The ‘home storage’ or ‘self-storage’ Individual Retirement Account (IRA) has been a topic of some popularity among those interested in owning physical gold inside of their retirement accounts. The gist of it is that, in apparent contravention of both the rules and essence of tax-deferred retirement plans, the account owner enjoys the privilege of maintaining the asset at their residence.
It has been perfectly fine, for many years, to buy physical gold and other, select precious metals inside of an IRA, using a self-directed IRA custodian for administration as well as an Internal Revenue Service (IRS)-approved metals depository to vault it. Still, for some, going that ‘traditional’ route – to the extent holding physical gold in an IRA is traditional – doesn’t quite cut it. For those folks, the idea of keeping the metal at their homes is particularly intriguing, as it provides what they see as the added peace of mind that goes with knowing they have ready access and full control over their gold, with no other entity through which to go in order to gain physical possession.
One of the most significant questions beckoned by the advent of the home storage IRA is this: Is it really possible for the beneficial owner of an IRA asset to legally hold that asset at their residence? There exist strict laws about account owners possessing the asset owned by the IRA, and especially during the period before IRA proceeds may be withdrawn without a penalty (currently age 59½). This is why IRA custodianship exists in the first place; the government obviously places a significant premium on ensuring the given asset is appropriately set aside, and that any distributions from the account are just-as-appropriately accounted for and reported.
Still, home storage gold IRAs are aggressively promoted throughout different elements of the commercial gold and financial services industries to such a degree that many laypeople who are interested in owning one understandably conclude that these must be good to go, because how else would it be possible for them to be marketed as they are?
Unfortunately for those folks, the short answer to the “Is it real” question is “No, not really.” The response would most certainly be an unqualified “No” if the IRS had already addressed this singular issue directly, but that has not happened…yet. There is a growing feeling, however, that such is simply a matter of time, and when the ruling does come down that firmly puts the kibosh on home storage IRAs, anyone who is keeping IRA assets in a safety deposit box in their basement will positively wish they’d done something different.
Start from here: If you know little else about IRAs and the custodianship thereof, you likely do know that IRA account owners are not intended to have possession of IRA assets while they are such assets. If it was OK for IRA owners to hang on to their account assets, then more, a lot more, would do it. There would be no need for anyone to promote any kind of homes storage IRA as a unique strategy, or loophole exception, or anything like that. It would be relatively common practice.
But it is not.
A reading of the relevant portions of the tax code should prompt any reasonable person to conclude that when it addresses the matter of IRA assets, including (and maybe especially) precious metals in the possession of a trustee, the trustee is not meant to be the individual citizen ultimately benefitting from the IRA.
If you look into this a little further, to see just what the IRS does say about retaining custody of these IRA assets, you will likely end up at Internal Revenue Code Section 408(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.”
When the Code says “such other person,” it is not referring to the beneficial owner of the IRA. As has been discussed, if the IRS was perfectly fine with account owners maintaining possession of IRA assets, this would be a well-established fact throughout the culture of investing and retirement planning. It is not.
Promoters of home storage IRAs say you can enjoy the benefits of the ‘loophole’ they infer from the above-quoted passage by strengthening your aspired-to position as a trustee, and that the way to do that is by setting up a limited liability company (LLC) that supposedly puts some legal distance between you and the physical gold.
Here’s how it might work, ideally (please note that what follows is a general description of but one variation of the arrangement):
You have an account at an actual IRA custodian that allows for monies to be invested in business entities, like LLCs. The type of custodian at which that kind of use of IRA funds is ‘good to go’ is the aforementioned self-directed IRA custodian. At this point, there is no problem.
So you have an IRA account at a self-directed IRA custodian. Next, you have to set up the LLC. You go to a lawyer, or use an online legal forms service, or maybe even use the resources of one of the companies promoting the home storage IRA, and set up the LLC, with your IRA as the sole member, and you as the non-member manager (LLCs have members, not shareholders).
Stop. Note that you set yourself up as the non-member manager in this situation. The reason you don’t want to be a member of the LLC is that it would eliminate the legal distance you want to keep between you and your gold. Your IRA can, and will be, a member – the sole member – but you cannot be a member.
From there, you direct your IRA to invest in the LLC. At that point, you, as the manager, will receive a checkbook from the IRA custodian that allows you, at the LLC level, to purchase investments for the LLC that is now “inside” of the IRA. It is in this way that you will purchase the gold in the name of the LLC.
What you have at this point is an LLC that’s owned by the IRA, and managed by you. Pretty clever, pretty flexible arrangement, right?
Well, yes it is. But with the added cleverness and flexibility comes greater responsibility for you, Mr. or Mrs. IRA LLC Manager.
It is at this point that the self-directed IRA custodian begins to come off the hook, as you are put increasingly on the hook, for what happens in this part of your IRA. That’s because you are the manager of the LLC; you make the decisions on its behalf. But you don’t enjoy the privilege of making them without bearing the burden of greater responsibility. You can’t cry to the IRS that your custodian – the real IRA custodian associated with all of this – should have known better when, for example, you make a mistake that results in the IRS disallowing an investment purchased by the LLC.
Well, principally, because you are the manager of the LLC, which means that you, alone, are responsible for the actions taken by it. If the LLC does anything illegal, the IRS will be knocking on your door. Again, one of the more salient points to remember is that, in this arrangement, your IRA custodian does not hold your gold; your IRA custodian holds the LLC, and it is the LLC that has decided to purchase some gold.
