A small handful of outfits in our industry recently sprang up and started heavily promoting a so-called “self-storage” or “LLC” IRA. The pitch is for you to establish an LLC company to store the metals on behalf of your IRA in your home (or nearby).
At first glance, it sounds like an attractive option. Investors buy metals to increase privacy and control. Some do not want to rely on third-party vaults and would prefer having personal access to their metals 24 hours a day, 7 days a week. We totally agree with this sentiment when it comes to precious metals that you personally and directly own. But anyone considering this “self-storage IRA” scheme should be extremely careful and aware of the risks.
In short, the scheme appears likely to blow up. The IRS may one day disallow the whole thing and declare taxes immediately due on the entire IRA balance, along with any applicable penalties.
First, a little background on the IRA structure. The IRS requires the assets in your retirement account to be held by a third party.
The intent is to stop account holders from using or accessing IRA assets for personal benefit because doing so would be tantamount to a fully taxable distribution. There are also a number of prohibited transactions and disqualified persons.
The innovation these dealers promote involves IRA holders setting up a stand-alone LLC company which they personally manage. The investor takes possession of the metals on behalf of their IRA rather than personally, thereby supposedly meeting the third-party requirement.
LLC IRA promoters haven’t convinced the IRS or any court that, in the context of precious metals stored at home, the LLC company scheme can be reliably managed to avoid impropriety with regard to IRA rules.
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.
Creating an LLC company to purchase gold and silver coins and then storing them in your home safe – e.g. next to the rifles and some coins you inherited from grandma – hasn’t been found definitively to be a violation of IRS rules, but it sure looks like trouble, particularly because IRS rules do state that IRA assets cannot be commingled with other property.
IRS Has Signaled It Will Disqualify “Home Storage” IRAs
It is easy to imagine the IRS ruling against attempts to store IRA metals at home – nailing people with a huge bill for taxes and penalties. In fact, the agency is now issuing warnings. Laura Saunders of the Wall Street Journal recently covered the topic; “The Internal Revenue Service says it ‘warns taxpayers to be wary of anyone claiming that precious metals held in your IRA can be stored at home or in a safe-deposit box.’”
So, thanks to the recent hype, these schemes are now on the IRS’s radar. Although we are the last ones to say that the IRS is always right in their interpretation of the law, it does appear they will start going after “home storage” IRAs soon. We doubt many of our customers would want to be a test case for this iffy strategy.
Here are some other reasons to tread with caution:
- The rules around third-party management and control of IRA assets are highly complicated, and it would be easy to trip up and violate them.
- There can be significant costs of setting up and maintaining the LLC's operating agreements and state LLC filings.
- Costs could be higher if the holder takes a bit more prudent course and has prospective transactions reviewed by an attorney and/or CPA.
- There is currently a lack of clarity on what coins, rounds, and bars can and cannot be held in the LLC IRA, even assuming the structure itself withstands legal muster.
If that still isn’t enough to give investors pause, we are also troubled by what we discovered when looking into some of the people who are aggressively marketing the “home storage” IRA scheme. Some of the characters involved are connected to shady, or even failed, rare coin dealers. They may tell you they have several letters from attorneys they've paid which declare the scheme is perfectly legal. They will charge what always amounts to huge set up fees. And they may try to sell you some of their overpriced “proof” coins to hold in the account.