An IRA LLC, commonly known as a Checkbook IRA, allows for hands-on control over investments without custodial interference from an intermediary. This structure is best suited to active investments such as real estate.
Utilizing this structure can help you avoid prohibited transactions, such as providing compensation to the IRA owner or any other non-eligible individuals.
Taxes
Transactions involving your retirement assets typically involve extensive discussions between yourself and the custodian of your account, but purchasing real estate or an LLC allows for faster action.
LLC structures provide protection from personal liability in the event of litigation, meaning creditors cannot seize your personal assets such as homes, cars and bank accounts in case they sue. This has proven invaluable for investors using this strategy.
An IRA used as “checkbook control IRA” does not alter IRS regulations regarding prohibited investments or Unrelated Business Taxable Income (UBTI). It’s essential that LLC documents and payment records don’t allow payments to disqualified persons (such as an IRA owner). Furthermore, all required state fees (some one-time fees; some on an ongoing basis) must also be paid by the LLC itself.
Management
Although an IRA/LLC structure can be beneficial, there are some legal issues to be aware of when opening one. There are limitations as to how IRA funds may be spent and its owner must abide by IRS rules when handling them.
The IRA/LLC structure is often preferred when investing in real estate, as it allows the IRA owner to sign contracts and authorizations without needing to go back and forth with his/her custodian for each transaction. Furthermore, rent checks can be sent directly into LLC business checking accounts instead of having them sent directly back out from property management fees.
Note that your IRA/LLC must comply with IRS rules regarding prohibited transactions and disqualified persons, so it’s wise for clients to work with a financial advisor in order to ensure compliance. An IRA/LLC may be managed either directly by its owner or through a third-party manager – if third parties manage it then an operating agreement tailored specifically for your Self-Directed IRA must be provided to ensure seamless operations.
Investments
IRA/LLC investments have become an increasingly popular means of real estate investing, as they allow an investor to avoid having to negotiate contracts and expenses with their custodian. Furthermore, this structure reduces transaction fees compared to purchasing property directly in their name – however you must ensure no prohibited transactions take place with your LLC.
Should this occur, the IRS could revoke your tax-advantaged status with them and force the closure of your IRA or LLC account. Therefore, it would be beneficial to consult an attorney knowledgeable in both LLC laws and IRA rules before taking any actions yourself.
IRA investors who purchase property through LLCs should make the rent checks payable to the LLC; that way it will appear like any other purchase-to-sale company and won’t raise red flags. All income and expenses from renting will flow back into your IRA account and allow profits generated to purchase more properties, gold, or stocks to diversify and strengthen your retirement portfolio.
Liability
Self directed IRA LLCs provide full diversification for your retirement savings while giving you “checkbook control”. With an IRA LLC you can invest in various areas, from real estate and private companies, to more exotic ventures.
However, LLC structures can present additional liabilities that must be carefully managed by you and your professional advisors. Particularly important for successful investment experiences is avoiding prohibited transactions; engaging in them even accidentally could result in dissolving your IRA by the IRS and incurring additional taxes and penalties.
Example: Your IRA cannot invest in an LLC that you and certain “disqualified persons” already own 50+% of, such as yourself and/or family (includes spouse, descendants, ascendants and their spouses) already own 50+%. Under IRS rules this transaction would be prohibited. Furthermore, an IRA cannot purchase property that you intend to live or vacation in directly through these investments.
