Monday, April 13, 2015

Beware of IRA and 401Ks (Especially Checkbook IRAs)

As part of the EPJ Daily Alert, I respond to questions asked by subscribers.

This question came in last week:
Do you have any thought's on "checkbook IRA"'s that supposedly allow you to personally keep the gold/silver you purchase? (within the IRS guidelines on the bullion itself)

I responded:
 Well the first thing to know is that the IRS doesn't like them. Thus, the IRS at anytime could find some kind of reasoning to go after those using them and charge all kinds of penalties and back taxes.

Here's one theory on how that could occur:
The May 2013 Peek, Fleck vs. Commissioner U.S. Tax Court decision may put Checkbook IRA holders at risk of prohibited transactions...

The ruling clarified the Court’s focus on the “broad language” in Section 4975 in IRA prohibited transaction cases...he use of broad language is “is intentional and aimed to prohibit a wider variety of acts than would be prohibited without it,” the court said before adding that it will focus on the spirit of the law rather than looking for specific prohibitions.
It was a narrowly-focused 1996 tax court ruling (Swanson vs. Commissioner) relating to IRA-owned entities and their creation that is commonly referenced as tacit court approval of the IRA-LLC structure as a whole. This includes providing management services, even though the case does not specifically address the day-to-day operations of the entity, nor the potential of that activity being deemed the prohibited provision of services by the IRA owner.

“The IRS, which has previously expressed concerns over such entities, may use the new court ruling as an invitation to revisit the issue,” ...
How could the IRS attack IRA-LLCs?
For small companies like IRA-LLCs, the burden of decision-making is generally on the company owner or the IRA owner. However, the burden of implementing the decision goes to an employee or contractor of the company. In the non-IRA world, the person who implements may be the owner.
However, when the IRA-LLC owner both makes decisions and runs day-to-day operations, it may constitute providing services to the IRA and thus be prohibited by 4975 under the broad reading of the code which says any “direct or indirect— furnishing of services between a plan and a disqualified person” is prohibited.

I am not a tax attorney so I am not going to provide advice as to the viability of IRA-LLCs. however, keep in mind there are a lot of so-called experts who pop up and charge all kinds of fees for plans that eventually the IRS disallows. 

If something isn't generally recognized by the general financial community when it comes to tax strategies, and I am talking recognized by banksters (or very proficient, very expensive tax lawyers) then it is very vulnerable.

On the scale of supposed methods to escape taxes the checkbook IRA is not as bad as other schemes I am aware of. but in general I just avoid this stuff.

Then this came in from a tax attorney subscriber to the ALERT:
Re Checkbook IRAs for gold. I'm a tax attorney specializing in IRAs and 401ks who has researched this issue extensively for my own IRA gold holdings, as well as for other assets like real estate. I agree with your analysis completely. For gold bullion, it cannot be done. Internal Revenue Code section 408(m)(3)(B) requires bullion coins to be held in the "physical possession" of an institutional IRA trustee/custodian. So even if you have the trustee own the LLC, the bullion itself must be in the PHYSICAL, not just legal, possession of the trustee. It won't do just to have it in the physical possession of an LLC owned by the trustee. Because a single-owner LLC owned by the trustee is disregarded for income tax purposes, legal ownership by the LLC may transmit into legal ownership of all LLC assets by the trustee, but again, this does not extend to physical possession. There is an exception for the American Eagle and a few other US-govt-issued coins, but not for most bullion and bullion coins.

Therefore, I strongly advise that one buy physical bullion from one's own non-IRA funds. For IRA funds, buy the ETFs or shares in the Sprott Gold & Silver Trusts or in the Central Fund of Canada (CEF). And if one must buy physical in the IRA, go with Goldstar Trust Company or any of the several other reputable bullion IRA custodians.

Regarding other LLC assets like real estate, as the article you quote indicates, there is a big issue as to prohibited transactions. I view this as meaning that the IRA owner cannot even safely mow the lawn, for free or for pay, on a rental property owned by the LLC IRA. You would have to hire an unrelated property manager to manage all aspects of the property. And you can never end up purchasing the property out of the IRA for yourself. When sold, it must be sold to an unrelated party.

Regarding IRAs and 401ks in general, even though I specialize in those, I have taken to advising people to avoid them entirely, regardless of the touted tax benefits. In my opinion, it is better to take the tax hit up front and be free. Accept the up front tax that could have been deferred through a 401k or IRA as just another theft, and take what is left to you free and clear to wheel and deal with as you see fit in local properties, small businesses, etc.

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