Is This The End For Using IRA LLC To Buy Gold?
You’ve probably heard of the infrastructure bill that Congress is finalizing right now. But, have you heard how this may impact your gold checkbook IRA?
One provision of the infrastructure bill, specifically Bill Section 138314, would prevent the owners of self-directed IRAs from forming single-member LLCs. Many people use these single-member LLCs to invest in alternative assets including gold, silver, other precious metals and crypto.
These LLCs are often referred to as “checkbook IRAs”. To many they seem to offer an optimum solution. However, they have been a thorn in the IRS’s side since their inception and therefor carry significant risks.
What Is A Checkbook IRA?
Unlike other types of self-directed IRAs, with a checkbook IRA your retirement funds are used to create a business or some type of entity that generates profits within the IRA. The business owns the IRA, and you own the business.
In theory the profits stay within your IRA. A nice nest egg is built through a privately-owned entity. This is instead of through mutual funds, bonds or stocks. A checkbook IRA allows someone to own gold, silver, precious metals and crypto within the IRA.
While the idea may sound simple, the actual execution is quite daunting. It has always been a challenge to open and manage this type of account legally and in compliance with related laws and regulations.
Since the very first one, attributed to James Swanson in 1996, the IRS has an extensive history of fighting this type of IRA.
In fact, Swanson won when the IRS decided to sue him to stop the practice. Since then it has remained a contentious, although legal, option.
Now it would seem that the IRS may finally be getting what it needs to close down checkbook IRAs.
Will The IRS Shut Down Checkbook IRAs?
This brings us back to the Biden Administration’s mighty $3.5 trillion budget bill and the debate surrounding what should be included in the bill.
In September 2021 additions and new proposals to the 2021 Budget Reconciliation bill were contributed and passed by the House Ways and Means Committee. These included language that directly impacts checkbook IRAs.
“Subpart B: Other Provisions Relating to Individual Retirement Accounts” is a list of specific changes to how IRAs work. These new rules restrict how much individuals can contribute to a retirement account. The proposals also limit how much may be rolled over into Roth IRAs.
For this discussion the most significant portion of this proposed legislation comes in Section 138314.
3 New Rules To End Checkbook IRAs For Good
Currently, it is legal for investors to use an IRA LLC, or checkbook IRA (also known as “home storage IRAs”) to buy and own precious metal coins and bars directly.
Normally checkbook IRAs are formed by an individual or entity opening a limited liability company (an LLC) for the sole purpose of buying precious metals. The IRA owner would typically be the owner of this LLC entity, allowing the business owner to use the company’s checkbook to buy gold, silver, other precious metals or even cryptocurrency.
Section 138314 specifically targets this setup. While not long, it does cover changes that directly impact checkbook IRAs. These three changes are:
Rule 1: Ownership
The current provisions allow no one to own more than 50% of a company, property, etc., held within an IRA. The owner creates and keeps a near-majority stake in the company.
The new changes reduce that allowable ownership stake to less than 10%. This makes it basically untenable to create a business for the sole purpose of owning gold and silver and controlling the investments within the account.
Rule 2: Prohibition of Offices
Many companies are managed just fine by people who don’t control a full 50% of its equity. In fact, CEOs, Directors, COOs, CFOs, etc., may barely own any share of the company and yet they decide what the company will invest in and how to operate all the time.
In addition to the first rule, Section 138314 also prohibits any IRA owner from holding an officer position in any company held within an IRA. So no individual would be allowed to be a decision-maker in their own IRA LLC.
Rule 3: Risk of IRA Dissolution
Historically regarding checkbook IRAs the IRS was only allowed to dispute ownership and management. This stems from Swanson’s court battle with the IRS.
Currently the IRS can claim an IRA owner broke a “prohibited transaction rule.” But all this does is allow the IRS to go after a specific bending of the rules. In contrast, the pending bill includes language that allows the IRS to completely dissolve an IRA it finds in violation of the rules. This gives the IRS power to not only dissolve the IRA, meaning someone could lose their IRA, but heavy fines and taxes could be imposed on the person for being even slightly outside these new rules, whether or not it was intentional.
Hopefully you can see that if these new rules pass, checkbook IRAs will not last.
If the proposal passes, it will go into effect at the start of 2022. For existing checkbook IRAs that already hold gold and silver, the IRA owners will have until the end of 2023 to unravel their positions or ownership stakes.
What Does This Mean for Precious Metals Investors?
For the vast majority of precious metal investors (including IRAs), the new rules should not change a thing. For those that own checkbook IRAs, it changes everything.
Fortunately, you don’t have to go so far as to start a business (LLC), dodge IRS rules, and manage the plethora of paperwork that comes with checkbook IRAs just to incorporate gold, silver, precious metals or cruptocurrency into your retirement portfolio. There are better options without the ongoing worry of running afoul with the IRS.
Best Gold Investing has identified the top five gold IRA companies to help you start and manage a self-directed IRA. None of these companies utilize checkbook IRAs so their clients like you are not at risk of being in violation of these new rules. Click to view our information on What Is The Best Company For A Gold IRA.
At this time, none of the proposed bills have been passed into law. Debates about this bill continue to rage on and will evolve from here. However, there’s one significant takeaway if you are considering a precious metals or cryptocurrency IRA. The IRS’s battle against checkbook IRAs will continue with the help of Congress so it is best to avoid this type of setup for your Gold IRA.
It’s clear that checkbook IRAs are more complicated and legally dubious than an ordinary self-directed IRA.