Also, with an IRA LLC, bookkeeping and administration of the LLC become the responsibility of the LLC manager – again, that’s you. The LLC will need to file a tax return and have numerous, other obligations, including that of informing the IRA custodian of the entity’s value each year so that the custodian can prepare the Form 5498 that tells the IRS what the IRA account it is administering is worth.
Something else: When the LLC purchases an investment, it (the investment) is actually titled in the name of the LLC, not the IRA. This was addressed just a few moments ago, when it was clarified that the gold purchased is bought by the LLC, not the IRA.
While an IRA custodian serves a variety of different and important purposes on behalf of the IRA account owner (you), its most important role is that of custodian. In other words, IRA custodians serve to hold in custody your assets. The fact that they do so proves, on its face, to the government that they are not in your personal possession. However, the inherent nature of the IRA LLC structure essentially eliminates that role of the IRA custodian, and opens the door to the possible, and dreaded, IRS interpretation of the gray-area strategy you’re employing.
Do you really want the IRS in the position of having to interpret the legitimacy of an outside-the-box tax strategy you’ve decided to pursue?
So now you may be thinking, “Well, then what purpose does the self-directed IRA custodian serve, if all of this is coming back to me?”
Not much, and that’s precisely the point. The role of the custodian becomes much more limited in terms of the IRA LLC, specifically. In fact, while self-directed custodians will typically play ball as far as allowing the LLC option, they are quick to protect themselves, and, in fact, many will recommend against such an arrangement even as they permit it.
Revisit, for a moment, the matter of the IRC definition of “trustee.” What anyone wanting a home storage IRA is relying upon is that the LLC owned by the IRA gets to enjoy the protected status of a physical trustee (a depository, in this case) of the IRA asset – in this case, gold. Also, because the LLC, rather than the individual, owns the gold, the IRA account’s beneficial owner would be off the hook as being seen as an in individual owner in possession of the asset.
In other words, the idea is that with the aid of some wind of a legitimate IRA custodian at the back of both you and the LLC entity (sort of), the LLC gains traction living in a self-created nether-region of “trustee,” as it remains undefined with great specificity in the tax code. This represents the ‘loophole,’ if you can call it that.
If you seek to do all of this entirely aboveboard, as you should if you’re going to do it at all, you’ll need to do a lot more than simply rely on the status of your LLC to purchase a safety deposit box that you would keep at your residence; you will have to file an application with the IRS to gain approval as a “U.S. trustee.”
Good luck with that.
In order to earn the government’s imprimatur as a U.S. trustee, the written application seeking that status must be able to show that the LLC satisfies a long list of intricate requirements, including those related to minimum net worth, fitness to handle retirement funds, professional fiduciary experience, annual audits, and meet a host of other stringent legal and financial obligations.
Is your IRA LLC, with its sights set on acting as the physical trustee of your gold IRA assets, going to be able to satisfy the IRS that it meets all of those requirements? And, if not, are you really just going to decide to roll the dice and wing it, anyway, keeping your gold stored at your house?
Is holding your IRA gold at your house really this important to you? Remember, you can always have gold at your home if it isn’t supposed to be an IRA asset; it’s the gold-as-IRA investment that is prompting all of this consideration.
You should be aware of something else. Those companies promoting this strategy, and offering various services to help you pursue it? They explain, but in no more than general terms, why the structures are legitimate and will pass muster with the IRS…and then will disclaim the heck out of precisely what they are promoting, telling you that, ultimately, you’re on your own, and that you should be seek the counsel of a bevy of professionals (tax attorneys, CPAs, etc.) before embarking down the path.
What does THAT tell you?
There has yet to be definitive, cut-and-dried guidance emerge from the IRS on the matter of holding IRA assets at your residence through the artfully-configured LLC of which you are not a member, but that you manage. There is no guidance because there has not so far been a seminal court case that takes on this issue directly.
However, it is likely that just such a day is coming, and it does not take a genius to figure out how that will go. When that case comes about, it seems clear the IRS will decide that any claim that an IRA LLC that home-stores gold is NOT the same thing as an individual who simply maintains physical possession of his IRA assets at his house…is the quintessential example of a distinction without a difference.
Should that happen, you will likely face the very real prospect of parting with around 35 percent of the value of the disallowed investment, and that does not take into account any additional penalties that may be applied if the IRS decides that you were going out of your way to pull a fast one on them.
If you are interested in having physical gold or other IRS-approved metals in your IRA, going through a reputable self-directed IRA custodian for account administration, as well as an IRS-approved depository for the actual storage of your assets, remains your best bet. Admittedly, owning IRA gold this way does not provide the aforementioned ‘peace of mind’ that some believe is achievable only by maintaining the metal at their location. That said, think of the peace of mind you are afforded by knowing that you’re not at risk of having well over a third of your IRA's value captured by the government, should it challenge what you’re doing, or when it finally decides to end the dream of home storage IRAs, more generally, for everyone.
The information contained here is for general information purposes only. The Financial Writer blog and Bob Yetman disclaim responsibility for any liability or loss incurred as a consequence of the use or application, either directly or indirectly, of any information presented herein. Nothing contained in this article, or any other article featured at this blog, should be construed as a solicitation or recommendation to engage in any financial transaction. You should seek the advice of a qualified professional before making any changes to your personal financial profile.