A Couple Stored IRA Gold at Home. They Owe the IRS More Than $300,000.
It’s official: Owners of individual retirement accounts with assets invested in gold and silver coins can’t store them in a safe at their home. So ruled the judge in a recent Tax Court case, Andrew McNulty et al. v. Commissioner. The decision will cost Mr. McNulty and his wife Donna dearly—taxes of nearly $270,000 on about $730,000 of IRA assets, plus penalties likely to exceed $50,000.
The ruling disallows a scheme that was heavily promoted several years ago, when radio and internet ads touted the benefits of using IRA assets to buy gold and silver coins and then store them at home or in a safe-deposit box. Promoters based pitches on a perceived ambiguity in the law, despite warnings from the Internal Revenue Service and legal specialists. These pitches are less common now, but they’re still around. Savers who have bought into them or are considering such a move should reconsider right away. The McNulty case has a broader lesson as well: It’s a cautionary tale showing how dangerous it can be to invest retirement-plan funds in alternative assets without proper guidance.
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Savers who have tax-favored retirement plans such as traditional IRAs, Roth IRAs, and Solo 401(k)s usually invest the assets in securities like stocks, mutual funds and exchange-traded funds. But they don’t have to. The law gives retirement-plan owners broad latitude in how they invest funds, as long as it’s not in collectibles like artwork, jewelry, antique furniture, cars, wine and such. Savers investing in alternative assets must follow strict rules against self-dealing. Otherwise, they risk disaster. For example, an IRA owner can use account funds to invest in a rental property like a beach house. But if she uses it herself for a week of vacation, that’s a “prohibited transaction” that dissolves the IRA, triggering taxes and perhaps penalties.
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According to the decision, the couple in 2015 began moving nearly $750,000 of existing retirement-plan funds, including from a MetLife annuity and 401(k), into self-directed IRAs. Then they had the IRAs purchase shares in limited-liability companies that in turn invested about $730,000 in a condominium plus gold and silver American Eagle coins. These moves are legal: The law allows IRAs to invest in physical gold and silver, and many savers hold alternative assets through LLCs to ease administration. By using an LLC, the IRA owner doesn’t have to ask the custodian to, say, cut a check to pay a plumber for repairs to a rental property within the IRA.
But in an IRS audit, Mr. McNulty, a Rhode Island-based plant manager at a sailcloth factory, conceded that he engaged in prohibited transactions in 2015 and 2016, although the decision didn’t say what they were. That dissolved his IRA and caused taxable IRA payouts to him of about $316,000.
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https://www.wsj.com/articles/a-couple-stored-ira-gold-at-home-they-owe-the-irs-more-than-300-000-11638527410 (subscription)
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