The 1997 Taxpayer Relief Act established the rules governing Precious metals and how they are held in self-directed IRAs.
One of the rules specifies that only an IRS-approved Custodian can hold the IRA metals.
These Custodians are called depositories and they provide secure, insured storage for Precious metals.
Home storage Gold IRA
There are companies online that claim you can set up a home storage Gold IRA and act as your own depository.
In a home storage Gold IRA the investor establishes an LLC to act as the third-party Custodian for their IRA. This Custodian stores Precious metals in a safe in the investor’s home.
The IRS has warned and advised against this strategy for several years saying that investors cannot do indirectly (i.e., via an LLC) what they are not allowed to do directly.
A US Tax Court ruling in November, 2021 (Andrew McNulty et al. v. Commissioner) clarified that home storage is not allowed in self-directed IRAs.
In an opinion issued after the ruling, the Tax Court described home storage Gold IRAs as a “questionable internet scheme” that would be ripe for abuse if it were allowed.
A couple stored IRA Gold at home they owe the IRS more than $300,000
Andrew McNulty et al. v. Commissioner
In November, 2021 a US Tax Court ruled in favor of the IRS over a man and his wife (Mr. & Mrs. McNulty) who had set up a home storage Gold IRA in 2015 and then got audited a few years later. In the audit the IRS had disallowed the McNulty’s IRA.
The couple sued over the matter and lost their case. After the Tax Court ruling the couple owed the IRS over $300,000 in taxes and penalties.
One of the interesting aspects of this case is that the couple’s entire IRA (almost $750,000) was invalidated on the day they purchased their first Gold Coin.
The IRS rules covering IRAs state that when any disallowed transaction occurs, all of the assets in the IRA are considered to be distributed.
In the McNulty’s case, a single Gold Coin purchase was treated by the IRS as a distribution of the entire $750K IRA!
The McNulty’s owed $270,000 in back taxes and about $50,000 in penalties. That is a serious, and probably unrecoverable, financial hit for this retired couple.
Precious metals Custodians
While we may not like the IRS requirement for third-party Custodian storage it is one of the rules that we have to accept if we want to invest in Precious metals using tax-advantaged money.
And, if we think about, this custodial arrangement is no different than the one we have with the Broker-Dealer who currently holds our Stocks, Mutual funds, ETFs, etc. This Broker-Dealer holds securities in our name but we never receive anything physical from them except an account statement each month.
Gold IRA Custodians
In a self-directed Precious metals IRA there are three key roles to be aware of.
First, there is a Trustee who establishes and maintains the IRA account. We refer to these Trustees as Gold IRA companies.
Next, we have the Broker-Dealer who handles the buying and selling of physical metals.
The final role of interest is the Custodian who securely stores the physical metal.
All of these roles are licensed and monitored by the SEC and/or State securities regulators.
Each of the Gold IRA companies has one or more Custodians that they regularly work with. They will recommend that you use one of these Custodians but in most cases they will work with any Custodian that you specify.
Location of the depository is the primary reason you might want to specify a particular Custodian over the ones suggested by the Gold IRA company.
An investor living in San Antonio or Austin, Texas, for example, might like to have their Precious metals vaulted at the Texas Precious Metals Depository in Shiner, Texas because it is within easy driving distance. If the investor wanted to, they could drive to the depository and take physical possession of their metal. With a depository in Delaware or California, the investor in Texas would have to rely on the US Mail or commercial shippers in order to put their hands on the metal in their account.
Gold IRA
Individual Retirement Accounts (IRA) and self-directed IRAs (SDIRA) were created in 1974 by the Employee Retirement Income Security Act (ERISA).
Self-directed IRAs were allowed to invest in a broader range of assets, but the Investment management firms of the day only offered investors Stocks, Bonds, and Mutual funds inside their IRA accounts. Investors gained powerful tax benefits from ERISA but they were still limited to the standard offerings from Wall Street.
The IRA industry changed significantly in 1997 after the Taxpayer Relief Act was passed. This massive tax-reduction legislation added Gold and Silver to the list of assets that could be held in self-directed IRAs. The Act also introduced the child tax credit, the Roth IRA, and lower capital gains taxes.
With ERISA in place, the Investment management companies began to offer self-directed IRAs for Precious metals, Real Estate, and other alternative Investments. Investors were finally able to take full advantage of the tax benefits that were first created by ERISA in 1974.
