An IRA LLC offers checkbook control and is the best strategy for those seeking a TRUE self directed IRA. Some transactions can go directly through a self directed IRA custodian but through an IRA LLC vehicle you can make ALL permissible transactions.
You are the manager of your self-directed IRA LLC and all decisions are made by you. When you want to make an investment, you write a check, use your debit card, wire funds, etc… All contracts can be signed by you.
If you want to hire another decision maker you can also do that. You will need to report to the custodian on an annual basis. Most custodians don’t have any formal documents to make this reporting, a simple letter will suffice. We recommend keeping a balance sheet for your entity and sending that to the custodian annually.
The rules state you cannot extend credit to your IRA, and your IRA cannot be used as security. This makes borrowing money a little more difficult, however, for us this isn’t a big problem.
As long as you get a loan that doesn’t take recourse against you or your IRA, you aren’t making a prohibited transaction. What most individuals do is use a property owned by the IRA LLC as collateral, as long as the loan-to-value ratio meets the right requirements, most banks will loan money to the IRA LLC. A good IRA LLC advisor will have relationships in place to help you facilitate this transaction.
Gain off of debt financing may be subject to Unrelated Business Income Tax (UBIT) and you would most likely want to hire a tax professional to assist in filing a return.
This is a prohibited transaction. If this is something you really want to do you might get an exemption from the Department of Labor allowing you to make this investment. Private letter rulings and exemptions can be tedious, costly and might not be approved.
If you are paying for this advice your broker, CPA or attorney should not be making this statement.
Your Financial Advisor will naturally show skepticism when they realize that you want to move funds outside of their management. We have heard every excuse in the book from brokers:
If you set this up your IRA will be taxed.
Not true, the funds are transferred from custodian to custodian ensuring that the IRA is still qualified and there are no taxes due on the conversion
This company will run off with your money.
Not true, most companies that structure an IRA LLC wont even have access to your funds and simply charge a fee to facilitate the process.
Once again, the funds are transferred to a Trust Company or Bank, the likelihood that your life savings will be stolen is the likelihood that your local bank will steal it.
Brokers and financial advisors will typically attempt to keep your assets under their management and this becomes more and more obvious the more they talk.
Your CPA is most likely in business to file taxes. Your local attorney doesn’t specialize in IRA LLCs. These professionals usually won’t want to take the time and effort to study the tax code in depth and give you a straightforward answer for free.
To put you off you might be told…
- “That’s illegal”
- “Technically you can but it is frowned upon”
- “This is a loophole and the laws will change”
If you are told this is illegal, simply ask your professional where exactly that is stated in the tax code. They won’t find it. Actually, ask them where it is stated that you can buy a stock – they won’t find that either.
To tell you that this type of structure is frowned upon by the IRS or any other government is completely wrong. Nowhere is it ever indicated that the government doesn’t want you managing your own retirement account. To the contrary, there are many indications that the relevant arms of government are completely aware of this type of strategy and don’t “frown” upon it at all. There are other strategies that are more hidden than the IRA LLC that are being openly scrutinized, if the IRA LLC were in the same category it would be publicly stated.
To say that this is a loophole or grey area in the law is just a clear misunderstanding of the terms loophole or grey area. The definition of loophole is “a means or opportunity of evading a rule, law, etc.” The IRA LLC structure is directly in line with the purpose of an IRA and is in no way a strategy to evade the rules in the tax code. Grey areas are usually grey because the situation has not yet been vetted through the legal system. The IRA LLC structure has clearly been vetted through the courts and relevant authorities and is in no way a grey area. Unless the professionals telling you this are senators or high level officials, they can’t tell you with any certainty how the laws may change. If you believe IRA rules are going to change in the near future then NOW might be a great time to act.
The tax code has always granted these abilities, but most custodians have a vested interest in controlling your money and distributing the profits into their pockets, not yours.
Before your money is deposited in a local FDIC-insured bank account of your choice, it will be moved to a registered qualified IRA custodian.
To be a qualified IRA custodian the institution must meet stringent state and federal requirements (explained in IRC Section 408) and have adequate reserves.
Your funds will be kept in a trust account for a short period of time (usually less than a week) before the funds are transferred into an LLC checking account of your choosing. Even if the trust company or bank goes out of business, your money will always be in your possession and the LLC can be registered as an in-kind transfer to another custodian.
As a general rule, you want to make sure that your retirement plan can be rolled over or transferred to another custodian before moving forward in getting an IRA LLC. Once you have established that you are eligible, most types of retirement plans can be converted into an IRA LLC, here is a list of the most popular:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Thrift Savings Plan
Since the Employee Retirement Income Security Act (ERISA) was passed in 1974, the big lobbyists for IRAs have been banks and investment firms. Since then there has been a common misconception that IRAs are only allowed to be invested in stocks, bonds, mutual funds, annuities and CD’s. Nothing could be farther from the truth.
The main reason you might not have heard of this type of retirement plan is that none of these traditional custodians have an incentive to allow you to make your own investment decisions outside of stocks bonds mutual funds, annuities and CD’s.
Since the downfall of the stock market in 2000 it has been individuals who have taken the initiative and built a market for “truly” self-directed IRAs.
According to IRS Letter Ruling 199929029, April 27, 1999 IRAs are not qualified as investors in Subchapter S Corporations.
Individuals can contribute to a traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer sponsored retirement plan.
[Note that contributions to a Roth IRA are not deductible and income limits apply.]
See Publication 590 for further information.
When you make an investment with your IRA LLC you will want to make sure that the asset is titled in the name of your entity.
Make sure all the expenses come from the IRA LLC and all the revenue flows to the IRA LLC.
Also, you will always want to make decisions in the best interest of the IRA LLC because once you become manager of your IRA, you become a fiduciary. One tactic to help you get on the right thinking track would be to imagine you are managing your deceased friends estate for his/her children, instead of your IRA.
A traditional IRA can be converted to a Roth IRA by:
Rollover – A distribution from a traditional IRA can be contributed to a Roth IRA within 60 days after distribution.
Trustee-to-trustee transfer – The financial institution holding the traditional IRA assets will provide directions on how to transfer those assets to a Roth IRA with another financial institution.
Same trustee transfer – As with the trustee-to-trustee transfer, the financial institution holding the traditional IRA assets will provide directions on how to transfer those assets to a Roth IRA, this is usually a simple IRA conversion form that requires your signature. In this case, things should be simpler because the transfer occurs within the same financial institution.
A conversion results in taxation of any untaxed amounts in the traditional IRA. Also, the conversion is reported on Form 8606, Nondeductible IRAs.
Yes. In Swanson vs. Commissioner Swanson’s IRA was partnered with the IRAs of his 3 children and Swanson was the director of the company (Swanson won the case).
However, if you are going to make your LLC owned by multiple members (whether they are disqualified or not), the IRA LLC will become disqualified for any additional IRA capitalization as where an LLC owned 100% by one IRA becomes a part of the IRA and you are allowed to make annual contributions to the entity (see See DOL Advisory Opinions 97-23A and 2005-03A).