The process of using a Self-Directed IRA to buy non-traditional or alternative investment assets can be confusing and seem restrictive. One of the ways to simplify the process is by utilizing an LLC to make your investments.
In the beginning of the process, an IRA account is opened with a Custodian. If you choose to use the LLC structure, while the setup and funding of that account is occurring, the LLC administrator like STC Inc. is creating a single member LLC that will be owned by the IRA. The LLC will be setup in the state of your choice and you will decide the name of the LLC. After the IRA account has been setup and the LLC has been formed with the state, the Custodian will fund the LLC with your IRA funds. This is viewed as your IRA buying shares of the LLC. At this point the LLC is ready to invest as a tax deferred or tax free (Roth) entity.
The LLC is especially beneficial when the IRA owner wants to purchase Real Estate within a Self-Directed IRA. When the IRA owner is ready to make an investment, a phone call is placed to the administrator to get the investment process started. The administrator will request certain documents so they can begin the review process. Based upon these documents and questions that the administrator will ask, each transaction is reviewed for IRS compliance before funding the transaction. Even though this review process is taking place, the funding of the transaction can still occur within 24 business hours as long as the client has provided the appropriate documentation. Since the IRA LLC is making the investment, the property is titled in the name of the IRA LLC and the IRA Owner can sign on its behalf.
If the property is being purchased in the name of the IRA and not an LLC, then the review process is completed by the Custodian. The custodian’s review process typically does not take place in the same time frame. The Custodian is also the party that signs all closing paperwork when real estate is bought directly in the name of the IRA and not the LLC. Many times the delays created by the custodian’s review and the need for original documents to be sent back and forth, an IRA investor can miss deadlines to participate in an investment when they cannot meet quick settlement dates. Also, the settlement company may not be familiar with dealing with an IRA as the purchaser of a property. But when an IRA LLC purchases the property, it looks just like any other LLC that is purchasing a property, which is viewed as a routine transaction for settlement companies.
After the real estate has been purchased by the IRA LLC, the use of the LLC is beneficial whether the property will be used as a rental property or will be rehabbed and sold. It is usually a good idea to use a property management company when your IRA purchases a rental property but if you don’t want to pay the additional fees that a management company will charge you, you can have the renter make the checks out to the LLC and send them directly to STC to credit to your account. Any expenses associated with the property must also be paid from the IRA LLC and these invoices are paid the same day that they are received by STC. The same is true for invoices that are related to the rehab of the property, vendors can be paid quickly as well as insurance or taxes. When the time comes to sell the property, the process is simplified by using the LLC just as it was when the purchase occurred.
Another benefit of using the LLC structure with your Self-Directed IRA is asset protection. When most real estate investors purchase properties they do so using an LLC to protect their personal assets or other investment assets from potential lawsuits or creditors. The members of the LLC are not personally liable for any debts or court judgments incurred by the LLC. The IRA LLC offers the account owner (the IRA) the same type of protection for the assets owned by the IRA LLC.
Even if you are not looking to invest your Self-Directed IRA in Real Estate, you can still benefit from the quick review when you are ready to make an investment. If you are looking to be a lender on a note or invest in a privately held company, the administrator will still review the transaction to make sure that you are not engaging in a prohibited transaction, this review will take place within 24 hours of the documentation being received.
The use of an LLC is not required when creating and using a Self-Directed IRA but the advantages should definitely be considered when determining the best type of account structure for your individual needs.
Mick Hersh is the Chief Operating Officer of STC Inc, Administrator of Self-Directed IRAs. STC provides full-service support for creation and maintenance of IRA LLCs and underlying transactions. For more information, contact us at 866-682-3683 or firstname.lastname@example.org.
*Mainstar’s role as custodian of self-directed accounts is nondiscretionary and/or administrative in nature. This information is for educational purposes only, and should not be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments. Mainstar encourages individuals to consult a financial or legal professional when making investment decisions.