Self-Directed IRA investors who seek more control in managing their IRA investments may find an LLC to be an advantageous solution.
As the owner of an IRA is also managing an LLC, it is imperative that they adhere to IRS rules regarding disqualified people and prohibited transactions.
An IRA LLC can invest in both traditional and Roth IRA assets, such as real estate, private equity investments and precious metals coins or bullion of sufficient purity.
Diversification
Diversification is one of the key tenets of investing. Diversifying involves diversifying across a number of assets with differing risk levels for each one, investing in various industries and geographic regions or even types of investments.
While you cannot completely eliminate investment risk, diversification helps lower it by spreading your investments across a range of asset classes and stocks – so if one stock decreases in value, other investments might rise to cover for it.
An LLC may be necessary when purchasing nontraditional assets with your self-directed IRA, to protect both you and the retirement funds. Such an entity enables you to manage investments directly without going through a Custodian, thus cutting transaction fees and paperwork significantly – perfect for hands-on investments such as real estate rentals or flips where physical investment might not be sufficient protection against risk. It must, however, be correctly structured and drafted to avoid IRS issues like prohibited transactions and disqualified persons.
Taxes
An LLC is ideal when an SDIRA invests in assets requiring active management, like real estate or private equity, since it can save on fees by investing through it instead of paying each time a transaction occurs to its custodian.
An IRA may also avoid UBIT and UDFFI taxes by creating an LLC with only one owner. The IRS treats such LLCs as sole proprietorships and does not impose any income reporting or filing requirements upon them.
However, if an LLC generates any taxable income (i.e. leveraged with debt or engaging in non-passive activities), then an IRS Form 990-T must be filed and taxes paid. To help minimize their taxes due, IRA owners should retain legal counsel who have experience forming self-directed IRA LLCs; legal fees can either be deducted directly from their IRA account or directly by paying from its checking account.
Asset Protection
An SDIRA (Special Purpose LLC for Self-Directed Individual Retirement Account) is an investment vehicle that allows your retirement funds to access alternative assets, such as real estate, LLC/LP interests, notes, private company stock and VC/PE funds. However, both the IRS and Department of Labor impose strict guidelines that must be observed to prevent prohibited transactions or self-dealing from taking place.
If your investment requires hands-on management, such as managing rental properties or flipping houses, an IRA LLC might be the better option. This structure enables the SDIRA owner/manager to write checks and conduct investments transactions without waiting for custodian approval first.
Establishing an LLC for your Self-Directed Individual Retirement Account (SDIRA) is an excellent way to diversify your portfolio and reduce fees. But working with an advisor who understands all of its complexities is paramount; SmartAsset’s free tool matches you up with trusted financial advisers in your area.
Investing in Real Estate
An SDA LLC is the ideal investment vehicle for real estate investments as it gives clients “checkbook control” of their retirement funds. An IRA LLC can be used for land deals, apartment buildings, family homes and commercial properties as well as alternative assets like tax liens, private loans or foreign real estate investments.
IRA/LLC structures can also prove invaluable for active investments like rentals and flips as it streamlines transaction processing by eliminating the need for custodian approval of each transaction. However, an IRA owner must still abide by IRS rules on prohibited transactions and disqualified persons.
Are You Thinking about Investing Your IRA Into a Special Purpose Entity? For assistance and more information on this subject, contact an experienced attorney. Our attorneys have over 14 years of experience assisting clients with their IRA investments and can assist you in choosing which type of investment best meets your needs.
