Self-Directed IRA LLC
If you want to take direct control of your retirement portfolio, then consider a self-directed IRA LLC. A self-directed IRA LLC is simply a limited liability company owned by an IRA. The benefit of a self-directed IRA LLC is generally three-fold: first, it allows the IRA owner to move quickly on investment opportunities, second, it eliminates many administrator fees, and third, it offers protection of assets held in the IRA account.
Checkbook Control
Owners of traditional IRAs can typically invest IRA funds only in publicly traded securities, like stocks, bonds, and ETFs. However, owners of self-directed IRAs can typically invest their IRA funds in hard assets, like real estate and precious metals, and in private businesses. Owners of self-directed IRAs can also typically lend IRA funds to other individuals and businesses. However, the administrator of the IRA usually charges a fee to the IRA each time the administrator is asked to transfer IRA funds. With some investments, like real estate, those fees can significantly cut into the cost of owning an asset. Payments by administrators also often take several days to complete. An IRA owner can lose some investment opportunities if immediate payment is not possible. A checkbook LLC circumvents these problems, as the IRA funds are transferred to the checking account of the LLC, and the owner of the IRA, who is the manager of the LLC, can then write checks from the LLC account for asset acquisition and to pay expenses incurred by the LLC.
IRA Fund Protection
An IRA can be sued. For example, a person who is injured on property owned by an IRA can sue the IRA for negligent management of the property. If the injured person gets a judgment against the IRA, that person can then seize IRA assets and funds to satisfy the judgment. However, if the property is owned by an LLC owned by an IRA, then, generally, the injured person can only sue the LLC, not the IRA. If such person obtains a judgment against the LLC, that person can generally only seize LLC property to satisfy the judgment. That person generally cannot also seize funds in the IRA account or other assets owned by the IRA outside of the LLC.
Managing a Self-Directed IRA LLC
Whether an owner of a self-directed IRA purchases assets directly from the IRA account or from a self-directed IRA LLC, the owner must be careful to not commit a prohibited transaction or a prohibited investment or perform any activity in relation to the IRA with a disqualified person. Performing a prohibited transaction can result in the IRS deeming the IRA funds and assets as having been fully distributed to you on January 1st of the year in which the prohibited transaction occurred. You will then be personally liable for the payment of taxes on the amount of the distribution at your ordinary personal income tax rate, along with penalties and interest. The IRS will additionally assess a 10% penalty on the distribution if you were less than 59 ½ years old on such first day of January. Because several years can pass before the IRS discovers an alleged prohibited transaction, the interest and penalties assessed on the distribution can be quite significant.
Forming a Self-Directed IRA LLC
A self-directed IRA LLC is generally formed in the same way as a conventional LLC, with some important exceptions. As stated, the IRA will be the owner of the LLC and the owner of the IRA will be the manager of the LLC. The LLC checking account may be funded only with IRA funds. The manager of the LLC will then have direct access to those funds. However, neither the owner of the IRA nor any disqualified person may either perform the steps necessary to form the LLC or pay from their personal funds the cost to form the LLC. Instead, the IRA owner should retain legal counsel experienced in forming self-directed IRA LLCs and pay the legal fee of the attorney either directly from the IRA account or from the checking account of the LLC. Finally, you should seek legal counsel if you require assistance in determining whether a certain activity or transaction might violate any of the laws or regulations governing IRAs. You should additionally seek the advice of a CPA or tax advisor competent in IRA tax matters regarding the tax liabilities and consequences of performing transactions with IRA funds, including funds held in the checking account of a self-directed IRA LLC.
This article is for general informational purposes only, and it is not intended as legal advice.
Sewell Law provides legal services in the areas of litigation, real estate, and business, including the formation of self-directed IRA LLCs and conventional LLCs. Please contact Michael Sewell at (314) 942-3232 or at michael@sewelllaw.net to discuss your legal matters.
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