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Self-Directed IRA LLC: How it Works

Self-Directed IRA LLC

The Self-Directed IRA LLC is a tax court and IRS approved retirement plan. You must establish a limited liability company (LLC), which you (IRA holder) will manage and the IRA will own. The Self-Directed IRA LLC structure gives you “checkbook control” over your retirement funds. With checkbook control, you can make any IRS approved investment as easily as writing a check or wiring funds from the LLC bank account.

Investors never need custodian consent with a Self-Directed IRA LLC. Therefore, you don't experience time delays when you wish to make an investment. As manager of the LLC, you can decide which investments to make, when you want to make them. The structure is very agile and a good idea for IRA holders who plan to make multiple investments.

With the Self-Directed IRA LLC structure, you can make non-traditional investments such as real estate, tax liens, private businesses, precious metals, promissory notes and much more. You can still make traditional investments, like stocks and bonds, but you are not limited to these types of investments.

How a Self-Directed IRA LLC Works

With a Self-Directed IRA LLC, after the LLC is established, the IRA holder’s IRA funds are then transferred by the Custodian to the LLC’s bank account. This provides the IRA holder with “checkbook control” over his or her IRA funds.

The Self-Directed IRA LLC “Checkbook Control” structure is approved by the U.S. tax court and has been widely popular for over 20 years. The notion of using an entity the IRA owns to make investments was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996).

The Self-Directed IRA LLC allows you to eliminate the delays from an IRA custodian, and immediately make investments as the opportunity presents itself.

Self-Directed IRA – Types of Plans

Many traditional IRA custodians advertise themselves as offering self-directed retirement accounts, because you direct them to make investments. However, with traditional institutions like Fidelity, you need custodian approval prior to making an investment. Additionally, these IRA custodians often limit you to traditional assets, because they do not make money when you invest your Self-Directed IRA in real estate, precious metals or other alternative assets. If you wish to diversify your retirement portfolio, you will need to work with a self-directed IRA facilitator, such as IRA Financial Trust.

There are three categories of Self-Directed IRA structures. You can distinguish them by the level of control the custodian exercises over your investments.

Financial Institution Self-Directed IRA

Again, with a financial institution Self-Directed IRA, you can direct your IRA investments in the financial products that the institution offers. These are traditional investments, such as stocks, bonds and mutual funds. As previously stated, most financial institution Self-Directed IRAs will not allow you to make non-traditional investments, also known as alternative asset investments.

Self-Directed IRA with Custodian Control

Another type of Self-Directed IRA structure is custodian controlled. With this Self-Directed IRA structure, many types of nontraditional investments, such as real estate, are permissible. However, before you engage in an IRA investment, you must receive the consent of the custodian. You must provide the custodian with the transaction documents for review as part of their transaction review process. This process can cause time delays, high annual fees and additional transaction fees.

If you are an investor who is moderately active, and you have close to $50,000 in assets, you may pay anywhere from $400 to $600 in aggregate annual fees.

Custodian Control Fees Include:

  • Account value fee
  • Transaction fees
  • Approval letters

Additionally, there is no guarantee that the custodian will approve your investment even if it doesn't violate IRS rules. Although you can make alternative asset investments, the self-directed IRA custodian-controlled structure has time delays and high custodian fees.

Self-Directed IRA with Checkbook Control

The truest definition of a self-directed IRA gives you complete control over your IRA funds. You gain the most control when you establish a self-directed IRA LLC, also known as the self-directed IRA with checkbook control. Unlike the custodian control self-directed IRA, you will not need the consent of a custodian to make investments. Therefore, when you find an investment, write a check or wire funds from your self-directed IRA LLC bank account.

Passive Custodian

A passive custodian is an IRS Approved FDIC backed custodian who allows for non-traditional types of investments. The passive custodian earns fees by establishing and maintaining IRA accounts, not by selling investment products. Traditional custodians, such as Charles Schwab, make money by selling traditional investment products.

The passive custodian does not provide advice or recommendations regarding the investments you make with your Self-Directed IRA LLC. The passive custodian simply executes investment decisions by the IRA owner and performs custodial/administrative duties to maintain the tax-deferred status of the retirement account.

Essentially, the passive custodian establishes and maintains retirement accounts. They are not in attendance to satisfy IRS regulations.

How to Set up a Self-Directed IRA LLC

Setting up a self-directed IRA LLC structure takes a matter of days. You will need the consultation of a professional financial group, such as IRA Financial Group, the leading provider of checkbook control self-directed IRAs. You will receive the assistance of a Self-Directed IRA specialist to set-up your structure. Set-up can take between 7-21 days to complete. The time-frame is largely dependent upon the state of formation and the custodian holding your retirement funds.

There are many advantages to a Self-Directed IRA LLC, which may be why it’s growing in popularity. It gives your retirement portfolio diversity and enables you to have full control over your finances. Additionally, you can invest in what you know and understand, which can decrease the risk of losing your funds.

With your Self-Directed IRA LLC, you have a world of investment opportunities:

  • Domestic or foreign real estate (rentals, foreclosures, raw land, tax liens etc.)
  • Private businesses
  • Precious metals (gold or silver)
  • Hard money
  • Peer to peer lending

IRA Financial App

Now, you can establish your Self-Directed IRA on our new retirement app. The new app is the first of its kind, enabling retirement investors to perform ongoing account maintenance, such as:

  • Move/rollover funds
  • Direct alternative Asset investments
  • Make or take contributions

Coming soon, you will be able to perform more actions and speak with a live, certified tax specialist. Download the app today for Android or iOS to get started.

In three simple steps, here is how to set-up a Self-Directed IRA LLC with Checkbook Control.

Capital One Bank

IRA Financial has recently partnered with Capital One Bank to simplify how our clients establish their Self-Directed IRA. Our specialists will open the LLC bank account on your behalf, and complete all documentation for the account. You never have to step foot in a bank. IRA Financial is the only Self-Directed IRA provider that can open an LLC bank account for their clients. As a result, this will make your process faster, easier and more cost-effective.

1. Transfer Retirement Funds Tax-Free

First, your retirement funds from your current custodian must transfer to an IRS approved FDIC backed passive custodian. You can make transfers from any retirement account, including:

  • Traditional IRA
  • Roth IRA
  • SEP IRA
  • 401(k)
  • 401(3)(b)

You can transfer or rollover funds to the passive custodian tax-free.

2. Investment of IRA Funds into New LLC

As the IRA owner, you will direct the passive custodian to invest your IRA funds into the new Limited Liability Company (LLC). The LLC is treated as a pass-through entity for federal income taxes, which means all income or gains of the LLC will flow to the IRA tax-free.

3. The Power of Checkbook Control

With checkbook control, you can direct the LLC to make investments in real estate, precious metals or any IRS approved alternative asset investment of your choosing. You can also make traditional investments. Again, all income and gains of the LLC flow back into the IRA tax-free.

We wrote the book on Self-Directed IRAs

The second installment in a four-part series, The Checkbook IRA: Why You Want it, Why You Need it, explores important topics regarding the self-directed IRA and why it has become the leading retirement structure to purchase real estate using IRA funds.

Following the success of Adam Bergman’s previous self-directed IRA book comes Self-Directed IRA in a Nutshell, a straightforward explanation on what IRA investors need to know about self-directed IRA retirement structure.

Learn more about the books →

Get in Touch

I want to self-direct my IRA! Call us at 800-472-1043 or fill out the form and we can help you.