What Role Does a Limited Liability Company Serve for a Self-Directed IRA?
A Limited Liability Company (“LLC”) gives the investor “checkbook control” over investment decisions and purchases. Without a LLC the investor must go through the self-directed IRA custodian for prior approval and authorization to make investment purchases and decisions. With a LLC the investor eliminates the cost, time, and need for authorization when making investment decisions and purchases. Checkbook control is the term used when the owner of the self-directed IRA has complete control over the funds in the IRA and all decision-making. You do not need to establish a LLC to get the benefits of a self-directed IRA, but most owners of Self-directed IRAs use them so that the owners do not have go through the IRA custodian to make investment decisions (see benefits of a LLC below).
What Role Does an Operating Agreement Serve for a Self-Directed IRA
The LLC Operating Agreement is the legal document that governs the operation of your LLC and the rights, responsibilities, and obligations of the LLC Members. It the primary document that is referred to when issues concerning the LLC need to be resolved. The LLC Operating Agreement is the most important document for your Self-Directed IRA. It is extremely important that you create an Operating Agreement customized particularly for your Self Directed IRA LLC.
The standard or generic LLC Operating Agreement will not meet the requirements for your Self-Directed IRA LLC. In general, a self-directed IRA LLC Operating Agreement should include special tax provisions relating to “Investment Retirement Accounts” and “Prohibited Transactions” pursuant to Internal Revenue Code Sections 408 and 4975. In addition, since the LLC will be managed by a manager and not the member, the Operating Agreement would need to include special management provisions.
It is extremely important to have a properly prepared Operating Agreement to fit the needs of your LLC and meet the requirements of the Internal Revenue Service for a Self-Directed IRA LLC. In fact, a copy of the LLC Operating Agreement will be required by the Custodian and also by the bank where you will have your LLC’s checking account.
How Does It Work?
In order to obtain “checkbook control,” you must first establish an LLC that is owned by your IRA. Once you establish this new LLC, a business checking account will be set up in its name. You then transfer funds from your Self-directed IRA to the bank account of the LLC. Once the funds are in the LLC, you have complete control over the investments made and the management of the investments. You will be given a checkbook that is directly linked to that LLC account. You will then be in control of that checkbook, therefore gaining “checkbook control” over your self-directed IRA funds. You must also have a LLC Operating Agreement drafted.
We do everything you need to establish the LLC. If you have not done so already all you have to do is establish an account with a self-directed IRA custodian and then transfer funds to your Self-directed IRA. We do the rest through our IRA Village website automated process.
Advantages of Using a Self-directed IRA LLC
Immediate Access to Your IRA Funds
When you identify an investment that you want to purchase, you can just write a check or wire the funds. You don’t have to fill out paperwork, rely on your administrator to fund a purchase, or wait for someone else to write a check—you can take care of it yourself. This can be particularly helpful with investments that have time restraints, such as auctioned items to close an immediate purchase of real estate.
Eliminate Per Asset and Transaction Fees
Checkbook control has the ability to help you avoid the administrative and transaction fees that are typically associated with a self-directed IRA. Without a LLC your investments are held by your IRA and the custodian will charge you a fee for each asset held and for each transaction you make. With a self-directed IRA LLC the IRA only owns one asset -the LLC. Thus you are only charged a fee for holding the LLC and not for each investment held by the LLC.
Note: While an IRA LLC structure will cost more to implement than simply opening an account with a custodian, most investors with a diverse portfolio will find that over time, they can save a considerable amount by using the checkbook IRA model.
Asset Protection
Using a LLC to hold assets provides protections not available through an IRA alone. The LLC entity affords limited liability protection to the owner of the LLC. If a lawsuit is filed related to a property held in an IRA LLC, the LLC would be the defendant, and the IRA as well as the IRA account holder would be shielded from claims or liability associated with the LLC.
Using only an IRA to hold your investment asses, if the IRA assets were not sufficient to satisfy the judgement against the IRA assets, the courts have determined that the IRA account holder’s personal assets may be subject to claims.
Tax Deferral
With the Self-Directed IRA LLC structure, all income and gains from investments will generally flow back to your Self-Directed IRA tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes, all income and gains of the LLC will generally flow-through to the IRA tax-free!
More than One Investor
If the investment will be made by more than one IRA (whether another IRA or an outside person), it is essential to use a LLC to coordinate and manage ownership interests, division of income and distributions. And manage business decisions.
Keep Your Capital Working
With any self-directed IRA portfolio, you are likely to have two types of potentially idle capital: contingency reserves and new income from investments. Because you have full control over your plan, and the ability to invest in absolutely anything the IRS rules allow, you can easily keep all of the capital in your IRA LLC deployed rather than leave these funds in cash.
You can keep things simple and just have a savings account for the LLC, or perhaps put some portion of the LLC funds in short-term CD’s. When it comes to contingency funds, something that is reasonably safe and easy to liquidate is best.
If you want to get more sophisticated, you can open a brokerage trading account in the name of the LLC, then take the rental income from an IRA-owned property and invest that into shares of your favorite stock or mutual fund. If you have both bank and brokerage accounts within the IRA LLC, you can simply move funds between these accounts without need for special processing or reporting.
Most custodian managed self-directed IRA plans cannot provide this kind of flexibility or have rather cumbersome and expensive methodologies for keeping idle capital deployed in conventional financial products.
Your IRA LLC is a legal entity that can purchase assets outright, allowing you the freedom to direct your retirement funds. When you use an LLC in your IRA, you have direct access to your IRA funds, which makes this a popular strategy among real estate investors, who often need quick access to cash for maintenance and repairs. With a Self-directed IRA LLC you will never have to seek the consent of a custodian to make an investment or spend funds. Note: All investments made through the LLC are purchased in the name of the LLC.