Rules For Your Self Directed IRA
Following Self Directed IRA Rules For Maximum Advantage
Gold and Silver Rules for SDIRA
Cryptocurrency Rules for a SDIRA
Precious Metal IRA Approved Depositories
General Rules for Self Directed IRA
Although all IRAs are “self directed” to some extent, there are a number of key differences between the rules for an actual Self Directed IRA and a Regular IRA.
While all IRA accounts can be managed by their owner – the extent of this management and choice of assets will differ widely.
A regular IRA could be better defined as “self-managed” in that the investor can pick and choose between a narrow set of investment options allowed by the custodian, with some custodians offering access to more, some less.
Self-managed IRA accounts will typically contain a selection of assets such as company stocks, bonds, mutual funds, US savings bonds, Treasury bills, CDs and money market bonds.
This is usually a more than adequate choice provided you only wish to invest in the asset classes the custodian authorizes and plan to keep the funds within the account when trading one asset for another. Account holders can still buy and sell assets as and when they require – within the limitations some custodians may set.
You get to manage what you own, but the company providing the IRA services will manage the day-to-day functions on your behalf. Many IRA management companies will also offer advice.
Self Directed IRA
A Self Directed IRA (SDIRA) on the other hand is a type of IRA where account holders have complete control and take full responsibility for their account – in terms of making investment decisions, alongside access to a far wider basket of investments than those available in any regular IRA.
Having full control and access to the widest range of investments available makes SDIRAs one of the most flexible ways to buy tax-advantaged investments, but on the flipside you’re also fully responsible for the management of your assets, for legal compliance, plus any research and due diligence needed before making decisions.
This is because SDIRA custodians cannot give any financial or investment advice.
SDIRA investors have scope to invest in almost anything provided:
- The investment isn’t on the IRS prohibited assets list
- The investment doesn’t involve a prohibited transaction
- The investor does not engage in “self-dealing”
Although in theory you can invest in anything outside of the above list, SDIRA custodians will not typically have the facilities or processes in place to allow for literally anything – they too will have a set of acceptable investments, but these investments give a significantly wider choice than regular IRA custodians.
The constraints the IRS put on what is an acceptable asset and the transactions they prohibit should be followed carefully as any errors made are the account holder’s responsibility and are likely to trigger tax events and in many cases additional penalties.
So what are the main constraints?
#1: Prohibited Assets
Because the IRS will allow almost any investment into a self directed IRA it’s far easier to list the investments not allowed.
At present the law does not permit IRA funds to be invested in life insurance, high risk derivatives, real estate for personal use or collectibles.
Collectibles are detailed fully in IRS publication 590-1 but include:
- Metals with exceptions
- Coins with exceptions
- Alcoholic beverages
- Certain other tangible personal property
Despite being classified as collectibles, investment grade bullion bars and precious metals coins that meet certain purity and manufacturing standards are now allowable, provided they are valued solely on their precious metals content with no additional premium for age, rarity, beauty or any other factor which would render them true collectibles.
This is why bullion bars and coins are such a boon for SDIRA investors – once outlawed within retirement accounts, SDIRA holders now have access to the wealth protection, portfolio diversification and market hedging powers bullion brings.
#2: Prohibited Transactions
Prohibited transactions in a self directed IRA are essentially “any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person.”
Disqualified persons will include the IRA owner’s fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are examples of possible prohibited transactions with an IRA:
- Borrowing money from it
- Selling property to it
- Using it as security for a loan
- Buying property for personal use with IRA funds
The penalties for carrying out a prohibited transaction are harsh: if an IRA owner or his or her beneficiaries were to engage in a prohibited transaction in connection with an IRA account at any time during the year, the entire account could stop being considered as an IRA from the first day of that year.
The IRS would see this as being a full distribution of all the assets in the account and would tax gains accordingly as if they were part of the holder’s annual income.
Additionally if this distribution was made prior to you reaching the age when distributions should be made you can be liable for an early distribution penalty – and additional 10% tax on the distribution.
#3: Self Dealing
This is the prohibited transaction both the IRS and SDIRA custodians most want to avoid and provide a lot of information to help ensure investors steer clear – the act of “self dealing.”
Self-dealing is a specific type of prohibited transaction where you personally take benefit from the IRA before such time as you start making distributions. It’s also the area where investors most frequently get it wrong.
