocated to the Self-Directed IRA

If you have any questions about whether your specific Self-Directed IRA transaction would potentially be in violation of IRS rules, please contact a tax professional at the IRA Financial Group at 800-472-0646.

 

Mar 06

What Types of Alternate Investments Can You Make with a Self-Directed IRA?

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS only describes the type of investments that are prohibited, which are very few.   The main advantages of using a self-directed IRA to make investments is that one can generate tax-deferred or tax-free gains on investments one knows and understands.

For 2017, the following are some examples of types of investments that can be made with your Self-Directed IRA LLC:

  • Residential or commercial real estate
  • Domestic or Foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds/Notes
  • Hard money lending
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies
  • Bitcoins
  • Hedge Funds
  • Private Equity Funds

Using a Self-Directed IRA LLC to make investments offers the investor the ability to make traditional as well as non-traditional investments, such as real estate, in a tax-efficient manner.

Below are some of the most popular reasons to purchase non-traditional assets with your Self-Directed IRA LLC.

What Types of Alternate Investments Can You Make with a Self-Directed IRA?

Diversification

In general, most Americans have an enormous amount of financial exposure to the financial markets. Whether it is through retirement investments, such as IRAs or 401(k) plans, or personal savings, many of us have most of our savings connected in some way to the stock market. In fact, over 90% of retirement assets are invested in the financial markets. With over $20 trillion in retirement assets as of 2013, you can see the scope of that exposure. Investing in non-traditional assets, such as real estate, offers a form of investment diversification from the equity markets. In general, the more diversified your portfolio, the greater chance that your assets will offer lower correlation, meaning they are less likely to move in the same direction. However, diversification does not assure profit or protect against loss. The use of non-traditional asset classes can help protect your portfolio when the market is down and help protect you from losing more than the market.

Invest in Something You Understand

Many Americans became frustrated with the equity markets after the 2008 financial crisis. Thankfully, we have seen the financial markets rebound since then and have even seem some years of over 20% growth in the equity markets. Nevertheless, many Americans are still somewhat shell-shocked from the market swings and not 100% sure what exactly goes on in Wall Street and how it all works. Real estate, for comparison, is often a more comfortable investment for the lower and middle classes because they grew up exposed to it, whereas the upper classes often learned about Wall Street and other securities during their younger years and college days. Everyone has heard someone talk about the importance of owning a home or the amount of money that can be made by owning real estate. From Donald Trump to reality TV, real estate is fast becoming mainstream and one of the most trusted asset classes for Americans. It is, of course, not without risk, but many retirement investors feel more comfortable understanding the real estate market and buying and selling real estate than they do stocks.

Inflation Protection

Rising food and energy prices, coupled with high federal debt levels and low interest rates, have recently fueled new inflationary fears. As a result, some investors may be looking for ways to protect their portfolios from the ravages of inflation. It is a matter of guesswork to estimate whether these inflation risks are real, but for some retirement investors, protecting retirement assets from inflation is a big concern. Inflation can have a nasty impact on a retirement portfolio because it means a dollar today may not be worth a dollar tomorrow.  Inflation also increases the cost of things that are necessary for humans to live and enjoy life, such as bread, gas, shelter, clothing, medical services, etc., decreasing the value of money so that goods and services cost more. For example, if someone had an IRA worth $250,000 at a time of high inflation, that $250,000 will be worth significantly less or have significantly less buying power. This can mean the difference between retiring and working the rest of your life. Buying hard assets is seen as one way of protecting your assets against inflation. Many investors have long recognized that investing in commercial real estate can provide a natural protection against inflation, as rents tend to increase when prices do, acting as a hedge against inflation.

Hard Assets

Many non-traditional assets, such as real estate and precious metals are tangible hard assets that you can see and touch. With real estate, for example, you can drive by with your family, point out the window, and say “I own that”. For some, that’s important psychologically especially in times of financial instability, inflation, or political or global upheaval.

Tax Deferral

Tax deferral literally means that you are putting off paying tax. The most common types of tax-deferred investments include those in IRAs or Qualified Retirement Plans (i.e. 401(k)). Tax-deferral means that all income, gains, and earnings, such as interest, dividends, rental income, royalties or capital gains, will accumulate tax-free until the investor or IRA owner withdraws the funds and takes possession of them. As long as the funds remain in the retirement account, the funds will grow tax-free. This allows your retirement funds to grow at a much faster pace than if the funds were held personally, allowing you to build for your retirement more quickly. And, when you withdraw your IRA funds in the form of a distribution after you retire, you will likely be in a lower tax bracket and be able to keep more of what you accumulated. So, with using a Traditional IRA as a retirement savings vehicle, not only are you not paying taxes on the money you invested, you could be paying them at a lower rate when you finally do “take home” your money.

