Taking control or unacceptable risk?

For several years now, I have been hearing about a means of being able to hold the precious metals acquired by your Investment Retirement Account (IRA) in your personal custody instead of being stored at a custodian as required for a self-directed precious metals IRA.

In a regular self-directed IRA, the taxpayer retains a trustee who then works with a storage vault to hold your purchases of tangible property. Both the trustee and the custodian of the assets are paid fees to provide their services. The owner of the IRA is not allowed to have custody of the assets, nor directly conduct transactions of the account. In practice, with the self-directed IRAs that hold precious metals, the owner of the account does negotiate the transaction with a specific dealer and then turns over the details to the trustee to execute the actual transaction with the dealer.

However, a self-directed IRA is allowed to purchase stock in companies. So, theoretically, a taxpayer could establish a Limited Liability Company (LLC) with his IRA as the owning member. This LLC could then buy and sell precious metals without the restrictions of having the inventory purchased by the LLC stored in a vault.

The fees to set up this arrangement of an LLC owned by an IRA range from $600 annually to almost $4,000. In order to be worth such high fees, don’t even think about trying this with an IRA that has less than $200,000 of assets.

Will this arrangement pass muster with the IRS? I am not an attorney, so you can’t look to me for an answer. The Internal Revenue service has not yet directly ruled on the legality of these IRA LLCs. Companies that market such entities claim that related decisions and private letter rulings support this practice.

To C. Dianna Webb, an assistant professor of finance at Northwood University, this is legitimate. She said, “As the owner of the IRA LLC, you have complete control over that checkbook. You can’t compensate yourself, but you aren’t having out-of-pocket fees every time you make a transaction.”

In contrast, Bill Smith, an attorney and managing director of the CBIZ MHM National Tax Office said, “If the IRS audits you and disallows it, there is no administrative appeal. The only way to fight it is to go to court. So the amount of the transaction better merit the $200,000 it will take to slug it out with the IRS. My advice is, don’t do it.”

If you have or if you are contemplating using an IRA LLC, one of the questions you might need to have answered in writing is if the precious metals selling company or storage company will cover any of your legal fees, taxes, penalties, and interest if you are audited and the IRS disallows the arrangement. If the company promoting this arrangement to you is unwilling to provide some kind of guarantee that you are protected from the costs of a legal problem with the IRS, you better meet your own legal counsel before you consider establishing such an entity. It is better to be safe before the IRS might come after you.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

More Collecting Resources

• Download The Metal Mania Seminar with David Harper to learn more about the metals market.

• Are you a U.S. coin collector? Check out the 2016 U.S. Coin Digest for the most recent coin prices.