by: Clint Siegner*
Bullion investors buy gold and silver as a matter of self-reliance. Physical metals aren’t dependent upon the promises of financial institutions, governments, or other third parties.
This lack of counterparty risk makes precious metals quite different from most conventional assets. There is no possibility of a default or mismanagement which renders them worthless. That is a lot more than can be said of securities such as stocks and bonds.
Recently, in the USA, a few firms promoting “self storage” precious metals IRAs have been trying to exploit the self-reliance streak running through bullion investors in a manner that could cause significant harm.
These firms offer a scheme to circumvent IRS rules which require IRA metals be stored by a third party, and some people are biting. The desire to have possession and control of the metals appears to be outweighing good sense.
The warnings are piling up. Last week, the Industry Council on Tangible Assets issued the latest warning about storing IRA metals at home.
The trouble is rooted in the IRS requirement that assets in your retirement account be held by a third party.
Some firms have begun offering a dangerous work-around. They help investors create an LLC company which they claim will fill the role of the third party. The LLC buys and holds the metals, and the IRA holder manages the LLC.
IRS officials have already signaled that they see the formation of the LLC as a simple fiction to grant control over assets which are supposed to kept at arm’s length. ”Self storage” IRA holders seem likely to find their accounts disqualified, with taxes and penalties due immediately (as an early distribution of the full account balance).
As one expert frames it; “you can own a bakery with your IRA, but you cannot be the baker.” Owning a business with your self-directed IRA is okay. Hiring yourself and paying a salary is a definite no-no. Likewise it is perfectly fine to buy investment real estate, but your IRA cannot purchase your personal residence.
IRA promoters are offering LLC or “checkbook” IRAs despite knowing the program has not been defended successfully in court. It certainly does not have the blessing of the IRS.
In fact, the IRS is explicitly warning people. Forbes reports the agency was asked about ads promoting these types of IRAs: “The IRS cannot comment on claims made by any particular IRA promoter, but the agency warns taxpayers to be wary of anyone claiming that gold held in your IRA can be stored at home or in a safety deposit box.”
It appears to be only a matter of time before the IRS starts nailing such account holders to the wall. If so, IRA account holders will be faced difficult choice; pay the tax and penalty or hire an attorney and try to defend the scheme in court.
If there is any certainty, it’s that the promoters behind this type of IRA will not be picking up these costs.
Anyone reading the fine print will find they disclaim responsibility, even though they are happy to collect a handsome fee for assisting investors with setup.
More than that, we’ve also noticed that the promoters of the “home storage” IRA scheme also tend to steer investors into rip-off “collectible” coins, especially Proof Gold Eagles and Proof Silver Eagles. These coins are eligible to be held in IRAs but give the dealer a huge profit margin at the expense of the buyer.
It’s telling that a few promoters of these risky “home storage” IRAs are also the bad actors when it comes to what products they promote. They aren’t really looking out for their customers.
There are plenty of great reasons to hold precious metals in an IRA, just be sure to do it right. Find a reputable trustee, such as New Direction IRA, and store the metal in a secure, audited vault that is not connected to the banking system and offers physically segregated accounts, such as Money Metals Depository.
Gold and silver bullion are a great way to reduce counterparty risk. The last thing investors want is to find the IRS is their counterparty!