As long as the funds remain in the account, they grow without taxes eroding their value. This enables assets to accumulate at a faster pace, giving you an edge when saving for the long term. And, when you withdraw funds after you retire, you’ll likely be in a lower tax bracket and be able to keep more of what you’ve accumulated.

The concept of tax deferral is premised on the notion that all income and gains generated by the pre-tax retirement account investment would generally flow back into the retirement account tax-free. Instead of paying tax on the returns of a Self-Directed IRA investment, such as real estate, tax is paid only at a later date, leaving the investment to grow unhindered. For example, if an IRA investor invested $100,000 into a Self-Directed IRA LLC in 2017 and the account earns $10,000 in 2017, the investor would not owe tax on that $10,000 in 2017. Instead, the Self-Directed IRA investor would be required to pay the taxes when he or she withdraws the money from the IRA, which could be many years later. For example purposes, assuming the IRA investor mentioned above is in a 33% federal income tax bracket, she would have had to pay $3,333 in federal income taxes on the $10,000 earned on the IRA in 2017. That would have left $6,667 in the account. At a 8% annual return, those earnings would go on to produce $533.36 in 2017. However, because IRAs are tax deferred, the self-directed IRA investor is able to earn a return on the full $10,000 rather than the $533.36 she would have had if she had to pay taxes that year. At a 8% annual return, she’d earn $800 in 2017. The beauty of tax deferral is that the deferral compounds each year.

The following examples illustrate the powerful advantage of tax-deferred contributions and compounding through a Traditional IRA versus making contributions to a taxable account.

Example #1:

Joe is 40 years old and makes a $5,000 contribution to an IRA. Joe is in a 30% federal income tax bracket. Joe invests his IRA funds and receives a 6% average annual return.  When Joe retires at age 70, his $5,000 contribution would be worth $21, 609.71. If Joe invested the $5,000 personally, the account would only be worth $14,033.97.

Example #2:

Jane is 35 years old and makes a $5,000 contribution to an IRA. Assume Jane makes a $5,000 contribution to her IRA each year until she reaches the age of 70. Jane is in a 30% federal income tax bracket. Further assume that Jane was able to generate a 7% average annual return on her investment. When Jane retires at the age of 70, her IRA account would be worth  $792,950.21. If Jane made these $5,000 contributions though a taxable account, the account would only be worth $490,707.49.

Tax deferred investments though a self-directed IRA LLC generally help investors generate higher returns. That’s because the money that would normally be used for tax payments is instead allowed to remain in the account and earn a return.

Real Estate

The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Real estate is the most popular investment made with a Self-Directed IRA. Making a real estate investment is as simple as writing a check. Since you are the manager of your Self-Directed IRA LLC, you have the authority to make investment decisions on behalf of your IRA. One major advantage of purchasing real estate with a Self-Directed IRA is that all gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA for $75,000 and later sold the property for $150,000, the $75,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Self-Directed IRA LLC. By using a Self-Directed IRA LLC to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all income and gains received would be tax-free.

More importantly, with a Self-Directed IRA LLC, you, as the manager of the IRA LLC, will have “checkbook control” over your IRA funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Loans & Notes

The IRS permits the use of IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA LLC to make loans or purchase notes from third parties, all interest payments received would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all interest received would be tax-free.

For example, if you used a Self-Directed IRA LLC to loan money to a friend, all interest received would flow back into your IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Private Businesses

With a Self-Directed IRA LLC you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using IRA funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512. The retirement tax professionals at the IRA Financial Group will work with you to develop the most tax-efficient structure for using your IRA to invest in a private business.

Precious Metals & Coins

Internal Revenue Code Section 408(m) lists the type of precious metals and coins that are permitted investments using IRA funds:

  • One, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure) and be legal tender coins.
  • one ounce silver coins minted by the Treasury Department;
  • any coin issued under the laws of any state;
  • a platinum coin described in 31 USCS 5112(k) ; and
  • gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).

By using a self-directed IRA to purchase IRS approved precious metals or coins, one is able to seemingly better diversify their retirement portfolio as well as generate tax-free gains on the sale of the metals or coins.

Internal Revenue Code Section 408(m) identifies the types of coins and precious metals that may be purchased using a Self-Directed IRA.

Section 408(m)(3)(A) lists the type of coins that may be purchased with retirement funds, which generally are American Eagle and U.S. state minted coins of a certain finesse.  The Technical and Miscellaneous Revenue Act of 1988 also allowed for the purchase of state minted coins. Whereas, IRC 408(m)(3)(B), refers to gold, silver, or palladium bullion of a certain finesse which must be held in the “physical possession” of a U.S. trustee, as described under subsection IRC 408(a), and which essentially refers to a bank, financial institution, depository, or approved trust company.

