Coins and your 401K

coinbuf

I have always thought that it would be great to combine my love for high end key dates and the inherent high cost of such coins; into my retirement plan. This would kill two birds with one stone, I get to buy the coins I like and get the tax benefit. Has anyone out there ever included rare coins into their 401/SEP or other retirment plans

its4real

It is trotally legal - as long as you do it correctly. You need a variation of the SEP or 401k or IRA so that the accont is flexible AND self directed.

Your IRA/SEP/401K can own fine art, coins and real estate. Just follow the advice of an acvcountant or someone well versed in these types of accounts. Any kind of co-mingling will cause a heavy penalty and tax burden.

jom

<< <i>Your IRA/SEP/401K can own fine art, coins and real estate. >>



Niether a Qualified Pension plan (IRC 401) nor an IRA (IRC408) can own collectables. If you buy art or coins (other than American Eagles) you will get HAMMERED by the IRS. They will deem your account distributed and you will be fined. DO NOT DO THIS.

An IRA or Qualified Plan can buy Real Estate, however.

Link:

IRA Info

Look under "IRA Investment Restrictions". 3rd Paragraph. "...Collectables are generally not allowed. 408 (m) of IRC. Look further down under "collectables". I've read the "further legislation" and it pertains to American Eagle coins.

jom

DaveG

Combining coins and your 401K/IRA may be something you'd love, but you might not like the investment returns.

You'd be missing out on the real power of the 401K/IRA, namely, the tax-free compounding of interest or dividends.

Also, you'd have to pay to store the coins somewhere and, when you sell them you'd be taxed at the long-term capital gains rate anyway, which is usually lower than ordinary income rates, so you wouldn't be taking full advantage of the tax deferral of the 401K/IRA.

Blade

its 4 real,
How do you make this work without taking the 10% distribution hit and the tax consequences?

jom

Blade: you can't because it isn't allowed by the IRS code. For Real Estate you can have your Trustee of your IRA buy the land/building for your with the IRA money. There are many other laws you have to watch out for here...it is rather complicated. If you have a Qualified Plan you could be your own Trustee and do it yourself.

Its4Real is right about "self-directed" plans it's just that Collectables and Life Insurance are not allowed in IRA's or 401k plans (qualified).

jom

its4real

Blade and others - the area of "retirement plans" is huge and a specialized filed. Unless you have a spoecialist/pro who is well versed in these plans and their limitations and/or flexibility - you are best to not play around.

However, if you have the resources and the gumption to have a go at it - as was said in an earlier post - there are "variations" of these plans that allow almost anything to be held by an "IRA/Retirement" account. As long as it is done correctly and done legally.

Pay particular attention to the "distribution" part of the plans - as will your tax attorney. This is the part that indeed - can get you into trouble.

I have several friends who have self-directed "plans" that include real estate. However, they use tax pro's that I will never be able to afford....or maybe some day but anyway - they blabber about it on the golf course and I am an old Merrill Lynch stock broker so at least a little versed in the subject. I KNOW what they are talking about because I used to help people do it.

I am NOT an expert in the nuances - only the possiblities. I also know that any govt. publication will say no and any good tax attorney will say "maybe - if we do it right....let me start this clock and let's talk about it..."

JJacks

My plan is just to withdraw my entire 401K and buy all the coins I can!

Well, maybe not

JJacks

jom

There are no variations my friend. The IRS sets what is allowed to be invested in. Certain IRA Custodians will NOT let you buy Real Estate because they don't want the trouble. That doesn't mean another Custodian won't so if you want to do RE then get another Custodian. A true "self-directed" Custodian will allow you to buy RE and the like but they tend to charge higher fees. Lawyers can say what they want but if the IRS finds out your lawyer will be running for the hills.

If the IRS catches wind that you've broken the rules they will:

1) Assume the WHOLE account to be distributed. Which mean you have to pay taxes on that value right along with your every day wages.
2) Hit you with a 10% excise tax off the top.

