IRS Code Section 408 details the rules and guidelines pertaining to IRAs. Within this chapter, IRS Section 408(m) pertains specifically to “collectible” assets while 408(m)(3) goes further to define them. To anyone considering investing with an IRA account, understanding which investments are permitted as investments while others could result in penalties is key; here’s a thorough breakdown of IRS Section 408(m)(3) for investors considering opening one themselves.
What Are Collectibles Under Section 408(m)?
Under section 408(m), “collectibles” refers to assets which generally cannot be kept inside an IRA and any purchases using funds from your IRA would constitute distribution and could incur penalties and taxes accordingly. Examples of collectibles might be:
Artwork, Rugs or Antiques, Metals or Gems, Stamps or Coins and Alcohol are examples of tangible personal property which could include Artworks, Rugs Antiques Metal Gems Stamps & Coins as well as Alcohol Beverages as tangible personal properties that exist as tangible personal properties.
Investigation of 408(m)(3):
An Exception to the Rule Its Not all collectible assets that appear to be prohibited within an IRA can actually fall within its parameters, specifically metals and coins that fall into this section 408(m)(3) offers specific exceptions as mentioned earlier.
Precious Metals: While precious metals may be considered collectibles and therefore ineligible for an IRA account, certain exceptions apply:
Gold, silver, platinum and palladium bullion of certain fineness (generally.995 or finer) is eligible to be held within an Individual Retirement Account provided they are physically held by either a bank or IRS-approved nonbank trustee – this rule means you cannot own them directly but instead they can be stored safely on your behalf.
b) Coins: While certain coins may be banned, U.S. minted ones generally qualify, including:
One, half, quarter and one-tenth ounce U.S. gold coins (American Eagle coins) as well as one ounce silver Treasury-mined American Eagle coins can all be considered legal tender. Additional state coins are also legal tender.
Coins issued under the laws of any state. Investment in coins minted by other countries, even those made from precious metals like platinum or palladium may not be acceptable and so it’s essential that before making an investment decision you consult a tax professional first.
Consequences of Violating the Collectible Rule
When an IRA invests in collectibles, that investment is treated as a distribution from their account in the year of purchase and may be subject to taxes and early distribution penalties.
Best Practices Before using an IRA to invest in items considered collectibles:
Research and Due Diligence: Before investing, ensure the asset in question does not fall under collectible classification, or, if applicable, that its sale falls under Section 408(m)(3) exceptions.
Consult Professionals: Speak to tax and financial advisors familiar with IRA investments as well as IRS Code sections in order to guide you.
Keep Current: Financial and tax matters are ever-evolving; thus it is wise to stay abreast of changes to IRS guidelines and rules.
Conclusion
Although IRS Code Section 408(m)(3) may seem daunting at first, understanding its nuances will allow IRA holders more options when selecting investments for retirement savings accounts. By staying informed and seeking professional guidance on financial matters, investors can avoid potential pitfalls while maximizing retirement savings investments.