IRA Financial Group suggests that all clients seeking to purchase IRS approved coins or precious metals/bullion with their retirement account hold them in the physical possession of a trustee, such as a depository.  The IRS, as outlined in IRC 408(m)(3)(B) clearly does not allow any individual to hold IRS approved coins or precious metals/bullion personally, such as in their house. However, the Technical and Miscellaneous Revenue Act of 1988 Senate amendment seems to suggest that state minted coins can be held by a person other than the IRA holder, without referencing the term trustee, as defined in IRC Section 408.  Nevertheless, we recommend that IRS approved coins should not be held personally by the IRA holder and should be held at a trustee, as defined in IRC 408.

For Self-Directed IRA LLC clients seeking to hold IRS approved coins and precious metals at a bank safe deposit box, we believe that this position has some risk, as the IRS has not offered any formal guidance. In the case of a Self-Directed IRA, if the bank where the safe deposit box is not the trustee of the IRA that purchased the metals or coins, an argument can be made that the metals or coins would not satisfy the physical possession definition outlined in IRC section 408 since the bank could not serve as the IRA trustee.

In general, the rules surrounding the ownership and possession of IRS precious metals or coins are complicated.  Therefore, it is crucial that one works with a firm, such as IRA Financial Group, that has the expertise and resources to help one navigate the IRS rules without being preoccupied with selling you coins or precious metals.

The advantage of using a Self-Directed IRA LLC with “checkbook control” to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the LLC at a financial organization (at any local bank) safe deposit box eliminating depository fees.

Foreign Currencies

The IRS does not prevent the use of IRA funds to purchase foreign currencies, including Iraqi Dinars. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

Purchasing foreign currency, such as the Iraqi Dinar, with a Self-Directed IRA LLC is as easy as writing a check. As manager of the IRA LLC, you will have “checkbook control” over your IRA funds, providing you with the ability to make investments without requiring custodian consent. In addition, the foreign currency notes, including Iraqi Dinars, can be held in the name of the LLC at a financial organization (any local bank) safe deposit box eliminating depository fees.

By using a Self-Directed IRA LLC to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all foreign currency gains would be tax-free.

Bitcoin

On March 25, 2014, the IRS issued Notice 2014-21, which, for the first time, set forth the IRS position on the taxation of bitcoin.  According to the IRS, “Virtual Currency is treated as property for U.S. federal tax purposes,” the notice said. “General tax principles that apply to property transactions apply to transactions using virtual currency.”  By treating bitcoins as property and not currency, the IRS is providing a potential boost to investors but it also imposing extensive record-keeping rules – and significant taxes – on its use. With IRA Financial Group’s Self-Directed IRA LLC bitcoin solution, traditional IRA or Roth IRA funds can be used to buy bitcoin without tax.

IRA Financial Group’s Self-Directed IRA LLC for bitcoin investors, is an IRS approved structure that allows one to use their retirement funds to make bitcoin and other investments tax-free and without custodian consent.   The Self-Directed IRA LLC involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the IRA custodian) and managed by the IRA holder or any third-party. As manager of the IRA LLC, the IRA owner will have control over the IRA assets to make traditional as well as non-traditional investments, such as real estate.

Using IRA Financial Group’s self directed IRA LLC with “Checkbook Control” solution to make bitcoin investments offers a number of very interesting investment opportunities, including the ability to diversify one’s retirement portfolio with real estate, precious metals, and other alternative investment options.

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Self-Directed IRA LLC may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Self-Directed IRA LLC with “Checkbook Control” is that you are not limited to just making these types of investments. With a Self-Directed IRA LLC with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

For more information about alternate investments in an IRA, please contact us @ 800.472.4646.

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Sep 15

Think You Can Hold Gold Or Coins In A Self-Directed IRA At Home – Think Again

Thanks to significant advertising by precious metals and coin dealers, it has become widely known that gold, silver, palladium bullion, as well as certain coins can be purchased with retirement account funds. In fact, Internal Revenue Code (“IRC”) Section 408(m) sets forth a list of approved precious metals and coins that are not considered “collectibles” and may be purchased with retirement funds. Even though IRC Section 408 generally deals with IRAs, section (m) applies to both IRAs and 401(k) plans.

By using a Self-Directed IRA to purchase Internal Revenue Service (“IRS”) approved precious metals or coins, one is able to seemingly better diversify his or her retirement portfolio as well as generate tax-free gains on the sale of the metals or coins.

IRC Section 408(m)(3)(A) lists the types of coins that may be purchased with retirement funds, which generally are American Eagle and U.S. state minted coins of a certain finesse.  The Technical and Miscellaneous Revenue Act of 1988 (“TAMRA”) also allowed for the purchase of state minted coins. Whereas IRC 408(m)(3)(B), refers to gold, silver, or palladium bullion of a certain finesse which must be held in the “physical possession” of a U.S. trustee as described under subsection IRC 408(a), and which essentially refers to a U.S. bank, financial institution, depository, or approved trust company. Therefore, one should never hold IRS approved coins or precious metals/bullion owned by his or her retirement account personally, such as in his or her home.

