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Self-Directed IRA Concepts
Checkbook LLC IRAs and variations thereof can be enticing for alternative asset investors, especially with respect to investing in assets like real estate and precious metals. However, a recent tax court case, MCNULTY v. COMMISSIONER OF INTERNAL REVENUE, examined the issue of the IRA owner having “unfettered control” over the assets held in the IRA account. Where this leaves the option of checkbook control remains a question.
In the recent IRS case, the taxpayer formed an LLC, funding the LLC with cash from their IRA, then purchased precious metals. The client physically stored these metals at their personal property. The tax court ruled this was a prohibited transaction, and the client suffered stiff consequences and penalties, effectively distributing the entire account, and imposing a 20-percent penalty on top of the distribution tax.
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“Independent oversight by a third-party fiduciary to track and monitor investment activities is one of the key aspects of the statutory scheme. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.” McNulty vs. Commissioner, 157 T.C. No.10 (Nov. 18, 2021)
The ruling reiterated the importance of a custodian when IRA assets are involved:
“A custodian is required to maintain custody of the IRA assets, maintain the required records, and process transactions that involve IRA assets…While an IRA owner may act as a conduit or agent of the IRA custodian; she may do so only as long as she is not in constructive or actual receipt of the IRA assets.”
Access the full whitepaper – Checkbook LLC IRA: Proceed with Caution – to learn more about what this ruling means for checkbook control, frequently asked questions, and more.
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