by Debra Buchanan, Attorney at Law
Did you know that you can purchase U.S. minted coins using an IRA or 401K plan (even a Roth)? Did you know that you can create a self-directed IRA, give yourself checkbook control, create a Limited Liability Company wholly owned by your own pension plan, AND as manager of the LLC, have control of the checkbook, purchase coins as an investment, keep the coins in your own safe, and buy and sell coins on behalf of your own pension plan?
I thought not.
This is not a new strategy. It has been around since 1978 when the I.R.S. gave to the Secretary of the Department of Labor the authority to issue interpretations regarding prohibited transactions and the IRS is bound by those interpretations. Since receiving this authority, the Department of Labor has issued hundreds of exemptions. One of these is for coins. But how can a pension plan custodian be directed to purchase coins for the plan? The answer is in self-direction. There are few pension plan custodians who allow such transactions. There are MANY who don’t even know this can be done. The same goes for accountants and attorneys. If you were to research on the web “self-directed IRA” you’ll be on your way. But there’s more to understand…
Limited Liability Companies.
A Limited Liability Company is a simple, asset protection entity. These entities may be manager-managed or member-managed. In every state, neither the manager, nor the members are proper defendants in a lawsuit against the company. Thus, these entities are useful for estate planning, business planning, tax planning and more. There is one area of the developing law in which LLCs are extremely useful. This is in the area of self-directed pension plans.
Where’s your pension plan? Do you have a pension plan that is stuck in mutual funds or even scarier stocks? Would you rather invest in coins instead? Tax-free or tax-deferred?
Yes, you can! This can be a legal nightmare, however. First you must navigate the “prohibited transactions” rules. Prohibited transactions for pension plan purchases include personal transactions you make with your plan, collectibles and life insurance. Pension Plans of all types are subject to these rules, but there are also many exceptions to the rules. The downside is that if a prohibited transaction occurs, your plan may be found to have incurred a “distribution” which subjects all plan assets to taxes and penalties. So be sure to surround yourself with professionals who understand the rules for you.
PROHIBITED IRA INVESTMENTS:
The IRS does not “approve” assets in retirement plans but they do indicate which assets won’t be allowed. Collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within your IRA as the asset of a self-directed IRA. If you decide to set up a partnership or company that owns, sells, or buys these items, they become an asset within an IRA and can “indirectly” become prohibited.
The IRC is specific as to what defines a collectible. Some notable exceptions are allowed for IRAs—in particular, certain gold (such as American Eagle) and silver coins and any coins issued by a state. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31; IRC sections 5112(a), (e) and (k); the Commodity Exchange Act; and IRC section 408(m)(3). This change is great news for individual collectors as well as coin and precious metal dealers (all of the coins allowed must be minted by the U.S. government or the states).
PLAN ASSET RULE:
Investment of IRA funds into a business entity is clearly permitted. However, the assets of the LLC are assets of the IRA where the plan owns 100% of the LLC. This is significant because where the LLC assets are considered “plan assets” any transaction between the LLC and a disqualified person is potentially subject to the prohibited transactions Code. This could arise in transactions such as loans between the IRA/LLC and the plan owner, employee or management payments to the plan owner or a lineal descendant, etc.
The question now is: When the assets of the LLC are in fact considered “plan assets” are there exceptions in the code for the plan (e.g. the LLC) to hold gold and coins?
The answer is YES.
WHO HOLDS THE GOLD?
An LLC can purchase “anything” as an investment. However, where one or more IRA accounts are involved in an LLC, there will be a “look through” (the entity) to ensure that the transaction is acceptable under the plan asset rule.
Thus, if one or more IRAs own an LLC 100%, the assets of the LLC are considered “plan assets” and the rules for prohibited transactions for the IRAs also apply to the LLC. Alternatively, if one or more IRAs own an LLC 25% or less, the plan asset rule does not apply and the LLC assets are assets of the LLC, NOT the plan or plans. Thus, any investment of the LLC is lawful.
The “gray area” is where one or more IRAs own between 26% and 99% of the LLC. In these cases the law is unclear so it is advisable to assume that the transaction MAY be prohibited, if the IRS investigates a potential prohibited transaction and finds that the assets of the LLC are assets of the plan.
If you wish to purchase coins through an LLC using the IRA strategy, the coins may be kept in a safe by the manager of the LLC as long as the rules are followed. Annually, the manager will provide the self-directed IRA Custodian with the account value based upon the going rate for the gold or coins.
If you wish to purchase collectables other than those mentioned above, the LLC should be owned by plans that own less than 25% of the LLC.
If you wish to purchase the exempted coins through the LLC, there is no problem regardless of the ownership amount of the plans.
 29 CFR 2509.75-2
 29 CFR 2510.3-101 (h) (3) See Also 29 CFR 2510.3-101(a)(2).
 Department of Labor Opinion Letter 90-23. See Also H.R. Rep 93-1280, 93rd Cong., 2d Session, 308 (1974) and 26 USC § 4975(c)(1)(B).
© Legal Strategies P.C. July 1, 2006