A self-directed IRA
, otherwise known as an IRA LLC, allows you to hold alternative installments in the name of LLC instead of using a self-directed LLC custodian, eliminating the custodian involvement and the limitations placed thereby. An IRA LLC allows multiple investments with no holding cost and ensures timely processing of investments since you are in control of the investments and their funding.
Starting an IRA LLC
The entire IRA LLC process can be summed up in the following five steps.
1. Transfer the client's IRA or 401(k) funds
to a self-directed IRA custodian, which will allow him or her to invest in private companies, since an LLC falls under the private company category.
2. Help the client choose a self-directed IRA LLC facilitator company that will register the LLC with the applicable state after obtaining the employer identification number (EIN) for the LLC. Thereafter, they will prepare the IRA LLC operating agreement containing specific IRA language.
3. Have the client open a checking account with a bank for IRA LLC funding in the name of the LLC.
4. Once all the steps above have been completed and the self-directed IRA has been set up — and the client's former IRA plan has been transferred to the self-directed IRA custodian and the LLC operating agreement and related forms are submitted to the self-directed IRA custodian — the self-directed IRA custodian will wire funds to the new LLC bank account.
5. As the manager of the IRA LLC, your client can now start placing funds in alternative investment avenues including real estate, private placement, promissory note, tax liens, commodities, etc.
Benefits of an IRA LLC
Some of the benefits of an IRA LLC:
Some rules to keep in mind
- It provides multi-layered protection against liabilities as investments are made under the name of LLC and not IRA.
- The entire transaction process for investment is done faster since your client is in charge as the manager.
- It allows your client to partner with other investors.
- It allows non-recourse loan or debt financing in real estate investments.
Some of the rules to be kept in mind for IRA LLC include the following:
- It attracts the same IRA prohibited transaction rules that apply to IRA or multiple IRAs.
- An IRA is the sole member of an LLC through the purchase of LLC units.
- Annual contributions to the IRA and IRA 401(k) must be made to the self-directed IRA and not IRA LLC.
- IRA LLC investment must be titled in the name of the LLC and not your client's name or the IRA’s name.
- The IRA LLC bank account cannot be co-mingled with other personal accounts.
- The IRA LLC manager may not be compensated if the manager is an IRA owner or a disqualified party.
- All investment profits and losses must flow through the IRA LLC bank account.
- The IRA owner is prohibited from guaranteeing debt personally on behalf of the IRA LLC.
The IRA LLC can be started by individuals for several reasons such as purchasing assets that are not traditionally allowed under the IRA scheme (stocks, bonds, mutual funds etc.). It also offers a greater amount of control over the funds.
The self-directed IRA: Retirement dream or tax nightmare?
The self-directed IRA, Pt. 1
| Pt. 2
| Pt. 3
| Pt. 5