There has been some uncertainty as to whether the “physical possession” requirement applies to both IRS approved coins and metals/bullion.  IRC Section 408(m) clearly states that gold, silver or palladium bullion must be held in the physical possession of a trustee, otherwise known as a U.S. bank, financial institution or approved trust company.  Hence, IRS approved precious metals may not be held personally or anywhere outside of the physical possession of a trustee, as defined under IRC Section 408(a). But what about IRS approved coins?  Can IRS approved coins, as described in IRC Section 408(m)(3)(A), which does not include the “physical possession of a trustee” language be held personally?  Unfortunately, there is not much IRS guidance on this point, but since coins may also be bullion, as defined in IRC Section 408(m)(3)(B), most tax practitioners take the position that IRS approved coins purchased by a retirement account should be held in the physical possession of a trustee, as defined under IRC Section 408. However, the language in TAMRA does state that a retirement account may purchase state minted coins so long as a person holds them independent of the IRA owner. The language in TAMRA does not define “person” and interestingly does not refer to the term “trustee.” So can one hold IRS approved coins personally?  The safest approach is to hold IRS approved coins owned by a retirement account in the “physical possession of a trustee.”

That begs the next question; can an LLC owned by a retirement account hold IRS approved coins and precious metals/bullion in a safe deposit box in the name of the LLC?  Over the last ten or so years, the self-directed IRA LLC or checkbook control IRA has gained popularity among retirement investors, including precious metals and coin investors.  A common self-directed IRA LLC strategy involves IRS approved coins or bullion purchased by the LLC manager in the name of the LLC, which is owned one-hundred percent by the IRA, and then held at a bank safe deposit box in the name of LLC. So what does the IRS say about this? Unfortunately not very much, but it is important to review what we do know.

Think You Can Hold Gold Or Coins In A Self-Directed IRA At Home - Think AgainLet’s start with IRS approved coins. If a an IRA holder holds coins in a safe deposit box at a U.S. bank in the name of the Self-Directed IRA LLC, the coins are clearly not being held by the IRA owner personally, which in the case of state minted coins would seem to satisfy the language in TAMRA. In the case of IRS approved coins that are not state minted, IRC Section 408(m)(3)(A) does not seemingly include a “physical possession” requirement, however, some IRS approved coins, such as American Eagles, can be considered bullion and could then fall under the “physical possession” requirement under IRC 408(m)(3)(B) for bullion. Thus, holding IRS approved coins at a bank safety deposit box in the name of the IRA LLC Plan is certainly not in the “physical possession” of the IRA holder since they will physically be held in a safe deposit box of the bank in the name of the IRA LLC. However, the question then becomes is whether the bank where the coins are being stored in the name of the IRA LLC is considered the trustee of the IRA, as defined by IRC Section 408. The answer to this question is also relevant when examining whether bullion/precious metals owned by a self-directed IRA LLC can be stored at a bank safe deposit box.

Unlike coins, IRC Section 408(m)(3)(B) clearly holds that the IRS approved bullion/precious metals must be held in the physical possession of a trustee and may not be held personally. We have learned that a trustee is defined under IRC Section 408 as a U.S bank, financial institution, or approved trust company, including a depository.  The definition of a U.S. trustee is outlined in IRC Section 408(a), which discusses the definition of an IRA.  So the argument goes if the IRS approved coins or bullion/precious metals are held at a bank safe deposit box in the name of the IRA LLC and the bank is not the trustee or the custodian of the IRA that hold the coins or metals/bullion, then is the physical possession definition satisfied and is the bank acting as the trustee of the IRA which owns the metals?  There are arguments on both sides.  For example, IRC Section 408(m) also applies to 401(k) plans and the definition of a 401(k) plan trustee is not the same as a trustee of an IRA.  Since the physical possession requirement outlined in IRC Section 408(m)(3)(B) applies to IRAs and 401(k) plans, some tax practitioners believe that the definition is satisfied so long as the bullion/metals are held at any bank or financial institution that satisfies the definition of trustee, as outlined in IRC Section 408(a), and not necessarily the actual trustee of the retirement account owning the coins, bullion/metals. The language in IRC Section 408(m)(3)(B) uses the term “a trustee” and not “the trustee” offering some support for the position that the coins, metals/bullion can be held at any trustee, as defined under IRC 408(a) and not just the trustee of the IRA.  This would make sense since a depository is considered a trustee pursuant to IRC Section 408(a), but may not be the actual trustee of the IRA owning the coins, metals/bullion.

