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Hard Cash in Your Retirement Plan

hard cash

The Coronavirus has and will change the way we live our life both socially and even financially.  Whether it will be social distancing self-quarantine, or hoarding cash, we may never go back to the way we lived pre-2020. The Coronavirus is not only very dangerous from a health perspective, but it has the potential to create a second Great Depression.  The equity markets are falling fast and are extremely volatile.  There does not seem to be many safe havens for investors, except hard cash.

Key Points
  • Hard Cash is a Safe Haven During Crises
  • You must self-direct your retirement plan to hold cash
  • Be mindful of IRS rules when holding cash in an IRA or 401(k)

IRS Rules

There are several ways one can have cash in their retirement portfolios. One of the more common ways is to own money market mutual funds that earn a small amount of interest.  In addition, one can just keep the cash in a bank savings account.  Cash in a savings account under $250,000 would have FDIC insurance protection.  However, what if you actually want to hold hard cash.  In other words, stacks of hundred dollar bills for emergency purposes?

The IRS and the Internal Revenue Code (“IRC”) do not describe what a Self-Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits “disqualified persons” from engaging in certain type of transactions.

The definition of a “disqualified person” extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings. Further, prohibit one from taking advantage of the tax benefits for their personal account.

Holding Non-Traditional Assets

The IRS has always allowed the use of retirement funds to purchase real estate and other nontraditional investments.  In terms of holding the IRA owned assets, precious metals is the only asset that the IRC specifically requires to be held in the “physical possession” of a depository of U.S. bank.  Hence, there does not seem to be any IRS prohibition against personally holding hard cash owned by your IRA. Obviously, an IRA can own a money market fund or a savings account.

Of course, the cash cannot be used for any personal purposes.  However, if there was an emergency, crisis, such as the coronavirus, or war, and there was a liquidity crunch or run on the banks, holding hard cash would have its advantages.  The cash would have to be taken as a taxable distribution in the case of a pre-tax IRA. It would be subject to a 10% early distribution penalty, if under the age of 59 1/2.

How Can I Hold Hard Cash in My IRA or 401(k)?

Establishing an IRA or 401(k) plan at a traditional bank or financial institution will not allow you to make alternative asset investments, such as real estate or hold hard cash.  The only way one could hold hard cash in a retirement account is by establishing a Self-Directed IRA LLC or Self-Directed 401(k). These two structures offer checkbook control and allow the manager or trustee of the plan control over plan assets.  As a result, you would be able to take the cash out of the IRA LLC or Solo 401(k) plan bank account and hold the cash personally.

Tips for Holding Hard Cash in Your Self-Directed Account

Although there is no express IRS guidance on this topic, there does not seem to any direct prohibition in the IRC against a retirement account older or plan trustee to holding hard cash personally.  The most important tip is to make sure you document the amount of cash you took and you can properly account for it.  If you can have a non-disqualified person hold the cash for you, such as a sibling, that would be the safest approach.

However, if you wish to hold the cash personally, it is good practice to have a document identifying the date, amount of cash taken, and where it is being held.  Having the document witnessed by a non-disqualified person is also a good idea.

The most important rule to remember is that the cash cannot be used for any personal purposes or to directly or indirectly benefit a disqualified person, including yourself.  However, if you wish to use the cash for personal purposes, you can always do so and treat it as a taxable distribution.  In the case of a Self-Directed IRA, you would report it to the IRA custodian.  Whereas, in the case of a Solo 401(k), the plan administrator would report the distribution by filing the IRS Form 1099-R.

The coronavirus has changed the way we all live and think about money. Holding hard cash in your retirement account does not generate any rate of return, but it could come in handy one day in case of a financial crisis. It’s better to be safe than sorry.

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