What is a Checkbook IRA?

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For gold buyers, bullion enthusiasts, and investors looking to stash some of their retirement savings in precious metals, so-called “home storage IRAs” or “checkbook IRAs” seemingly offer a perfect solution. However, they garner significant risks as they’ve been a thorn in the IRS’s side for many years.

What is a checkbook IRA?

A checkbook IRA is a specific type of self-directed IRA. In a checkbook IRA, you use your retirement funds to create and own a business, property, or some other kind of entity that generates its own profits within the IRA. The business owns the IRA, and you own the business.

Those profits, in theory, stay within your IRA, building a nice nest egg through a privately-owned entity. In the world of precious metals, a checkbook IRA is commonly called a “home-storage” IRA. As the name suggests, these accounts allow you to own gold and silver within your IRA (and store it at home).

The idea sounds simple enough. However, the execution of opening and managing one legally and in compliance with relevant laws and regulations have always been a challenge.

There’s just one looming problem, however–the IRS. In fact, the IRS has a long history of fighting checkbook IRAs, starting with the very first one created by James Swanson in 1996.

The IRS decided to sue to stop the practice before it began. However, Swanson won the case, and checkbook IRAs remained a legal, though contentious, option for investors.

But now, it seems, the IRS might finally get its wish to close the door on checkbook IRAs for good through proposals to the Budget Reconciliation Bill.

Responsibly Funding Our Priorities: Subpart B

document being signedAs of October 2021, the Biden Administration is looking to expand on its campaign promises through a hefty $3.5 trillion budget bill. For months, politicians on both sides of the aisle have been debating what to include in the bill, and in some cases, how to stop it from passing entirely.

Birch Gold Group does not speculate on politics. But we can look at how this massive effort to alter the tax code has progressed.

In mid-September 2021, the House Ways and Means Committee contributed and passed its own additions and new proposals to the 2021 Budget Reconciliation bill. These proposals include language that directly attacks the very idea of checkbook IRAs.

“Subpart B: Other Provisions Relating to Individual Retirement Accounts” is a list of definitive changes to how IRAs work. The Democrat-held Committee included new rules restricting how much high-wealth individuals could contribute to a retirement account. The proposals also limit how much can be rolled over into Roth IRAs.

But the significant portion of this proposed legislation for our discussion comes in Sec. 138314.

3 New Rules to End Checkbook IRAs for Good

Currently, precious metal investors can use checkbook IRAs (also known as “home storage IRAs”) to buy and own gold coins and bars directly.

Some checkbook IRAS are formed by an individual or entity opening a limited liability company (an LLC, and indeed these accounts are often called “IRA LLCs”) for the sole purpose of buying precious metals. Typically, the IRA owner would also be the owner of this LLC entity, allowing the “business owner” to use the company’s checkbook to buy bullion.

Sec. 138314 specifically targets this type of operation. It isn’t a long section. But it does cover three major changes that directly impact checkbook IRAs like the type detailed above.

Rule 1: Ownership

Currently, no one can own more than 50% of a company, property, etc., held within an IRA. However, the owner creates and keeps a near-majority stake in it for the purpose of buying and holding precious metals. This is how checkbook IRAs currently work.

The new proposal reduces that allowable ownership stake to less than 10%. This makes it virtually 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

Still, many businesses are run and managed just fine by people who don’t control a full 50% or so of its equity. CEOs, Directors, COOs, CFOs, etc., decide what to invest in and how to operate all the time, even if they barely own any share of the company.

Along with the first new rule, Sec. 138314 also prohibits any IRA owner from holding an officer position like those listed above in any company held within an IRA. So no individual can be the majority owner or a decision-maker in their own IRA LLC.

Rule 3: Risk of IRA Dissolution

Ever since Swanson’s 1996 court battle against the IRS, the IRS was only ever allowed to dispute the specific ownership and management of these checkbook IRAs.

It can take actions like it did against Swanson and claim an IRA owner broke a “prohibited transaction rule.” In essence, this just allowed the IRS to go after a specific bending of the rules. This bill includes language that allows the IRS to completely dissolve an IRA it finds in violation. Meaning, for anyone straying even slightly outside these new rules, they could lose their IRA and face heavy fines and taxes for their mistake.

As you can see, checkbook IRAs will not last under these new rules. If the proposal passes, it will go into effect at the start of 2022. For checkbook IRAs already holding gold and silver, those IRA owners will have to unravel their positions or ownership stakes before the end of 2023.

What Does This Mean for Precious Metals Investors?

For the vast majority of precious metal investors, it shouldn’t change a thing. But for those that own checkbook IRAs, it changes everything.

Fortunately, you don’t have to go so far as to start a business, dodge IRS rules, and manage the plethora of paperwork that comes with checkbook IRAs just to incorporate gold, silver, platinum, or palladium into your retirement savings. There are better options without the worry of the IRS interfering.

Plus, the downside risk of Checkbook IRAs is too large– just ask the Rhode Island couple that was ordered to pay over $300,000 in taxes and penalties (on a $730,000 checkbook IRA) in a recent Tax Court case.

Here at Birch Gold Group, we’ve helped people start and manage self-directed IRAs for years. None of our customers’ SDIRAs are checkbook IRAs and are not at risk of being in violation of the IRS. Birch Gold Group customers have absolutely nothing to fear from these proposed legal changes.

Of course, none of the proposed bills are settled into law. Debates about this bill remain in Congress and will evolve from here. However, there’s one significant takeaway anyone can make from all of this. The IRS’s battle against checkbook IRAs is now Congress’s.

If you are interested in adding precious metals into your retirement savings, it’s clear that checkbook IRAs are more complicated and legally dubious than an ordinary self-directed IRA. Birch Gold Group can help you get started the right way.