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Impermissible IRA Investment in Collectibles


Daniel Nugent
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It was discovered that a self-directed IRA has invested in a collectible that does not meet any of the exceptions in Code Section 408(m), and therefore the IRA is treated as having distributed the cost of the collectible to the IRA owner.

Two questions.

1. In addition to the deemed distribution, does the IRA's investment in the collectible constitute a prohibited transaction, or could a prohibited transaction arise if appropriate steps are not taken?

2. Does the IRA custodian have any duty to ensure that the IRA owner correctly handles the deemed distribution, or have a reporting obligation regarding the deemed distribution?

Any thoughts are welcome. Thanks! 

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https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments

It is a taxable distribution in the year the collectable is purchased with the IRA funds. I am not aware of any additional PT issues since it is considered a distribution at the time of purchase and not held by the IRA.

A 1099-R is required to be issued for the distribution which I believe is equal to the purchase price of the collectable.

It appears to be treated the same as if the the IRA owner took an cash distribution form the IRA and then purchased the collectable with the funds received.

 

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It's been a couple of years since I've been in the alt world. But if my memory serves me correctly, I believe the transaction investment in the collectable would be processed as a removal of excess contribution, since the investment was not eligible to be held in an IRA. An investment in a collectable is not treated as a PT. So the process is to calculate gains/losses, do a removal of excess contribution and report it current year. The client is now subject to any taxes and penalties associates with the excess contributions from the year in which the investment was purchase until 2020. Hope this helps.

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4 hours ago, JOH said:

But if my memory serves me correctly, I believe the transaction investment in the collectable would be processed as a removal of excess contribution, since the investment was not eligible to be held in an IRA

No, Lou S. is right, it's a distribution. See Code sec. 408(m)(1).

Note that, depending on how much money was at issue and what the taxpayer's income is, if the investment was more than 3 or 6 years ago, you can have some interesting statute of limitations issues.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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