So What Should I Do?

The safest approach for anyone seeking to purchase IRS approved coins or precious metals/bullion with their retirement account is to hold them in the physical possession of a trustee, such as a depository.  The IRS, as outlined in IRC 408(m)(3)(B), clearly does not allow any individual to hold IRS approved coins or precious metals/bullion personally, such as in his or her home. However, the language in TAMRA seems to suggest that state minted coins can be held by a person other than the IRA holder, without referencing the term trustee, as defined in IRC Section 408.  Nevertheless, it is recommended that IRS approved coins should not be held personally by the IRA holder and should be held at a trustee, as defined in IRC 408.

For individuals with a Self-Directed IRA LLC seeking to hold IRS approved coins and precious metals at a bank safe deposit box, there is risk to this position, as the IRS has not offered any formal guidance. In the case of a Self-Directed IRA, if the bank where the safe deposit box is not the trustee of the IRA that purchased the metals or coins, an argument can be made that the metals or coins would not satisfy the physical possession definition outlined in IRC section 408 since the bank could not serve as the IRA trustee. The safest approaching to holding IRS approved coins or bullion/precious metals is at a trustee, as defined in IRC Section 408, such as an approved depository.  One thing that is clear, is the one should not ever hold IRS approved coins or precious metals/bullion personally.

In general, the rules surrounding the ownership and possession of IRS precious metals or coins are complicated.  Therefore, it is crucial that one seeks the advice of a tax attorney or tax professional in order to safely navigate the IRS rules.

For more information about holding precious metals and coins in an IRA, please contact us @ 800.472.0646.

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Sep 12

Adam Bergman, IRA Financial Group Partner, Authors Article on Holding IRS Approved Coins and Precious Metals in a Self-Directed IRA for Forbes

Adam Bergman is a contributor to Forbes.com on the topic of retirement taxation, with attention to the self-directed IRA rules and investments

Adam Bergman, partner with the IRA Financial Group, authors an article on Forbes.com titled, “Buying Gold Or Coins In An IRA Creates Possession Issues”. Thanks to significant advertising by precious metals and coin dealers, it has become widely known that gold, silver, palladium bullion, as well as certain coins can be purchased with retirement account funds, such as a self-directed IRA gold. However, there has been great degree of attention on the subject of how one is able to hold IRS approved coins and precious metals/bullion. “I felt it was important to write an article that offered an in-depth analysis of the rules involved in owning and holding IRS approved coins and precious metals as per IRC Section 408(m).” stated Adam Bergman, IRA Financial Group Partner.

Mr. Bergman has writing about various items involving the taxation of retirement funds, particularly on the matters of Self-Directed IRAs and Solo 401K Plans. For example, Mr. Bergman recently wrote a blog about the self-directed Solo 401(k) Plan as well as the impact of the Greek financial crisis on retirement accounts. Mr. Bergman has just contributed an article to Forbes.com on the topic of retirement tax planning tax-planning opportunities for the millennials or Generation Y.

Adam Bergman, IRA Financial Group Partner, Authors Article on Holding IRS Approved Coins and Precious Metals in a Self-Directed IRA for ForbesAdam Bergman is a partner with the IRA Financial Group, LLC, the markets leading provider of Self-Directed IRA LLC and Solo 401(k) plans. Mr. Bergman is also the President of the IRA Financial Trust Company, a self-directed IRA custodian. In addition, Mr. Bergman is a recognized expert on IRAs and 401(k) Plans and is the founder of the BergmanIRAReport.com and the Bergman401KReport.com. Mr. Bergman is the author of six books on self-directed retirement plans, such as “Going Solo: America’s Best Kept Retirement Secret For the Self-Employed, The Checkbook IRA, Self-Directed IRA in a Nutshell, In God We Trust – In Roth We Prosper, and Turning Retirement Funds in” available on Amazon, and is a frequent contributor to Forbes. Mr. Bergman has advised over 12,000 clients on the Self-Directed IRA LLC and Solo 401(k) Plan solutions.

Mr. Bergman has been quoted in a number of major publications on the area of self-directed retirement plans. Mr. Bergman has been interviewed on CBS News and has been quoted in Businessweek, CNN Money, Forbes, Dallas Morning News, Daily Business Review, Law.com, San Francisco Chronicle, U.S. Tax News, the Miami Herald, Bloomberg, Arizona Republic, San Antonio Express, Findlaw, Smart Money, USA Today, Houston Chronicle, Morningstar, and American Lawyer on the area of retirement tax planning.