Whether you’re buying or selling an asset to or from your IRA at a preferential rate or taking direct benefit from an asset such as receiving IRA-held real estate rent directly into your bank account, or living in a property your IRA owns even if for just a short amount of time – these are all types of self-dealing.
Another thing: Don’t think you can outsmart the IRS by having an accomplice buy an asset from your IRA and then sell it to you.
This is called a “prohibited step IRA transaction” where the IRS will rightly disregard the step you took to hide the self-dealing trade.
Selling a bullion dealer your personal collection of gold and silver, then directly buying it back from them for use in your IRA is an example of a prohibited step transaction and the IRS would simply consider you as having added the bullion directly into your account – which is prohibited.
Avoid self dealing at all costs – the risks are never worth the benefit.
Playing it Safe
When it comes to your self directed IRA, it’s always best to be conservative in approach if you’re thinking of anything that could be considered even close to a prohibited transaction. The risk of losing your entire IRA and the resulting taxes payable is just too great for a small advantage. If in doubt we recommend you always speak to a qualified CPA, tax accountant or tax attorney.
Even though you are legally considered as fully responsible for any and all decisions when it comes to your SDIRA – the reality is that there’s a lot of help available in terms of information and advice from intermediaries such as professional bullion dealers and gold investment companies.
Although they will have at least some vested interest in you investing in gold, silver or even bitcoin, the best dealers have teams of genuinely expert advisors who know the market inside out and can offer something close to impartial information.
Gold and Silver Rules for SDIRA
You can’t add just any gold and silver bullion products to an IRA – and as mentioned above definitely not collectible items such as gold jewelry or special collector coins (numismatics).
Investment grade metals if they are to be held in an IRA must follow a set of strict rules.
Precious metal IRAs may only contain bullion bars and coins if they come from a COMEX/NYMEX accredited mint, metals refinery or assayer – or from a national government mint. They must also meet certain purity standards.
Gold should be a minimum of .995 fineness – which means a gold purity of 99.5% or greater and silver should be a fineness of .999 (99.9% pure) (with American Gold Eagles being a key exception)
Bullion bars and particularly coins meeting these purity standards should be valued solely on the value of their precious metal content. This means that slabbed / graded and numismatic or collectible coins are not permitted – although the IRS does make an exception for two products from the United States Mint: Proof American Gold Eagles and Proof American Silver Eagles are allowed.
The following bullion coins and bars are considered as acceptable for inclusion in a precious metals SDIRA:
IRA Approved Bullion Coins & Rounds
- American Gold Eagle coins
- U.S. Buffalo Bullion gold coins
- Canadian Maple Leaf gold coins
- Austrian Philharmonic gold coins
- Australian Kangaroo/Nugget gold coins
Other acceptable gold coins/rounds include:
- Chinese Gold Panda coins
- Gold Incuse Indian rounds
- Gold Engelhard Prospector rounds
- Perth Mint Lunar Series gold coins
- American Silver Eagle coins
- Austrian Vienna Philharmonic coins
- Australian Kookaburra coins
- Canadian Maple Leaf coins
Other acceptable silver coins/rounds include:
- UK Silver Britannia coins (2013+)
- Sunshine Mint silver rounds
- Candian Silver Arctic Fox coins
- Australian Silver Kookaburra coins
- American Platinum Eagle coins
- Platinum Canadian Maple Leaf coins
- Platinum Australian Koala coins
Other acceptable platinum coins/rounds include:
- Platinum Britannia coins
- Platinum Australian Platypus coins
- Canadian Maple Leaf Palladium coins
IRA Approved Bullion Bars
IRA approved bullion bars must meet minimum fineness requirements and be manufactured by a NYMEX or COMEX-approved refiner/assayer and should be ISO9001 Certified.
- Perth Mint .9999 fine bars
- Credit Suisse .9999 fine bars
- PAMP Suisse .9999 fine bars
- Royal Canadian Mint .9999 fine bars
- Ohio Precious Metals .9999 fine bars
- Royal Canadian Mint .9999 fine bars
- Sunshine Mint .999+ fine bars
- Ohio Precious Metals .999+ fine bars
- Engelhard Hand Poured .999+ fine bars
- Golden State Mint ISO9001 .999+ fine bars
- Credit Suisse .9995 fine bars
- Scotiabank .9995+ fine bars
- Johnson Matthey .9995 fine bars
- Pamp Suisse .9995+ fine bars
- Credit Suisse .9995+ fine bars
- Baird & Co. .9995+ fine bars
If in doubt ask your bullion dealer to confirm the metals they are selling are suitable – or deal directly with a gold IRA specialist.
