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.
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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.
“Good tax advice may appear expensive, but it’s not as costly as blowing up your IRA,” says Warren Baker, an attorney with Fairview Law Group in Seattle who specializes in alternative-asset IRAs.
Here’s what happened in the McNulty case, starting with some background.
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.
Ami Givon, a benefits attorney with GCA Law Partners in Mountain View, Calif., says he has seen retirement accounts holding investments in real estate, litigation funding, deeds of trust and cryptocurrency. Mr. Baker says he knows of an IRA investment in a sports franchise, and ProPublica’s reporting on Peter Thiel’s $5-billion Roth IRA said his account had large amounts of nontraded stock.
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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.
The McNultys ran afoul of such rules. Their attorney, Thomas Quinn of McLaughlinQuinn in Providence, R.I., said they declined to comment on the case and are considering an appeal.
According to the decision, the couple in 2015 began moving nearly $750,000 of existing retirement-plan funds, including from a
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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That left two issues for Tax Court Judge Joseph Robert Goeke to decide: whether Donna McNulty’s storage of about $411,000 of gold and silver American Eagle coins in a safe at her home was permitted under the law, and whether the couple owed stiff penalties for understating their tax. The couple lost on both issues.
According to the decision, Mrs. McNulty, a registered nurse, 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 safe.
However, the judge ruled that her “unfettered control” of the coins, if upheld, would be ripe for abuse. He clarified what some saw as a gray area and said the law requires independent oversight of investments in coins or bullion by a third-party fiduciary—so it doesn’t allow for storage in a safe at home. Because that wasn’t allowed, Mrs. McNulty had a taxable payout from her IRA payout of the coins’ $411,000 value.
The decision also came down hard on the McNultys’ reliance on their LLC provider’s advertisements instead of competent professional advice, calling home-storage gold IRAs a “questionable internet scheme.” It added that the McNultys didn’t act in good faith because they didn’t disclose information about their IRAs to the CPA who prepared their 2015 and 2016 tax returns.
As a result, the judge imposed accuracy penalties of 20% of the McNultys’ tax understatement under Section 6662(a) of the tax code. Based on the facts in the decision, the penalty comes to about $54,000.
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