Prior to joining the IRA Financial Group, LLC, Mr. Bergman worked as a tax and ERISA attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent corporate law firms in the world. Throughout his career, Mr. Bergman has advised thousands of clients on a wide range of tax and ERISA matters involving limited liability companies and retirement plans. Mr. Bergman received his B.A. (with distinction) from McGill University and his law degree (cum laude) from Syracuse University College of Law. Mr. Bergman also received his Masters of Taxation (LL.M.) from New York University School of Law.

Mr. Bergman is recognized as a leading retirement tax-planning expert and has lectured attorneys on the legal and tax aspects of Self-Directed IRA LLC and Solo 401(k) Plans. Mr. Bergman is a member of the Tax Division of the American Bar Association and New York State Bar Association.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading “checkbook control Self Directed IRA and Solo 401(k) Plan provider. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-06

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Mar 29

New Podcast – The Cold Hard Truth About Holding IRS Approved Coins and Metals With a Self-Directed IRA

IRA Financial Group’s Adam Bergman discusses the topic of how to hold IRS approved coins and metals in a Self-Directed IRA.

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Jan 11

Investing in Coins with a Self Directed IRA LLC

The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.

The categories of transactions that are not permitted to be purchased using a Self-Directed IRA LLC can be found in Internal Revenue Code Sections 408 & 4975.

When it comes to coins or metals, Internal revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 408.

Internal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31; IRC sections 5112(a), (e) and (k); the Commodity Exchange Act; and IRC section 408(m)(3).

This change, in general, resulted in a windfall for individual collectors as well as coin and precious metal dealers (all of the coins allowed must be minted by the U.S. government or the states).

The Law

Internal Revenue Code Section 408(m):

(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) 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.

Subsection (a) states:

(a) Individual retirement account

For purposes of this section, the term “individual retirement account” means a trust 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 meets the following requirements:

(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).

(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is non-forfeitable.

(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.

31 U.S.C. 5112 refers to Denominations, specifications and design of coins.

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin that is 1.043 inches in diameter.

(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.

(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.

(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.

(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.

(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.

(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) and contains one-tenth troy ounce of fine gold.

(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —

(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;

(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.

How do I hold IRS Approved Coins with a Self-Directed IRA LLC?

Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next questions becomes how can the coins be held without violating IRS rules.

Investing in Coins with a Self Directed IRA LLCMost people don’t realize that a coin can be treated as bullion. As a result, based on the language in IRC 408(m)(3)(B), all coins defined in IRC 408(m), including American Eagle and State minted coins must be held in the ‘physical possession’ of a U.S. trustee, just like all precious metals (i.e. pure gold and silver bars). Since IRS approved coins, such as American Eagle and State minted coins are considered bullion for purposes of Internal Revenue Code Section 408(m), all IRS approved coins, just like precious metals, should be held in the “physical possession” of a U.S. bank or depository.

Although, bullion may be cast into bars or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Hence, it appears that the “physical possession” requirement outlined for bullion in IRC 408(m)(3)(B) does pertain to coins, such as American Eagle coins, as defined in IRC 408(m)(3)(A), since they can be defined as bullion. That being said, it is best for retirement account holders to hold all IRS approved coins outlined in IRC 408(m) at a depository or bank safe deposit box and not in their personal possession. It is best practice to hold all IRS approved coins at a bank or depository, including the American Eagle and State minted coins.

Holding IRS Approved Coins in a Safe Deposit Box

IRC Section 408(m) clearly states that gold, silver, or palladium bullion, which includes IRS approved coins, must be held in the physical possession of a U.S. trustee, otherwise known as a U.S. bank or financial institution.

Here is the exact language from the tax code under IRC 408(m)(3)(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, U.S.C.) 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.”

The tax code clearly states that any IRS approved metals (bullion) must be held in the physical possession of a trustee, which we now know means a U.S. bank. So the question then becomes is whether holding IRS approved coins (bullion) in a safe deposit box at a U.S. bank in the name of the Self-Directed IRA LLC or Solo 401(k) plan that would be considered to be in the ‘physical possession’ of a U.S. trustee or bank and satisfy the definition under IRC 408(m)?

An argument can then be made that holding precious metals (bullion) at a U,S. bank safe deposit box would not be considered to be in the physical possession of the IRA holder since the bullion will physically be held in a safe deposit box of the bank in the name of the IRA LLC or Solo 401(k) plan. However, the safe deposit box is in the constructive control of the Self-Directed IRA LLC manager or Solo 401(k) plan trustee. That being said, the Internal Revenue Code under Section 408 clearly states ‘physical possession’ and not possession or ‘constructive control.’ From a legal standpoint, possession is not defined to represent control, meaning you can be in possession of an item but not in control or ownership of it. Therefore, many tax practitioners take the position that holding bullion in a safe deposit box in the name of the Self-Directed IRA LLC or Solo 401(k) plan would satisfy the ‘physical possession’ requirement under Internal Revenue Code Section 408(m).”

