A Rhode Island couple made a smart move when they purchased precious metals to include in their IRA. However, they overlooked one important guideline regarding storage of these precious metals. Instead of storing the gold and silver coins in an IRS-approved depository, they stored the coins at home. The IRS does not allow at-home storage of IRA precious metals.
In November 2021, a U.S. tax court judge ruled that the couple, Andrew and Donna McNulty, incorrectly stored gold and silver American Eagle coins at home. These coins were part of a self-directed IRA they had set up. The IRA, established through an LLC (limited liability company), held the coins, along with a condo, as assets, according to The Wall Street Journal.
The McNultys learned the hard way that coins held in an IRA are supposed to be kept at an IRS-approved depository and not at a home or even in a safe-deposit box. The tax court judge, Joseph Robert Goeke, ordered the couple to pay $270,000 in taxes on about $730,000 in IRA assets, along with penalties that are expected to surpass $50,000.
As The Wall Street Journal explains, the judge faced a decision on two issues:
- Whether Donna McNulty’s storage of about $411,000 of Gold and Silver American Eagle coins in an at-home safe—when the coins were bought with retirement account funds and supposed to be held in an IRS-approved depository—was allowed under the law;
- And whether the couple should pay harsh penalties to satisfy their tax burden.
Goeke ruled against them on both counts. Their attorney said in December 2021 that the McNultys might appeal the ruling.
How to Avoid This IRA Mistake
The Wall Street Journal reports that Donna McNulty “was careful with her IRA’s coins in some ways.” She opened a bank account in the name of the LLC, documented the purchase of the coins, and labeled the coins as belonging to her IRA-owned LLC when she put them in the couple’s at-home safe. But the McNultys either didn’t properly interpret or understand a provision of federal law that forbids storing physical precious metals belonging to an IRA at home or in a safe-deposit box.
The IRS, says The Wall Street Journal, “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.”
The IRS specifies that you can’t store precious metals (gold, silver, platinum, or palladium) from a self-directed IRA at your home or in your own safe-deposit box. If you keep precious metals that are included in a self-directed IRA at home, the IRS likely will treat that as a taxable IRA distribution. Furthermore, if you’re under 59½ years old, you might face a 10% penalty for early withdrawal from the IRA.
On top of that, storing IRA assets in your own home might be viewed as “self-dealing.” Self-dealing is “when your self-directed retirement account makes a prohibited transaction with the same person who owns it (you),” explains the alternative asset advocates at RocketDollar. “You must keep your [assets] at arm’s length.”
Anything that falls into the category of self-dealing could be considered by the IRS as a prohibited transaction, the Industrial Council for Tangible Assets says. A prohibited transaction refers to the distribution of all the assets in an IRA, not just precious metals kept at home.
However, if you want to keep precious metals at home, you can do so as long as the precious metals are not part of a self-directed IRA. But if those precious metals are part of a self-directed IRA, they’re supposed to be purchased through a custodian and kept at an IRS-approved depository. Be sure to get up to speed on IRS rules before you open a precious metals IRA so that you don’t put any of your hard-earned assets at risk.
If you adhere to IRS rules about storage and other elements of a precious metals IRA, this type of asset is perfectly legal and can be a powerful, wealth-building part of your portfolio.
As Equity Trust notes, diversifying your portfolio with precious metals remains a smart move for many people. Some of the benefits they cite:
- Gold provides diversification and liquidity with no credit risk and can thus be especially attractive during periods of increased market volatility.
- Gold and other precious metals may help guard against high inflation.
- Precious metals can offer liquidity within an account, meaning they can readily be converted into cash if need be.
Have questions about properly setting up a precious metals IRA or any of the terminology in this article? Reach out to one of our knowledgeable IRA Account Executives today and request your free Precious Metals IRA Information Kit.