Finally you are not allowed to add your own bullion bars and coins into your IRA. This is a prohibited transaction even if the metals meet all other criteria, as it is a form of self-dealing. Only metals delivered direct from a bullion dealer to your trustee vault are permitted.
For any questions you may have regarding acceptable bullion in an IRA freecall 877 460 2824
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Cryptocurrency Rules for a SDIRA
Cryptocurrencies are neither life insurance or collectibles. Although they are considered high risk, they’re not classified as high-risk derivatives in the same way as derivative trades with unlimited or undefined risk are, which are prohibited by the IRS.
This means Bitcoin and other cryptocurrencies are currently allowed in a Self Directed IRA.
There are no exceptions or exclusions as you find with bullion bars and coins – possibly because cryptocurrencies are still too new an asset class for the IRS to weigh in on, so for now all cryptocurrencies can be included.
How cryptocurrencies can be held is another matter altogether – and there are presently two principal methods in which Bitcoin is held in an IRA.
- Directly with the IRA Custodian / Custodian’s Depository. In this case the custodian or their designated depository will hold the secret key for the wallet/s containing the cryptocurrency assets.
- Through a single member LLC. In this case the IRA account will fully hold a single-member LLC and this single member LLC will in turn control the cryptocurrency wallet and secret key.
The first method is the most straightforward as this is how other alternative assets such as gold and silver are held – and this is a method the IRS is fully comfortable with.
The second method carries a significant risk where the IRS holder is also controlling the LLC – there too great a chance that the IRS holder will mistakenly make prohibited transactions or even be accused of self-dealing.
There are even those who argue that the entire set up can be considered as self dealing and so until we see examples being closed down by the IRS, or being formally deemed acceptable then this is going to be a high risk approach.
After all, self dealing can see an entire IRA closed and all it’s asstes being coinsidered as distributed – with the income tax this will entail.
Until there is clarity on this issue, seek impartial and professional advice if considering the LLC route and if in doubt use a company such as CoinIRA who will set up your Cryptocurrency using the first method.
Precious Metal IRA Approved Depositories
When adding precious metals to your IRA, you are not permitted to store your bullion at home. It must be held and looked after on your behalf by a custodian – and and your custodian will vault your metals in an approved depository.
Precious metals depositories are high security vaults, often solely specialized in the storage of bullion. They carry excellent insurance usually with top-tier specialist insurers and form what amounts to an impenetrable barrier between your investments and the outside world.
SDIRA custodians will seldom give a wide choice of depositories you can use as they will typically have a good working relationship with one or two.
This not only helps streamline their services, making everything more efficient, but has a knock-on bonus for you in the form of lower charges and fees. You are not restricted by law to use their storage company, but there’s always a good reason they’ve made their choice.
Because SDIRA custodians have a fiduciary duty to both you and the IRS, you can be assured that any depository they use for your metals storage will meet the highest of standards both in terms of security and insurance.
Goldco for example us Delaware Depository Services Company, Brinks and International Depository Services Group.
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Bitcoin and Crypto IRA Approved Depositories
Bitcoin and cryptocurrencies only truly exist in the digital realm – a series of numbers held inside a complex chain of bits, bytes and mathematical equations. These type of assets only become solid when converted to an asset like physical banknotes or precious metals.
But if they don’t have any solid form then how can you vault a Bitcoin?
The fact is, you don’t actually vault the bitcoin itself – the coin “exists” out there on the blockchain, as do any transactions and changes of wallet the coin may be involved in. But all bitcoin are held in wallets – which can be virtual and online, or offline in a physical storage device.
Wallets all have two keys, a public key and a private key – and it’s this private key where the value lies. If someone has your private key then they essentially have access to your wallet and all the coins stored inside.
When you invest in bitcoin within an IRA, it’s the private key and often a physical device containing this private key that are stored in a depository. With some wallets containing millions or even billions of dollars it’s clear that these private keys are immensely valuable and as such they are held in high security vaults much as gold and silver bullion are.
Although Bitcoin is a relatively new investment and has only been accepted in IRAs for the past few years, a growing number of depositories have developed new processes to ensure the absolute safety of wallets and private keys.
No matter what bitcoin does in terms of market price, you know your key will be kept safe.
