With inflation at the highest recorded rate since the early 1980’s (and climbing) and the specter of higher taxes looming on the horizon, many Americans are looking for innovative ways to protect and grow their assets. One popular device is gold bullion. Gold has long been prized as a robust store of value and hedge against inflation. When held inside an Individual Retirement Account (IRA), gold can be expected to appreciate at least as fast as inflation, tax free.
Precious metals are generally considered “collectibles” under the US Tax Code, which means that gold bullion cannot be held in an IRA. However, the Code provides an exception for bullion coins that are legal tender, provided they have a fineness level of at least 99.5%. Gold bars and gold rounds with a fineness of at least 99.9% also qualify for the exception. The mechanics of this exception were the subject of a recent Tax Court case that should give anyone considering bullion or any other atypical investment a moment of pause.
Andrew McNulty et al. v. Commissioner
Starting in 2015, Rhode Island residents Andrew McNulty and his wife Donna engaged in a series of transactions meant to reallocate close to $750,000 in assets from conventional securities held in the couple’s retirement accounts into gold and silver coins and real estate. The assets were to be held by a limited liability company under their newly established self-directed IRAs. (Side note: a self-directed IRA is an arrangement whereby a third party trust company serves as the trustee, but the beneficiary exercises direct control over the funds and associated investments. This is usually Rather than storing the coins in a bullion depository, Mrs. McNulty elected (for unknown reasons) to store approximately $411,000 worth of coins in the McNultys’ home safe. Under audit, the IRS took exception to this method of storage, citing section 408 of the Internal Revenue Code which states that bullion not in the physical possession of an IRA trustee does not qualify for the exception and is thus classes as a collectible. The couple sued. In a subsequent opinion based on the facts stipulated by the McNultys and the IRS, the Tax Court sided with the IRS, describing at-home storage as a “questionable internet scheme.” According to the Court, Mrs. McNulty’s “unfettered control” of the coins would be ripe for abuse if upheld.
The bill for this this debacle will be devastating to the McNulty’s future retirement plans. Because the $411,000 was invested in a prohibited asset, the IRS deemed the purchase of the bullion to be a distribution from the IRA, subject to ordinary income tax, plus late payment and underpayment penalties and interest running from the date of the distribution. The Tax Court also upheld a 20% accuracy related penalty assessed by the IRS on the tax associated with the bullion purchase and several other unspecified prohibited transactions that occurred during tax years 2016 and 2017. The tax, penalties, and interest will consume roughly 40% of the couple’s IRA assets. At the time of the Court’s ruling, Andrew McNulty was just shy of 70 years old.
The McNulty case is a cautionary tale for anyone considering diversifying their retirement portfolio into non-traditional investments. The record is silent as to whether Mr. and Mrs. McNulty sought the advice of a qualified CPA or attorney in connection with their plans (a CPA prepared the tax returns for the years at issue, but the McNultys admitted he was unaware of the IRAs). One can safely assume they did not. The moral of the story is, while good advice may be expensive, no advice (or worse: BAD advice) can be nothing short of catastrophic.
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