Increasingly, more and more investors are diversifying their retirement accounts by investing in real estate and other real estate related assets with their IRAs. As noted by USnews.com, real estate tends to be better than mutual funds and stock in the long term— with the added benefit of being a physical asset. In the self-directed IRA space, account owners often use an IRA LLC when investing in real estate or other alternative investments. This gives you what is known as “Checkbook Control”— meaning you, as the IRA holder, have complete signing authority over your retirement funds. Is a self-directed IRA (SDIRA) LLC the choice for your retirement? Whether you’re looking to invest in private stock through an LLC or you’re creating an LLC to invest in real estate, we’ll help break down the process, so you can see if this retirement strategy works for you.
What is a Self-Directed IRA LLC?
A Limited Liability Company (or LLC) is a type of legal entity where LLC owners, known as members, have “limited liability”, which means they receive a liability protection similar to a corporation. Creating a Self-Directed IRA LLC is one strategy IRA investors have used to purchase real estate, to gain what is known as “checkbook control” over their IRA, allowing both greater control and lower transaction fees by doing more of the recordkeeping yourself.
To obtain checkbook control, the LLC will establish a checking account and it will be funded by your Self-Directed IRA. First you need to create the LLC. IRAR Trust cannot do this for you, but there are resources to available. You can start your research on the internet. The requirements for opening an LLC vary from county to county, so be sure to check your local resources.
Once the LLC is established, you’ll set up a business banking account in its name— this will require a Tax ID Number (EIN) as well as a copy of your Articles of Organization and Operating Agreement. You’ll fund the business checking account from your Self-Directed IRA. The bank used to (before the days of internet banking) provide a checkbook that gives you direct access to those funds when you open your bank account— that’s why this is often referred to as “checkbook control”. If you have further questions about this process, please reach out to an IRA Resources representative, we’d be happy to assist.
To reiterate, IRA Resources does not sell or create LLCs. To learn more about the specific requirements of forming an LLC, visit the IRS website, or with your local SBA office.
Relevant: LLCs & Self-Directed IRA Investments FAQs
Why Do Self-Directed Investors Use LLCs to Invest in Real Estate?
There are three main reasons investors use IRA LLCs: for the speed, the cost, and the flexibility. Investors often use an IRA LLC to have more control over their IRA, most notably the faster access to capital. This is valuable especially to real estate investors who deal with auctions and foreclosures, because of the flexibility and access to funds through what is called "checkbook control." Additionally, at an IRA custodian who charges per-asset (Like IRAR Trust), you end up saving more on annual fees because, regardless of the number of real estate assets the LLC owns, it is considered one asset.
Using a Self-Directed LLC IRA account also offers additional benefits. It provides a level of privacy and confidentiality that you don’t get from a typical account. If your LLC buys property, the renters will make the rent checks payable to the LLC and not to your IRA. It isn’t always required (and can vary by state) whether you must make the names of the member(s) of the LLC public. With an LLC, nobody will know your IRA is the owner. If your IRA purchased the property directly (without using an LLC), your name and IRA account number would be on all the real estate and title-related documents, which are publicly available. It offers its members (your IRA and, if applicable, any partners) limited liability, helping protect your IRA and its assets.
Another potential benefit with an LLC IRA is the ease of partnering on transactions. It is often much faster and simpler to purchase property and fund investments through an LLC, versus trying to coordinate two or more investors on a real estate deal.
Self-Directed Roth IRA LLC
Another popular tax-advantaged strategy for real estate investors is the Self-Directed Roth IRA LLC.
Here's the tax advantage: Since you contribute to a Roth IRA with after-tax dollars, any qualified distributions in retirement, including growth on your investments, are tax-free. This means you can potentially grow your wealth through real estate within the Roth IRA and withdraw funds tax-free in retirement.
Setting up Self-Directed IRA LLC: Step-By-Step Process
Step One — Open Your Self-Directed IRA
To set up your IRA LLC, first you’ll need to open an account with IRA Resources. The process is simple—just complete a New Account Application and submit it to us online, along with a copy of your government-issued photo ID, via fax, email, or USPS mail.
Step Two — Fund Your Self-Directed IRA
After opening your account, you’ll need to move money into your IRA to fund your IRA LLC. You can contribute to your IRA, if you have yet to make your yearly contribution, or move your money from an existing retirement plan with a transfer or rollover. If you’re unsure about what method is right for you, we have more resources on transfers and rollovers.
Step Three — Move Money to Your IRA LLC
Once your account is open and funded, we’ll need some documentation before your IRA can hold your LLC.
We require the following documentation:
- A Buy Direction Letter, a Private Placement Disclaimer and Indemnity Agreement (found in our Private Placement Kit)
- A copy of the LLC Operating Agreement signed “read and approved” on every page where a signature is required
- The Articles of Organization for your LLC
Once the account is open and funded, then it’s time to form your LLC. You’ll need your IRA Resources account number to finalize the process, though clients sometimes begin the process ahead of time. You will have to set up the LLC on your own, outside of IRA Resources, — this is not something we can do for you. There are resources available on the web and at your local small business association if you need more information. Costs to form the LLC and for any similar expenses related to the creation, formation, or maintenance of the LLC must come directly from the IRA. However, once the LLC is formed and established within the IRA, income and expenses are paid to or from the LLC directly.
Then, with both the IRA and the LLC open, you can begin the process of moving funds to your IRA, where the funds can then be sent to the LLC bank account. You, or the manager of the LLC, can then make investments from within the LLC. Remember: The LLC can be managed by you or a third party, but you can’t pay yourself a salary for doing so. Do not use the LLC for personal use, or deposit personal funds into the LLC bank account— these are prohibited transactions and are not allowed within your self-directed IRA LLC.
For example, say you own a rental property within your LLC. Expenses related to the LLC, like creation and other assorted costs, are to be paid by your IRA Resources IRA (IRA Resources FBO John Doe IRA #XX-XXXXX). However, your tenant would pay rent to the LLC and the LLC would pay for any other expenses related to the property, like property taxes and repairs.
Relevant: What You Should Know About Prohibited Transactions
Prohibited Transaction Rules within your IRA LLC
Like any self-directed IRA, you can hold investments in alternative assets such as private equity, real estate, and even make loans. However, there are a few types of transactions and situations specifically prohibited by the IRS, with specific individuals your IRA cannot do business with.
These are known as “prohibited transactions” and “disqualified persons”. A prohibited transaction is any transaction between the IRA and a disqualified person. Any transaction with a disqualified person is not allowed— except with one notable exception. At the time of a new transaction (for an LLC, this would be its creation), you, your IRA, and a disqualified person or persons may invest in the LLC.
The following are considered disqualified persons by the IRS:
- You
- Your spouse
- Your lineal ascendants, descendants, and their spouses (your grandparents, your parents, your children, and their spouses)
- Any fiduciaries to the account (an IRA custodian)
- Any person providing services to the IRA (a corporation, partnership, trust, or estate, where you own at least 50% of the asset, either directly or indirectly)
IRA LLCs have so many benefits— but there are cons as well. You gain additional control over your funds and transactions, but end up doing a lot of the legwork yourself to make sure the LLC is following all the necessary and required IRA Rules. However, for many investors, the trade-offs are worth it. Does an IRA LLC fit into your retirement strategy? Anything you’re still left wondering? If you have more questions about holding an LLC in your self-directed IRA, feel free to reach out to us— we’d be happy to answer any questions you may have.
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