Unfortunately there is no IRS guidance on this. What is clear is that, IRS approved precious metals should not be stored in the home or personal possession of the Self-Directed IRA holder. It is good practice to hold IRS approved precious metals or coins owned by a retirement account at an IRS approved depository where it is clearly in the ‘physical possession’ of a US Bank (trustee as defined under IRC 408(a).

To learn more about purchasing and holding coins with a Self-Directed IRA LLC, please contact one our tax professionals at 800-472-0646.

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Dec 22

New Podcast – Don’t Believe the Hype – The Truth About Holding Precious Metals & Coins With a Self-Directed IRA

IRA Financial Group’s Adam Bergman discusses the truth behind the rules the IRS has set forth about holding precious metals with a Self-Directed IRA or Solo 401(k) Plan.

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Dec 02

Tips for Investing with a Self Directed IRA LLC

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The foundation of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

The following are some examples of types of investments that can be made with your Self-Directed IRA LLC

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

How to Make the Most of Your Self Directed IRA InvestmentsReal Estate

The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Since you are the manager of the Self-Directed IRA LLC, making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account. The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the IRA holder turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA LLC for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Helpful Tips :

  • The deposit and purchase price for the real estate property should be paid using Self-Directed IRA LLC funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Self-Directed IRA real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Self-Directed IRA or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • With a Self-Directed IRA the use of a nonrecourse loan would be subject to tax pursuant to Internal Revenue Code Section 514, which would not be the case with a Solo 401(k) Plan. This provides a very exciting investment opportunity for a self-employed individual or small business owner who is eligible for a Solo 401(k) Plan.
  • No services should be performed by the IRA holder or “disqualified person” in connection with the real estate investment. In general, other then typical trustee type of services (necessary and required tasks in connection with the maintenance of the plan), no active services should be performed by the plan participant or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the Self-Directed IRA LLC. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC XYZ, LLC, title to real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from the Self-Directed IRA LLC real estate investment should be allocated to the IRA
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Self-Directed IRA. By using a Self-Directed IRA to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax IRA distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

More importantly, with a Self-Directed IRA, you, as manager of the Self-Directed IRA LLC, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Helpful Tips :

  • The deposit and purchase price for the tax lien should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • A check from the Self-Directed IRA account should be taking to auction or used for the tax lien purchase – no personal check or cash should be used
  • No credit card should be applied for in the name of the Self-Directed IRA as that would violate the IRS prohibited transaction rules. A pure debit card is allowable
  • All income, gains or losses from tax lien investments should be allocated to the Solo 401(K) Plan

Loans & Notes

The IRS permits using IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax IRA) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you used a Self-Directed IRA to loan money to a friend, all interest received would flow back into your Self-Directed IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Helpful Tips :

  • The loan or note amount should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used in the loan transaction
  • The loan or note should not involve a “disqualified person” directly or indirectly
  • The loan or note should have a stated interest rate of at least Prime as per the Wall Street Journal (3.25% as of January 1, 2015)
  • All interest and principal associated with the loan or note should be allocated to the Self-Directed IRA
  • It is good practice to have the loan terms documented in a promissory note or loan agreement
  • If you will be acting as the lender, consider securing the loan with an interest or lien in an asset owned by the borrower
  • Make sure you will not be engaging in any self-dealing loan transaction which would involve a loan or note that will personally benefit you or a “disqualified person”

Private Businesses

With a Self-Directed IRA you are permitted to purchase an interest in a privately held business. The business to be purchased can be any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Helpful Tips :

  • The deposit and purchase price for the business should be paid using Self-Directed IRA or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used to purchase the business
  • The purchase of the stock or assets of the business should not directly or indirectly benefit the plan participant personally or any “disqualified person”
  • The purchase of a business operated via an LLC or partnership will potentially trigger the Unrelated Business Taxable Income rules under IRC 512 and a corresponding tax of approximately 40% for 2015 would be applied
  • Stock of an S Corporation should not be purchased with retirement funds as the S corporation rules only allow individuals to be S Corporation shareholders
  • The purchase of stock of a C Corporation would not trigger the application of the Unrelated Business Taxable Income rules under IRC 512
  • All income, gains or losses from the purchased business should be allocated to the Self-Directed IRA
  • The plan participant or any “disqualified person” should not have any ownership in the business being purchased and should not directly or indirectly personally benefit from the acquisition
  • Make sure to perform adequate diligence on the business you will be purchasing or investing in especially if you will be buying the stock/interests and not the assets
  • Make sure you will not be engaging in any business acquisition transaction which would involve buying or selling a business that will personally benefit you or a “disqualified person”

Precious Metals & Coins

The Self-Directed IRA structure allows for investments into precious metals and certain coins. The advantage of using a Self-Directed IRA to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the IRS approved metals can be held in the name of the Self-Directed IRA at a financial organization (any local bank) safe deposit box eliminating depository fees and the coins can be held in the personal possession of the plan participant or trustee.

