What You Should Know: Owning Coins With Your Self-Directed IRA LLC
Did you buy any coins lately, or are you thinking about buying some? You should know that owning coins with your Self-Directed IRA LLC can be a complex process, from a legal standpoint anyway. (More on that later).
When it comes to investing and holding coins or metals with your Self-Directed IRA, Internal Revenue Code Section 408 outlines what your friends at the IRS say you can and can’t do. Collectibles such as:
- certain coins
are not allowed within your Self-Directed IRA LLC.
But wait, there are some exceptions.
Some exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state.
Note: All of the coins allowed in a Self-Directed IRA must be minted by the U.S. government or the states.
Get ready for the specifics.
So what defines these exceptions? Here’s the rules, see for yourself! (And get ready to do some serious reading.)
Internal Revenue Code Section 408(m):
(3) Exception for certain coins and bullion
For purposes of this subsection, the term “collectible” shall not include —
(A) any coin which is —
- a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code,
- a silver coin described in section 5112 (e) of title 31, United States Code,
- a platinum coin described in section 5112 (k) of title 31, United States Code, or
- a coin issued under the laws of any State, or
(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract if such bullion is in the physical possession of a trustee described under subsection (a) of this section.
Subsection (a) states:
(a) Individual retirement account
In this context, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his/her beneficiaries.
But only if the written governing instrument creating the trust meets the following requirements:
- 1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).
- 2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
- 3) No part of the trust funds will be invested in life insurance contracts.
- 4) The interest of an individual in the balance in his account is non-forfeitable.
- 5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
- 6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.
Summary of everything above you just read (or probably skipped over).
Everything written before this paragraph is basically saying that, in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository).
However, the “physical possession” requirement does not appear to relate to the possession of coins. More details about the physical possession requirement can be found below.
31 U.S.C. 5112 refers to Denominations, specifications and design of coins.
(a) The Secretary of the Treasury may mint and issue only the following coins:
- 1) A dollar coin that is 1.043 inches in diameter.
- 2) A half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.
- 3) A quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.
- 4) A dime coin that is 0.705 inch in diameter and weighs 2.268 grams.
- 5) A 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.
- 6) Except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.
- 7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.
- 8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.
- 9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.
- 10) Contains one-tenth troy ounce of fine gold.
(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —
- 1) are 40.6 millimeters in diameter and weigh 31.103 grams;
- 2) contain .999 fine silver;
- 3) have a design —
- a) symbolic of Liberty on the obverse side; and
- b) of an eagle on the reverse side;
(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
How do you hold IRS approved coins with your Self-Directed IRA?
Hopefully you now have at least some understanding about how the IRS views Self-Directed IRA’s holding coins. If you don’t, I can’t blame you. There’s a reason people pay me money to interpret these IRS rules for them!
Did you know that a coin can be treated as bullion? This means that, based on the language in IRC 408(m)(3)(B), all IRS approved coins, just like precious metals, should be held in the “physical possession” of a U.S. bank or depository.
What’s the key difference between bullion and money?
While bullion may be cast into bars or minted into coins, the defining attribute of bullion is that it is valued by its mass and purity, unlike money which only has a face value.
It appears the “physical possession” requirement outlined for bullion in IRC 408(m)(3)(B) does pertain to coins, such as American Eagle coins, as defined in IRC 408(m)(3)(A), since they can be defined as bullion.
Which means, legally speaking, you should put all IRS approved coins in a bank or other trustee.
Putting IRS approved coins in a bank.
IRC Section 408(m) clearly states that gold, silver, or palladium bullion, which includes IRS approved coins, must be held in the “physical possession” of a U.S. bank or financial institution.
Here is the exact language from the tax code under IRC 408(m)(3)(B):
“Any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section.”
(That doesn’t make much sense, does it? That’s the IRS for you!)
Interpretation of everything you just read above.
We’re almost done folks! So, the tax code clearly states that any IRS approved metals (bullion) must be held in the physical possession of a trustee, which we now know means a U.S. bank.
So the question now is whether holding IRS approved coins (bullion) in a safe deposit box at a U.S. bank in the name of the Self-Directed IRA LLC or Solo 401k plan is considered to be in the ‘physical possession’ of a U.S. trustee or bank?
Note: If the answer is yes, it would satisfy the IRS according to the definition under IRC 408(m).
What if the answer is no?
An argument can be made that holding precious metals (bullion) at a U,S. bank safe deposit box would not be considered to be in the physical possession of the IRA holder since the bullion will physically be held in a safe deposit box of the bank in the name of the IRA LLC or Solo 401(k) plan.
However, the safe deposit box is in the “constructive control” of the Self-Directed IRA LLC manager or Solo 401k plan trustee. That being said, the Internal Revenue Code under Section 408 clearly states ‘physical possession’ and not possession or ‘constructive control.’
Note: From a legal standpoint, possession is not defined to represent control, meaning you can be in possession of an item but not in control or ownership of it.
The bottom line.
Many people believe holding bullion in a safe deposit box in the name of their Self-Directed IRA LLC or Solo 401k plan would satisfy the ‘physical possession’ requirement under Internal Revenue Code Section 408(m).
IRS approved precious metals should not be stored at home or in the personal possession of any person that does not satisfy the definition of a trustee according to the IRS. (So if you own the coins, don’t keep them at home or at your friends house.)
Here’s my personal advice on this issue.
So before I give you my advice from a legal standpoint, just remember, it’s my job to help you avoid costly fees and penalties.
Your best option when it comes to IRS approved precious metals or coins which are owned by your retirement account is to keep them at an IRS approved depository where it is clearly in the ‘physical possession’ of a US Bank (trustee as defined under IRC 408(a).
If you would like answers to any questions you have about owning coins or collectables with your Self-Directed IRA LLC, call Royal Legal Solutions at (512) 757–3994 to schedule your free consultation!