Why a Self-Directed IRA LLC

This blog posting covers the IRA LLC process and rules.

The self-directed IRA LLC process entails the following:

Step 1: Transferring IRA or 401k funds to a self-directed IRA custodian: First transfer your current IRA or former employer 401k plan or other type of qualified plans such as a 403(b), 457 or Defined benefit to a self-directed IRA custodian that allows for investing in private companies, as an LLC falls under the private company or private placement category.

Step 2:  Working with RA LLC Facilitator: Choose a self-directed IRA LLC facilitator company that will register the LLC with the applicable state, obtaining the employer identification number (EIN) for the LLLC and preparing the IRA LLC operating agreement containing the specific IRA language. Note that an off-the-shelf LLC operating agreement from Legal Zoom is not recommended as it won’t contain the required IRA language.

Step 3.  Open the LLC bank account at your local bank. Before the LLC IRA can be funded, you must open a checking account at your local bank in the name of the LLC.

Step 4.  Fund the IRA LLC: After the self-directed IRA has been setup, your former IRA or qualified plan transferred to the new self-directed IRA custodian, and the LLC operating agreement and related forms (LLC EIN, LLC articles of organization, and investment forms) submitted to the self-directed IRA custodian, the new self-directed IRA custodian will wire the funds to the new LLC bank account.

Step 5. Begin placing IRA LLC investments. As the manager of the IRA LLC, place investments in alternative investments such as real estate, promissory notes, tax liens, private placements and precious metals, to name a few.

IRA LLC is a self-controlled investment vehicle in which the Self Directed IRA becomes the member in the newly formed LLC by purchasing units of the LLC.  In the IRA LLC structure the Self Directed can be a full or partial owner of the newly formed LLC. The IRA LLC’s management is vested in the manager(s) where the IRA holder may act as the manager of the IRA LLC.  A key feature of the IRA LLC is the checkbook control. This allows you as the manager of the IRA LLC to direct investments by simply writing a check. IRA LLC offers you a repertoire of investment possibilities that are unlimited, which include real estate, gold, private loans and much more.

Why a Self-Directed IRA LLC

·         IRA LLC allows for holding of alternative investments in the name of the LLC instead of using a self-directed IRA custodian, resulting in far less custodian involvement and thus removing limitations placed by the IRA custodian.

·         IRA LLC allows for multiple investment holdings at no cost whereas the self-directed RA custodian charges transaction fees and holding fees per investment, both at the front and back end.

• IRA LLC arrangement results in processing timely investments because as the manager, you process purchases by writing checks or having the funds wired.
• IRA LLC provides a multi-layer protection against liabilities because investments are made in the name of the LLC not the IRA.
• IRA LLC allows partnering with other investors.
• IRA LLC allows for non-recourse loan/debt financing when investing in real estate.

Self-Directed IRA LLC Rules 

• The same IRA prohibited transaction rules that apply to an IRA apply to an LLC only having and IRA or multiple IRAs as the members.

• An IRA may be a member of an LLC through the purchase of LLC units.

• When an IRA is the sole member of an LLC, the LLC is deemed a single member LLC and thus classified as a disregarded entity.  As such, an LLC where the single-member is an IRA, the LLC does not file a business-tax return.  

• IRA can own a 100% of a newly formed LLC. Important: It is imperative that the LLC is newly registered and units issued for the first time in order for an IRA to own 50% or more of the LLC member units. If not, the transaction will be deemed a prohibited transaction.

• The manager of the IRA LLC may not be compensated if the manager is the IRA owner or a disqualified party (e.g., the IRA owner’s spouse, kids, parents and financial professionals).

• IRA LLC investments must be titled in the name of the LLC not your name or in the name of the IRA.

• IRA LLC bank account may not to be co-mingled with your personal funds.

• Investment gains and expenses must flow through the IRA LLC bank account. Therefore, if the LLC invested in a fixer-upper, you may not pay for such repair expenses with personal funds butrather use IRA LLC funds.

• IRA owner is prohibited from personally guaranteeing debt on behalf of the IRA LLC.

• When an LLC obtains a non-recourse loan from a third-party, usually for investing in real estate, the LLC must secure the loan and thus LLC funds must be used make the loan payments.

• Annual IRA contributions and IRA/401k transfers must flow to the self-directed IRA not the IRA LLC.

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