IRS Code 408 M3 – Coins and Precious Metals in Self Directed IRAs
Individuals can use their retirement funds to purchase coins and precious metals/bullion, but these assets must comply with IRS Code 408 M3. This rule dictates that they be physically held by an appointed trustee – potentially disqualifying Self-Directed IRA LLCs which store coins/metals in bank safe deposit boxes as compliance.
Coins and Precious Metals/Bullion
Precious metals are highly-regarded tangible assets that offer protection from inflation, currency fluctuations and economic uncertainty. Individuals can invest in precious metals bullion through dealers active on global bullion markets or through ETFs and futures contracts.
Coins are high-grade precious metals produced by government agencies for coinage. Usually adorned with standard metric measurements stamped upon them to show weight and purity, the coins also carry the backing of their creator agency.
People using their retirement funds often purchase IRS approved coins and bullion investments; however, the rules surrounding such investments can be complicated. According to IRS regulations, any assets acquired with retirement funds must be physically stored with an appointed trustee; some tax practitioners argue depository facilities meet this criteria as they fall under IRC 408’s definition of trustee; however most tax professionals advise storing these items with either an approved depository facility or independent custodian instead.
Physical Possession Requirement
Although IRS approved coins and precious metals bullion are allowed in an IRA, the code also stipulates they must be physically in the care of an appointed trustee. Many self-directed IRA investors believe holding state minted coin and/or bullion and precious metals in a bank safe deposit box meets this criteria.
However, this may not be the case: according to tax practitioners, physical possession of investments held within an IRA/LLC by taking physical possession may not suffice for satisfying this requirement. A recent Tax Court decision also disapproved of physical ownership by ruling against a taxpayer who took physical ownership over American Eagle coins held within his IRA/LLC account.
ReSure recommends that any SDIRA, Solo 401(k), or QRP with metals/coins held within it be kept at an approved depository institution to comply with IRS rules and avoid potential future taxes when selling precious metals and coins in future. This will also help ensure compliance with any potential future taxes when selling these precious commodities or coins in the future.
Tax Treatment
Coins and precious metals have far-reaching tax repercussions that could alter how individuals manage their retirement accounts. When non-permitted collectibles are purchased within an IRA, they could trigger unexpected taxes and early distribution penalties that are often greater than what was paid for.
In March 2023, the IRS released Notice 2023-27 (“Notice”) soliciting comments on how NFTs should be taxed in relation to IRAs. This Notice provided initial guidance as to how these investments may be treated taxwise.
To purchase IRS approved coins and bullion/precious metals in an IRA safely, the best practice is storing them with a trustee as defined by IRC Section 408, such as an approved depository. While some investors believe that placing state minted coins into safe deposit boxes at banks fulfills this requirement, others argue it does not comply with TAMRA as TAMRA does not reference this term as being appropriate for an IRA holder’s purchases.
Investment Options
Coins and precious metals with particular finesse or luster offer IRA investors an exciting investment alternative. However, the IRS Code 408 M3 must always be taken into consideration to ensure investments comply with IRS regulations; for this reason IRA holders looking to invest in coins and precious metals should consult a tax professional first before making purchases; alternatively self-directed IRAs often store metals/coins in depository facilities or trust companies in order to satisfy physical possession requirements under IRS code 408 M3.
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