Recently I received a brochure from the Capital Gold Group entitled “My Home Storage IRA – Get the Facts”. It described what is sometimes described as a “home storage gold IRA” or “home storage precious metals IRA” where you are the custodian of your own IRA and purchase gold or silver coins with the funds in your IRA and store those coins in a home safe or bank safety deposit box.
The first time I heard of this idea I thought it must be a mistake. I thought it must be illegal. My understanding of IRS rules is that you can not be the custodian of your own IRA assets. Retirement accounts are considered partnerships between account holders and the IRS where only if you abide by the IRS rules can your retirement accounts avoid or delay certain taxation. Despite that, organizations like the Capital Gold Group seemed to imply that the arrangement was completely legal. They even implied that the approach was approved by the IRS. After researching the subject I have concluded that Home Storage IRAs are illegal and the companies that promote them are misleading and untruthful in their advertising.
My understanding is that being the custodian of your own IRA assets is illegal.
In “Are ‘Home Storage’ Precious Metal IRAs Legit?” Seth E. Pierce writing for Law360 explains why:
Any entity wishing to comply, such as the LLC set up to hold your “home storage” precious metals, must complete a written application with the IRS demonstrating that the applicant satisfies a long list of requirements specified in the applicable regulations, including requirements relating to fiduciary ability, fiduciary experience, capacity to account, fitness to handle retirement assets, bonding, audits and net worth. Moreover, the applicant cannot act as a trustee until the IRS provides notice that the application has been approved. This reality is in stark contrast to the 1-2-3 step process promoted by some of the companies in this field, which promise that opening such an account is easier than “buying a car.”
If the U.S. government wanted to let people keep direct physical control over their retirement savings, it could have easily done so. It did not — it imposed the trustee requirement. This was not accidental; the government wants an independent trustee holding the assets to make sure the funds or coins are actually held and that any distributions are reported to the government. If you are holding your own assets, even under the guise of an LLC (that you own and control, by the way), it is fair to say you are going to have a difficult time “satisfying” the secretary of Treasury of anything.
Consumers can easily fall for the Capital Gold Group’s marking scheme where they suggest that home storage has been approved by the IRS.
Just to be clear, home storage has not been approved by the IRS. If you click on that link it will explain, “The IRS approves select eligible precious metals and other forms of bullion for IRAs.” The only thing that the IRS has approved is that some forms of physical precious metals can be held in an IRA. The IRS has specifically denied that you can store your IRA assets in your home. I believe that their statement is misleading in what the IRS has approved. And that amount of deception and misdirection should be sufficient for you not to do business with a company. Any amount of intentional deception, no matter how small, should be reason enough to stop listening and walk away.
I need to stop and address those who assume that if it were illegal the government would have already done something about it. Law enforcement and especially tax compliance is mostly voluntary in the United States. According to the IRS, tax compliance is your responsibility.
If you still don’t believe that there are legal issues with this scheme. Here is a list of additional articles to read.
If my IRA invests in gold or other bullion, can I store the bullion in my home?
Gold and other bullion are “collectibles” under the IRA statutes, and the law discourages the holding of collectibles in IRAs. There is an exception for certain highly refined bullion provided it is in the physical possession of a bank or an IRS-approved nonbank trustee. This rule also applies to an indirect acquisition, such as having an IRA-owned Limited Liability Company (LLC) buy the bullion. IRA investments in other unconventional assets, such as closely held companies and real estate, run the risk of disqualifying the IRA because of the prohibited transaction rules against self-dealing.
Advertisements this summer have claimed that people can invest their tax-free retirement accounts in gold and store it at home. But the IRS has issued a stern warning against the move.
Regardless of the information online that might try to convince you otherwise, it is essential to store precious metals with a self-direct IRA third-party custodian. Simply storing your gold at home is not legal according to the IRS code, which means that you would need a depository or bank to store the metals for you. Some firms advertise as though you can actually store your metals at home, but this would likely open you up to penalties and taxes.
The Wall Street Journal recently reported on the radio advertising that promotes an ability to store gold owned by a self-directed IRA at the IRA owner’s own home. Based on the Journal’s reporting and investigation, the IRS issued a statement warning against such storage. I’ve written about this topic on a number of occasions and our firm has always recommended against home storage for precious metals owned your IRA or your IRA/LLC.
