An IRA LLC can give you greater control of your self-directed IRA investments in assets like real estate and private placements, but properly creating one requires articles of organization as well as an operating agreement that restricts prohibited transactions.
This strategy comes with its own set of risks and requires care in ensuring IRS compliance. Read on to understand its potential advantages and drawbacks as an IRA LLC (commonly referred to as Checkbook IRA).
1. Tax-Advantaged Investments
An LLC’s primary appeal lies in its limited liability feature, protecting personal assets from being used to pay debts incurred from business operations. To maintain this protection and avoid penalties from the IRS, LLC owners must abide by specific rules related to IRA accounts such as not investing in assets that directly benefit themselves or disqualified persons such as spouses of beneficiaries of those accounts.
Investment assets commonly included here include real estate, tax liens, precious metals and more popular investment assets. Direct investing could result in taxes, penalties or disqualification from an IRA plan; for the best tax advice contact a financial advisor or tax professional and they’ll help devise a tax-saving strategy tailored specifically to you and your goals.
2. Flexibility
If you’re looking to diversify beyond Wall Street products, an LLC is an attractive way to expand your retirement investments beyond Wall Street products. An LLC allows for greater flexibility when investing in alternative assets like real estate and private equity while helping eliminate fees incurred when using an IRA custodian to handle each transaction individually.
To create an IRA owned LLC, register it with your state and have it open a business checking account that is funded by your SDIRA. Submit its operating agreement along with your investment request at IRA Resources so your SDIRA can gain “checkbook control”.
This step is of critical importance as most custodians and banks require it for safe custody.
3. Asset Protection
Self-Directed IRA LLC with “Checkbook Control” gives you the flexibility to quickly take advantage of investment opportunities as they present themselves, without waiting for custodian approval of each transaction. This structure can save both money and time!
An LLC provides your SDIRA assets with added asset protection from creditor claims made against you directly, making this asset protection tool especially helpful when investing in real estate.
To maximize asset protection through an LLC, it is critical that proper documentation be in place. This means drafting an operating agreement that clearly establishes that your IRA or SDIRA is the sole owner, while outlining how its manager’s role should adhere to IRS requirements. Furthermore, personal funds should never become mixed up with these assets.
4. Privacy
Investors using an LLC as their investment vehicle enjoy greater privacy by shielding it from being included on financial documents such as tax returns or credit reports. An LLC acts as its own legal entity and therefore does not appear on financial documents such as tax returns and credit reports.
However, an IRA still must comply with IRS rules regarding prohibited transactions and disqualified individuals. Our affiliated law firm can help guide you through these issues.
Custodians often require an LLC Operating Agreement before transferring funds, while banks require copies of the Articles of Organization and EIN in order to open an LLC banking account. You should also make sure the LLC has an appropriate management structure as well as meets all tax rules.
5. Streamlined Administration
Investment through an LLC owned by your Self-Directed IRA allows for what’s known as “checkbook control,” meaning the account holder has access to investments, make real estate purchases and cover expenses without needing custodian approval – something particularly helpful in competitive real estate markets or time-sensitive investment opportunities.
However, in order to take full advantage of this approach you will require assistance from a qualified IRA LLC facilitator in the creation process. They will assist in creating an operating agreement which clearly defines your LLC management structure and procedures according to IRS guidelines while funding it properly so it qualifies for pass-through tax status – using this method can also reduce transaction and asset fees charged by your custodian.
