An LLC within your self-directed IRA can give you greater control and reduce transaction fees by bypassing custodian approval, but proper compliance must be ensured to avoid prohibited transactions that can compromise its tax advantages.
Discover more about using an IRA to invest in real estate or alternative assets by connecting with an experienced financial advisor in your area using SmartAsset’s free tool that connects users to pre-screened advisors.
The IRA Owner
An LLC within a Self-Directed IRA gives its owner direct control of investments without going through the custodian. This can save time and money if you need to close on real estate deals quickly or require greater flexibility with investments such as private equity or real estate investments approved for an IRA account.
But keep in mind that an LLC cannot pay salaries to disqualified personnel like financial advisors, attorneys and real estate agents; doing so could violate IRS rules and lead to unwanted taxes and penalties.
Single-member LLCs do not need to file tax returns, while multi-member LLCs may need to submit an informational return with the IRS. Furthermore, since an LLC allows more flexibility and eliminates some associated IRA transaction fees known as “checkbook control”, making it particularly advantageous when investing in hard money loans or auctions that require frequent transactions.
The IRA Custodian
Custodians must adhere to federal tax law and regulations regarding the IRA/LLC structure. In particular, prohibited transactions cannot occur between an IRA and disqualified people or entities. We therefore highly advise consulting legal advice that has experience dealing with this type of investment to build parameters into your LLC operating agreement that prevent illegal trades from taking place.
These professionals typically aren’t custodians but administrators that offer the IRA/LLC product before referring IRA owners to an independent custodian for a fee. An administrator isn’t subject to regulatory oversight but rather provides marketing/sales, data entry/statements/basic reporting as services provided.
An IRA LLC can be an excellent way to quickly invest in assets like real estate that require quick action and direct check writing from its bank account, without needing approval from your custodian first. Furthermore, using such an entity saves money as transaction fees can quickly mount with multiple investments or frequent transitions.
The IRA Manager
An LLC within an IRA enables its owner to maintain “checkbook control”, while increasing flexibility with regards to real estate investments and partnership investments that require mortgage financing.
As with any LLC, an IRA LLC requires proper management and operation just like any other. As with other forms of LLC ownership, its owner cannot utilize it for personal gain or make prohibited transactions with non-eligible parties.
As part of your self-directed IRA setup process, it is recommended that an LLC bank account be opened with funds coming directly from Entrust’s Self-Directed IRA as the sole member. You will also need to submit its management operating agreement as well as an investment request document to Entrust for approval.
If you’re considering investing in real estate through an IRA LLC, speaking to an advisor may be useful. SmartAsset’s free tool connects users with qualified advisors in their area who can explain both its pros and cons.
The IRA Trustee
Self-Directed IRA LLC allows the IRA owner greater control of his or her investments while saving on transaction fees by handling investment activities outside the custodian’s custody. It is often used for real estate investments or alternative investments like precious metals or private equity.
LLC structures can assist IRA holders in avoiding prohibited transactions by isolating their IRA assets from personal funds and thus reducing the likelihood of them being used to invest in businesses owned or run by disqualified people (e.g. spouse or children of an IRA owner).
The IRA/LLC structure makes it easier to verify information about investments, including prices and asset values. This can be particularly important for intangible and privately-held assets that require an independent valuation from an expert third-party – in order to ensure the IRA owner pays fair market value for investments they hold within the account.