Helpful Tips :

  • Only IRS approved metals and coins may be purchases as per Internal Revenue Code 408(m)
  • The IRS approved precious metals or coins being purchased by the plan should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • With respect to IRS approved precious metals, the metals should not be held in the personal possession of any individual
  • With respect to the IRS approved precious metals, the metals must be held in the “physical possession” of a U.S. depository or at a U.S. bank
  • With respect to the IRS approved coins, the “physical possession” requirement that applies to precious metals does not appear to apply to coins
  • An affidavit signed by the trustee of the plan confirming that the IRS approved precious metals or coins are being purchased with being held in the sole interest of the plan is good practice
  • All income, gains or losses from the purchased precious metals or coins should be allocated to the Self-Directed IRA
  • IRS approved precious metals should not be held at a bank outside the United States
  • Perform adequate diligence on the dealer with which you will be transacting with for the purchase of metals or coins

Foreign Currencies

The IRS does not prevent the use of IRA funds to purchase foreign currencies, including Iraqi Dinars. In fact, the Self-Directed IRA Plan structure permits the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Self-Directed IRA to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax IRA distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

Helpful Tips :

  • Make sure you have a solid background in trading currencies – high volatile and significant risk
  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade foreign currencies and all his/her securities licenses are in good standing.
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • All income, gains or losses from the foreign currency transactions should be allocated to the Self-Directed IRA

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Self-Directed IRA may purchase stock, bonds, mutual funds, and CDs. The advantage of using a self-directed IRA is that you are not limited to just making these types of investments. With a Self-Directed IRA with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless! When purchasing stocks or securities with a Self-Directed IRA, all income and gains, including dividends, would flow back to the plan without tax. With a Roth Self-Directed, all gains are tax-free. Whereas, if you purchased stocks with personal funds, all income and gains would be subject to federal and in most cases state income tax would be subject to federal and in most cases state income tax.

Helpful Tips :

  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade stocks or securities and all his/her securities licenses are in good standing.
  • Beware of promoters who are promising high returns and that do not work at reputable financial institutions – high likelihood of fraud
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • Open up a brokerage account in the name of the Self-Directed IRA – not a personal account
  • All income, gains or losses from the stock investments should be allocated to the Self-Directed IRA

If you have any questions about whether your specific Self-Directed IRA transaction would potentially be in violation of IRS rules, please contact a tax professional at the IRA Financial Group at 800-472-0646.

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Nov 13

IRA Financial Group Releases Self-Directed IRA Investor Alert on Holding Precious Metals with Retirement Funds

Misleading advertising leading self-directed IRA investors to violate IRS rules when holding precious metals with retirement funds.

IRA Financial Group, the leading provider of “checkbook control” Self-Directed IRA LLC solutions releases an investor alert to all its Self-Directed IRA clients on the topic of holding IRS approved precious metals with a Self-Directed IRA in light of the inaccurate advertising on the subject.

The categories of transactions that are not permitted to be purchased using a Self-Directed IRA LLC can be found in Internal Revenue Code Sections 408 & 4975.

When it comes to coins or metals, Internal revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 408.

IRA Financial Group Releases Self-Directed IRA Investor Alert on Holding Precious Metals with Retirement FundsInternal Revenue Code Section 408(m) is specific as to what defines a collectible. Some notable exceptions are allowed for gold, silver, and palladium bullion of a certain finesse, as well as American Eagle and state minted coins. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31. Internal Revenue Code Section 408(m) is clear that the IRS approved bullion must be held in the physical possession or a US bank. “Unfortunately, there has been a significant increase in misleading advertisements online and via traditional media outlets about being permitted to hold IRS approved precious metals or coins personally by the IRA holder outside of a US bank – this is completely false,” stated Adam Bergman, a partner with the IRA Financial Group. “The Internal Revenue Code is clear under Section 408 that IRS approved bullion, which includes coins must be held in the physical possession of a US bank, including a depository,” Mr. Bergman continued.

According to Mr. Bergman, the repercussions for holding precious metals owned by a retirement account, such as a self-directed IRA or solo 401(k) plan personally can potentially trigger tax and penalty. Before purchasing precious metals with a self-directed IRA or solo 401(k) plan it is important to talk to a tax attorney ot tax professional who is familiar with the IRS rules on owning and holding IRS approved precious metals.

IRA Financial Group’s investor alert highlights the IRS rules surrounding the ownership and holding of IRS approved precious metals and coins and provides guidance to clients on staying within the IRS rules.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading “checkbook control” Self Directed IRA precious metals and Solo 401(k) Plan provider. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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