You are the manager of your Self-Directed Checkbook IRA LLC and all decisions are made by you. When you want to make an investment, you write a check, use your debit card, wire funds, etc. All contracts can be signed by you on behalf of the LLC.
If you want to hire another decision maker you can also do that. Either way, you will need to report to the custodian on an annual basis. Most custodians don’t have any formal documents to make this reporting, a simple letter will suffice. We recommend keeping a balance sheet for your entity and sending that to the custodian annually.
The rules state you cannot extend credit to your IRA, and your IRA cannot be used as security. This makes borrowing money a little more difficult, however, it can be done.
As long as you get a loan that doesn’t take recourse against you or your IRA, you aren’t making a prohibited transaction. What most individuals do is use a property owned by the IRA LLC as collateral, as long as the loan-to-value ratio meets the right requirements, most banks will loan money to the IRA LLC.
Gains off of debt financing may be subject to Unrelated Business Income Tax (UBIT) and you would most likely want to hire a tax professional to assist in filing a return.
This is a prohibited transaction. If this is something you really want to do you might get an exemption from the Department of Labor allowing you to make this investment. Private letter rulings and exemptions can be tedious, costly and might not be approved.
My financial advisor, CPA and attorney tell me this is illegal or frowned upon by the IRS, are they correct?
If you are paying for this advice your broker, CPA or attorney should not be making this statement.
Your Financial Advisor will naturally show skepticism when they realize that you want to move funds outside of their management because your creation of an IRA LLC will result in them losing fees charged to you.
Before your money is deposited in a local FDIC-insured bank account of your choice, it will be moved to a registered qualified IRA custodian.
To be a qualified IRA custodian the institution must meet stringent state and federal requirements (explained in IRC Section 408) and have adequate reserves.
Your funds will be kept in a trust account for a short period of time (usually less than a week) before the funds are transferred into an LLC checking account of your choosing. Even if the Custodian goes out of business, your money will always be in your possession and the LLC can be registered as an in-kind transfer to another custodian.
As a general rule, you want to make sure that your retirement plan can be rolled over or transferred to another custodian before moving forward in getting an IRA LLC. Once you have established that you are eligible, most types of retirement plans can be converted into an IRA LLC, here is a list of the most popular:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Thrift Savings Plan
Since the Employee Retirement Income Security Act (ERISA) was passed in 1974, the big lobbyists for IRAs have been banks and investment firms. Since then there has been a common misconception that IRAs are only allowed to be invested in stocks, bonds, mutual funds, annuities and CD’s. Nothing could be farther from the truth.
The main reason you might not have heard of this type of retirement plan is that none of these traditional custodians have an incentive to allow you to make your own investment decisions outside of stocks bonds mutual funds, annuities and CD’s.
Since the downfall of the stock market in 2000 it has been individuals who have taken the initiative and built a market for “truly” self-directed IRAs.
According to IRS Letter Ruling 199929029, April 27, 1999 IRAs are not qualified as investors in Subchapter S Corporations.
Individuals can contribute to a traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer sponsored retirement plan.
Please note that contributions to a Roth IRA are not deductible and income limits apply.
See Publication 590 for further information.
What is the difference between buying real estate or any other investment for me or for my IRA LLC?
When you make an investment with your Self-Directed Checkbook IRA LLC you will want to make sure that the asset is titled in the name of your LLC.
Make sure all the expenses come from the IRA LLC and all the revenue flows to the IRA LLC.
Also, you will always want to make decisions in the best interest of the IRA LLC because once you become manager of your IRA, you become a fiduciary. One tactic to help you get on the right thinking track would be to imagine you are managing your deceased relative’s estate for his/her children, instead of your IRA.
Can I partner with my spouses IRA or another disqualified person within the LLC? What transactions by my IRA LLC would trigger the Unrelated Business Tax?
Yes. In Swanson vs. Commissioner Swanson’s IRA was partnered with the IRAs of his 3 children and Swanson was the director of the company (Swanson won the case).
However, if you are going to make your LLC owned by multiple members (whether they are disqualified or not), the IRA LLC will become disqualified for any additional IRA capitalization as where an LLC owned 100% by one IRA becomes a part of the IRA and you are allowed to make annual contributions to the entity (see See DOL Advisory Opinions 97-23A and (2005-03A).
Please note that you are required to file partnership tax returns annually when you partner with someone else in your IRA LLC.
- Investing in an active trade or business by your IRA LLC via a tax pass through entity such a an LLC and a S Corporation
- Using margins to buy stock
- Using nonrecourse loan to buy real estate
Note: An IRA LLC investing in an active trade or business using a C Corporation, which would include almost all public stock companies and mutual funds, would not trigger the UBTI.
UDFI only occurs if two conditions are met:
(1) The income arises from property acquired or improved with borrowed funds, and
(2) The production of income is unrelated to the purpose constituting the basis of the IRA LLC’s tax exemption