Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.īankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. They also should consider having their strategies reviewed by tax advisors who don’t have an interest in promoting IRA strategies using LLCs or other vehicles.We are an independent, advertising-supported comparison service. Owners of true self-directed IRAs need to be sure they’re following all the rules and have their documentation in order. In addition, the cases pave the way for the IRS to argue that the IRA owner can’t be the managing member of the LLC and control or take possession of the assets. The LLC must follow all the IRA rules, because the IRA is considered to have engaged in any of the transactions the LLC undertakes and to own any assets the LLC owns. These cases show some limits of the strategy. This saves transaction fees since the IRA custodian isn’t making the transactions.Īt least that’s the theory behind the strategy. The transactions are conducted using the LLC’s checkbook. Then, the LLC can buy or invest in anything the tax code allows. The LLC establishes a financial account or checking account. In this strategy, an LLC is created and a true self-directed IRA buys all the ownership interests in the LLC. 10 (20210).īoth these cases involved variations of a strategy that’s popular among owners of true self-directed IRAs. She had to include the value of the coins in her gross income for the year she took possession of the coins. The court ruled that the physical possession requirement clearly applies to both bullion and coins.Īs a result, the purchase of the coins by the IRA was treated as a distribution to the taxpayer. Both the IRS and the Tax Court disagreed. The taxpayer argued that the physical possession requirement applies only to bullion and not to coins. The tax code says certain precious metals aren’t considered collectibles and can be owned by an IRA when they are in the physical possession of the IRA custodian. The dispute concerned whether the taxpayer could take physical possession of the coins. But exceptions are allowed for certain types of bullion and coins, the American Eagle coins being among the exceptions. An IRA isn’t allowed to own collectibles. Generally, gold bullion and coins (as well as other precious metals) are considered collectibles in the tax code. The taxpayer as managing member of the LLC took physical possession of the coins. She had the IRA buy American Eagle gold coins. In the second case, the taxpayer also created an LLC that apparently was owned by her IRA and of which she was the managing member. The taxpayer took some shortcuts, apparently because he didn’t want to switch IRA custodians and wanted to save some money on fees. He might be able to structure the investments so that they are made through an LLC, which in turn makes the mortgage loans or other investments. Then, he could direct the custodian to make the loans or other investments. To invest in mortgages through the SEP-IRA, the taxpayer needed to move the IRA to a custodian that allowed non-traditional investments such as mortgage loans. When the money was returned to the SEP-IRA, it didn’t qualify as a tax-free rollover, because more than 60 days had passed since the distributions. The IRA custodian had no control or legal authority over the money once it was distributed. The taxpayer also made the mistake of owning the LLC instead of ensuring the IRA owned the LLC. He directed where the distributions were to be made and had full control over the checking account. It doesn’t matter that the distributions were made to a checking account that wasn’t in the taxpayer’s name. Most importantly, after the distributions were made the taxpayer had full control of the funds. He also checked the box indicating he was taking an early distribution. The taxpayer used the standard withdrawal request form of the custodian when requesting the transactions and did not claim any of the exceptions to taxability of the distributions. The taxpayer argued that he didn’t take distributions since the money went directly from the IRA custodian to the checking account of the LLC. The IRS assessed him for taxes on the distributions plus the 10% penalty for distributions taken before age 59½. The taxpayer didn’t report the distributions in his gross income. The custodian bank sent the taxpayer a Form 1099-R for each of the distributions reporting them as taxable distributions.
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