Rules for a Gold IRA Home Storage
Gold in an IRA must remain with your custodian or trustee at an approved depository. You cannot hold IRA gold in your home.
It is possible to take a distribution from your IRA, however this may be taxable and may carry additional fees and penalties if you have not reached the permitted age for distributions.
In recent years IRA companies have started promoting “Home Storage”, “Check Book” IRAs or “LLC” IRAs as a loophole to this rule, where the IRA holder forms a Limited Liability Company. This LLC then buys gold, which can be stored at the company HQ, which in most cases is the IRA holder’s home.
However IRS Publication 590 specifies that for all IRAs, “The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.”
Storing Gold IRA products in the IRA owner’s home or in a safe deposit box to which the IRA owner maintains a right of access is not within the letter or spirit of the Internal Revenue Code – that is, the tax-advantaged IRA assets should be held outside the possession and personal control of the IRA owner until retirement or early distribution.
By holding your own IRA gold you are at grave risk of being considered as self-dealing, a prohibited transaction which could see the whole IRA declared null and void, causing it’s entire contents to be considered as a distribution.
Some Home Storage IRA companies mention the Swanson v. Commissioner case in 1996, adding that the IRS and the Department of Labor have, through field service advisory letters, and DOL advisory opinion letters, consistently acknowledged the existence of the CheckBook IRA – however the Self-Storage IRA arrangement has not been approved or recognized by the Internal Revenue Service – either formally or in a no-action letter issued by the IRS, Employee Plans Division.
In short, don’t risk it.
Tax Penalties for Self Directed IRAs
Self directed IRAs as with regular IRAs can receive tax advantage up front or at distribution. Whilst a traditional IRA sees reduced income tax contributions when you buy assets, a Roth IRA sees distributions made free of tax. For any tax-advantaged program, IRA rules must be obeyed and if not you can receive tax penalties.
Any tax penalties for self directed IRAs will come about as a result of making early distributions, prohibited transactions, adding prohibited assets or self dealing.
In any prohibited event, the IRS will consider either the transaction or the whole IRA null and void and will treat the assets involved as a distribution. This distribution will be treated as taxable income in the year it is distributed.
In the event of a significantly sized investment being treated as a prohibited asset or prohibited transaction this can result in an equally significant tax bill. Imagine the tax due on a large piece of real estate if it’s value was wholly considered as income!
For early distributions there is an additional 10% tax penalty on top of any income tax due.
Before making any decisions which could result in a taxable event and for up to date tax advice, it’s essential you speak with a qualified tax advisor or CPA prior to acting.
When it comes to making tax mistakes in your SDIRA, the IRS is rarely kind
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Getting the Most From a Self Directed IRA
Getting the most from your self directed IRA whether in terms of profit or tax-savings is under your full control.
However unless you’re some kind of investing wizard with amazing inside knowledge on specialist investments then you’re going to need help at some point. After all a prohibited asset or prohibited transaction could see the IRS charging you tax penalties or even canceling your whole IRA.
This is where IRA specialists come in. These specialists are not specifically custodians or qualified accredited professionals but will typically employ staff who do meet these capabilities.
In the precious metals market , IRA specialists are bullion dealers and professional gold investment companies who work the majority of their trade dealing with IRA accounts.
As such you get all the benefits of their knowledge of precious metals, investment uses, market news and analysis, alongside an up to date knowledge of IRS legislation, specifically related to retirement.
They will know the best ways to make tax savings, plus they’ll have insider knowledge on special deals along, access to wholesale prices and they can even offer savings on third-party IRA fees and storage costs due to the work volume they send both vaulting companies and gold IRA custodians.
By working with a gold IRA specialist like Goldco you’ll not only save on costs but can do so safe in the knowledge that everything you buy and the way you buy it is in full compliance with IRS rules.
The same applies in any specialist investment market. If you’re looking to add Bitcoin to your IRA you’d work with a Bitcoin IRA specialist such as CoinIRA. With real estate you’d find a real estate company who specializes in putting together investment packages perfect for capital growth and income.
In almost any of the major alternative asset niches – from Gold and Silver to Cryptocurrency or Tax Lien Certificates – there will be a specialist who’s daily bread and butter is working with SDIRAs.
Of course you can go it alone and do the research, put in the hours and learn the markets, their best processes and unique taxation situation – but the sometimes your time is more valuable than a $250 fee or a 0.5% saving.
But if you have any concerns or worries, that’s when IRA specialists come into their own.
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