Basically, you'll get screwed. Not only to you lose the 10% you'll have an unplanned distribution that will be taxed at your marginal tax rate. Another words you won't be "having a nice day".

jom

its4real

Ahhh - I found a little more "clarification" on what IRA funds can be DIRECTLY invested in:

What you can invest in includes:

Real Estate: Including apartments, single family homes, duplexes, commercial property, developed or undeveloped land
Mortgages/Deeds of Trust
Promissory Notes
Stocks, Bonds, Mutual Funds
Limited Partnerships
Private Stock Offerings
Limited Liability Corporations
Judgments/Structured Settlements
Tax Sale Certificates
Car Paper
Factoring
Accounts Receivable
Commercial Paper

While you do have a larger selection, there are still some limits on what you can invest in. Internal Revenue Code clearly states that you may not use IRA funds to invest in collectibles such as:

Art work
Rugs
Antiques
Metals/Gems
Stamps
Coins
Stamps
Alcoholic beverages
"S" Corporations


Notice - in the "okay to invest in" column is "promissory notes" and "limited liability companies". You can, however, BUY and HOLD notes secured by coin collections and fine art. You may also buy and hold shares or an interest in "LLC's" that buy and hold art, porcelan doll collections, coins or whatever else they decide to deal in. Your IRA funds can also be used to buy Judgements against an individual who may want to SETTLE that judgement with a coin collection. Your trustee, however, would have to liquidate the coins within 60 days of receiving them or then you would have a "distribution".

So, JOM you are correct - and I give you that - it is true that you cannot DIRECTLY invest in these items - you can certainly invest in investments that contain these items....as long as you do not directly hold these items in your IRA account.

Example: You can set up an LLC with a couple of collector friends - or even set it up so that a trusted third party - a TRUSTEE (named by a trust that you control - see note below on beneficiary) - sets up an LLC. The primary function of the LLC would be to buy and sell rare collectable coins. YOUR IRA account could invest funds in the LLC to be used for the purpose of acquiring coins. So in essence - you are buying and selling coins with your IRA funds - but in reality - you are only investing funds in an LLC.

Note: the beneficiary of a TRUST doesn't have to be disclosed on any document except the TRUST document itself. This document reveals the TRUSTEE and thier relationship to the beneficiary but is not required by law to be produced EVER, in ANY court of law. It is a private agreement and can always be held in trust. If the beneficiary of the TRUST is never revealed - the IRS will never learn that YOU are the beneficiary of the TRUST and that the TRUSTEE is doing your bidding in setting up the LLC.

JJacks

You could invest in CLCT, right? LOL

JJacks

its4real

Precisely -

BUT - if you were a significant shareholder or CEO (defined as a fiduciary) you couldn't. Unless you did it through a third party Trustee.

jom

There might still be a problem but not of what I mentioned earlier. If your IRA does "business" then it might get stuck with Unrelated Business Income Tax which rates are based on Trust tax rates...which are very high. With the LLC you might get around that. Good idea!

There's another advantage here in that if you have your IRA (IRC 408) buy the LLC then you'll have "checkbook" control over the account. Normally, you don't have this with IRA's since the Custodian actually does the buying (you directed them however). If you have a Qualified Plan (IRC 401) you CAN have checkbook control since you can be your own Custodian. You'd still have to set-up the LLC however to do the "coin" thing.

Keep in mind you might want to have to get an approval letter from the IRS before you invest. It's costs dough but it might be worth it.

jom

GregWatson

>>Example: You can set up an LLC with a couple of collector friends
>> - or even set it up so that a trusted third party - a TRUSTEE (named
>>by a trust that you control - see note below on beneficiary) - sets up
>>an LLC. The primary function of the LLC would be to buy and sell rare
>>collectable coins. YOUR IRA account could invest funds in the LLC to
>>be used for the purpose of acquiring coins. So in essence - you are
>>buying and selling coins with your IRA funds - but in reality - you are
>>only investing funds in an LLC.

You can't do this one either ... this would also be a prohibited transaction. I can't remember the specific rule, but I was just looking at it less than a week ago. The bad news was NADA ... no can do.

Greg Watson