As a minimum, a precious metals home storage Gold (precious metals) IRA requires:
- You must have or create a limited liability company, in your name, and with a specially written operating agreement.
- After incorporation and audits, you must have a minimum net worth of at least $250,000.
- All employees and trustees of the company must put up a $250,000 fidelity bond as corporate insurance.
- Ownership of the trustee corporation must be divided between several people.
- Applicant must have verifiable fiduciary experience with a “reputable financial background” and prove to have had experience handling retirement funds.
- The trustee corporation for your IRA must have a business location that is open to the public.
- Applicant must have corporate legal counsel on retainer and provide a detailed audit by a qualified public accountant annually.
Beware of Home Storage IRAs: “The bottom line is that the IRS clearly defines that all IRA assets, whether it be cash, stock, ETFs, real estate, a business or physical metals be held by a third party.”
While it is true that an LLC can have a checkbook IRA account, thus giving its owner control over day-to-day transactions, the online article leads people to believe that you can form an LLC, buy any number of precious metals, and then store them, say, under your mattress. This is not true and is prohibited by the IRS. Therefore, self-storage is out of the question, and it would be considered a distribution if you took physical possession of your metals and stored them improperly.
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.
Warning: some of those articles are by companies that want to custody your gold IRA. We believe that investing your IRA in gold is not a good idea even if you have a third party custodian. But the fact that even pro-gold investment companies think a home storage gold IRA is illegal should give you pause.
The consequences if the scheme isn’t legal? Pierce explains:
If your precious metals are not held by a trustee, the purchase is treated as a taxable distribution from your retirement account. Your IRA assets will lose their tax-deferred status and be subject to immediate taxation (at current applicable rates), plus, if you are under age 59 1/2, you face a 10 percent penalty for early withdrawal in addition to any taxes owed.
What should I do if I have already set up a Home Storage Gold IRA?
For those who have already set up a Home Storage Gold IRA I would unwind it as quickly as possible. Shut it down and transfer it back into a traditional custodian and traditional investments.
In addition to it being illegal, there are many other reasons to ignore this specific offer and unwind your Home Storage IRA as quickly as possible.
Gold is a terrible investment. Gold does not appreciate much more than inflation over long periods of time and it is extremely volatile. There are investments which both have a higher mean return and a lower volatility which deserve a place in your portfolio. Gold is not on the efficient frontier and has utterly failed as a safe haven. The optimum allocation to gold is zero.
Gold is sold through fear. The presentation promises, “My intent is to present the information without hype of hard core sales tactics.” And then it goes on to tell a story of how you could lose everything in your IRA if you don’t store your IRA assets in your home. And ends with, “I don’t wish to frighten you with this story. However…” In my religious tradition, fear is the opposite of faithfulness. You can’t make faithful decision with your assets when you are overcome with fear. Don’t invest in anything based on fear.
You are required to work with one company. Your Home Storage Gold IRA company has you as a captive audience. They do not need to be competitive because you have to buy from them. The account agreement fine print reads, “The price for proof, semi-numismatic and numismatic coins includes a bid/ask spread from fifteen to thirty-five percent.” That means you can purchase $1,000 worth of coins for somewhere between $1,150 and $1,350 immediately losing 15% to 35% of your investment. They can also sell you more expensive “proofs” and claim that they are worth it. They can even charge you a setup fee, annual fee, custodial fee, and any other fees they think they can get away with.
The investment information presented is purposefully inaccurate and misleading. They assert that gold and silver is an integral part of a balanced portfolio but cannot support that claim. They suggest that “studies show that a typical investment portfolio can benefit from as little as 5% in precious metals” and “experts recommend somewhere between 5% and 30%” but again cannot support those claims over long periods of time. They compare the Dow Price Index against the growth of gold for a very specific five year period of 2008-2012 and then they cherry pick the five scattered years with the most inflation (1946, 1974, 1975, 1979, and 1980) to again compare the Dow Price Index against gold. The Dow Price Index has no reinvested dividends and does not reflect stock price movements.
You can’t easily do Roth conversions. We believe that the ability to do Roth conversions is more valuable than any gold investment or Home Storage IRA.
We believe it is a mistake to work with companies that hype gold and its investment properties. You should avoid any offer that overstates the case for any investment and whose advertising is misleading and based on either fear or greed.
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