Gold IRAs made it possible for investors to move retirement savings from existing IRAs and eligible 401(k)s into physical Precious metals.
How does a Gold IRA work
Opening a Precious metals IRA is simple and all of the Gold IRA companies have IRA Specialists to walk you through the process.
These are the simple steps you will follow when you are ready:
- Open an account with a Precious metals IRA company
- Specify whether the account will be a standard IRA (tax-deferred) or Roth IRA (tax-exempt)
- Fund the account with a rollover or transfer from your existing Retirement accounts or deposit new funds directly
- Specify a Custodian where the physical metal will be stored
- Choose the specific bars and Coins you want to hold in the IRA
At this point your Gold IRA is set up and you don’t have to do anything else until you reach retirement age (usually 59 ½).
Distributions from the IRA can be taken as cash, which requires selling the Precious metals, or the Custodian can securely mail the physical metal to you.
This ability to take distributions of physical Silver and Gold creates some interesting possibilities. Once you receive the metal in retirement it is fully outside of the Financial system. If keeping your family wealth private is a priority for you, give some thought to how you might take advantage of this Gold IRA feature.
For example, you could gift the distributed metal to individuals of your choice or leave the metal in a secure location for your beneficiaries to inherit. The metal could also be sold as needed for income or large expenses. It goes without saying that you should follow appropriate IRS rules for disposing of valuable assets.
Benefits of Gold IRA
There are several benefits of Gold IRAs that are typically mentioned on the internet:
- Hedging against Inflation
- Diversifying a Portfolio of Stocks, Bonds, and Mutual funds
- Investing in an asset with zero counter-party risk
- Capital gains on the Precious metals are taxed as regular income instead the 28% rate for Collectibles
The ability to distribute physical metal from a Gold IRA isn’t discussed online, although this could be an important benefit for some investors.
In the current economic environment investors are seeking the first three bennies listed above. Inflation is raging, the Stock markets are correcting (rolling over?), interest rates are rising sharply, and world powers are choosing sides for a potential kerfuffle.
* kerfuffle: a commotion or fuss, especially one caused by conflicting views
Gold IRA reviews
When we want to research potential Gold IRA companies or Gold IRA Custodians, an excellent resource is provided online by companies that compile customer reviews.
These reviews are provided by customers who were motivated to write a review on the company. Whether their experience was good or bad, they wanted to tell people about it.
It is well worth the time spent to look at the reviews posted on these sites, BBB in particular:
Better Business Bureau (BBB)Consumer AffairsTrustLinkTrustpilot
Birdeye
If you read enough Gold IRA reviews you will realize that most of the negative reviews involve the same issue.
The most common complaint comes from customers who purchased proof Coins, limited edition Coins, or fractional-ounce Gold Coins and then lost money when they liquidated their account.
It is super simple to avoid these potential problems. All you have to do is NOT buy proof or special edition Coins, and when possible, stick with one-ounce bars and Coins instead of fractional weights.
Here’s another tip: premiums on American Gold Eagles are very high, regardless of the size of the Coin. Before purchasing Eagles compare them against prices for the Canadian Maple Leaf, Australian Kangaroo, or Austrian Philharmonic.
One last point on Gold IRA reviews: a few negative reviews are OK as long as the company is working to resolve the issue. It is the companies with lots of negative reviews that we want to avoid, especially if they ignore their dissatisfied customers.
Conclusions
In this short post we’ve covered these main points:
- The Precious metals in your IRA have to be stored with a third-party Custodian. Home storage Gold IRAs are not permitted by the IRS.
- You can choose the Custodian who will hold your Precious metals. Some investors opt for the depository closest to their home.
- Setting up a Gold IRA is simple and the Specialists at your Gold IRA company will walk you through the process.
- Online customer reviews are a useful resource when you are evaluating Gold IRA Custodians or companies.
Hopefully you now understand that storing your Gold IRA at home is not allowed. If a Precious metals IRA still makes sense to you, check out the other resources on our website. We provide informative Precious metals content for free as a service to investors and consumers.
About Satori Traders
Satori Traders LLC is a California-registered Investment Advisor specializing in the Precious metals.
Bryan V Post is a California-registered Investment Advisor Representative and the founder of Satori Traders.
Bryan has worn numerous hats during his life: Engineer, Portfolio manager, Precious metals Investor, Technical analyst, Proprietary trader, Swing trader.
