Self-Directed IRA (“SDIRA”) investing is financially empowering and enables you to freely pursue investment strategies on your own terms.
IRA-Owned legal entities and structures can significantly enhance your SDIRA investing outcomes by:
• giving you even greater control and access to your investable funds,
• improving asset protection,
• reducing frictional SDIRA costs,
• eliminating transaction processing paperwork, and
• enabling you to invest in alternative asset-classes that can’t be effectively accessed through an SDIRA custodian, but are allowable for IRAs by the IRS.
You may be wondering what these structures are and would like to learn more about them – and in this post we’ll aim to provide the answers to your questions.
Just as you may personally own a limited liability company (an “LLC”) through which to manage and hold investments, your SDIRA may do the same. In fact, an SDIRA should use an LLC to hold alternative assets for all the same reasons you would use an LLC when investing with personal funds outside of an IRA.
The most obvious reason for using an LLC is to limit and segregate liabilities as state laws provide powerful legal protections through LLCs. In addition, the use of an LLC can provide privacy by keeping your personal name from being associated with assets. These LLC features provide protection for your personal and IRA assets in the event of a liability event that takes place either inside or outside of your SDIRA.
To illustrate, suppose you use a portion of your SDIRA funds to purchase multiple real estate rental properties. In the event that a tenant or visitor was to sue the landlord, your SDIRA, they could potentially pursue all IRA assets – and possibly your personal assets as well. Savvy real estate investors understand these investment risks and use LLCs to limit liability. Your IRA should certainly do the same.
It is noteworthy that an LLC within an IRA may also protect your SDIRA assets from liability that’s generated by your personal actions or investments.
Overall, the use of an LLC to hold SDIRA assets is a powerful investing tool used by all knowledgeable investors to protect wealth. Anybody using an SDIRA should consider doing so, too.
By establishing and investing through IRA-owned LLC, your SDIRA funds will be transferred from the SDIRA custodian to an LLC business bank account. Once the LLC bank account is funded by the SDIRA custodian, all investment transactions are handled by the LLC-manager without any SDIRA custodian involvement.
When an investment opportunity arises, a check, wire, or ACH from the bank account is all that’s required to fund the deal. There’s no need to present deal documents to the SDIRA custodian for processing and counter-signature!
In addition to eliminating transaction processing times and fees, an IRA-owned LLC can give your SDIRA access to investment opportunities that can’t be invested in or held by the SDIRA custodian. Some examples are tax-lien & deed auctions, REO auctions, cryptocurrencies & alt-coins, foreign assets.
An IRA-owned LLC empowers you by providing greater control and access to your SDIRA funds. This also means that you must have a greater awareness of the IRS rules that apply to IRAs. When it comes to IRA-owned LLCs, there are numerous compliance pitfalls – “unknown unknowns” – that can be encountered at every step of the investing process.
It is absolutely crucial that you get educated about SDIRA rules and work with a service provider that can provide you with that education - to help you navigate compliant SDIRA investing through an IRA-LLC.
Another factor to consider is the cost of annual LLC maintenance, which varies from state to state. While for most states these costs are nominal, a handful of states have more substantial annual LLC maintenance costs.
In some instances, you can pick and choose your LLC state, and in others, the nature of your investment may dictate where the LLC should be registered. It’s of the utmost importance that you work with a service provider that is well-versed with the requirements of all 51 – 50 states plus Washington, D.C. – LLC domiciles.
One of the factors that are driving the increasing popularity of IRA-Owned Trusts is the avoidance of LLC costs, particularly in those states in which annual LLC maintenance is $500 and above.
Similar to using SDIRA-LLC, an IRA can be “owner” of a trust that will have its own bank account. However, from a legal perspective trust are very different than LLCs. In contrast with LLCs, which are state-created legal entities, trusts are contractual arrangements between 3 parties: grantor, beneficiary, and trustee.
That’s a lot of legal jargon, but understanding the distinction between an IRA-owned LLC and IRA-owned trust is key to helping you determine which to use.
Contrary to what you may find promoted, most trusts may provide you with privacy and anonymity but not with statutory limited liability – because a trust is created by contract, not through state limited liability company law.
It is for precisely this reason that trusts are not subject to state fees; they are not created by state law and are not provided the statutory protections that LLCs get. If you want legal limited liability, states require you to register an entity and pay the associated fees.
An IRA-trust, however, does provide the same control, access, freedom, cost reduction, and flexibility that an IRA-LLC provides.
An IRA-owned trust is a very versatile tool that provides control and freedom. However, if you – the IRA Account Holder - want to serve as a Trustee of a trust created by your IRA you must know that there is a higher level of IRS compliance risk associated with doing so.
When establishing these structures, it is imperative that you seek out a service provider that has the unique expertise in this area of tax law and is committed to your success.
• You want to work closely with a provider that will facilitate every step of the process – and take you all the way to the finish line. There are multiple components to getting these set-up and you’ll benefit immensely from working with a firm that has implemented these countless times. You don’t want to be sold a set of documents and be left to sort things out on your own.
• You’ll also want a transparent fee structure. There are, potentially, 3 cost components – SDIRA custodian, LLC registration costs, and the service fee to the firm helping you get everything set-up. When you’re quoted a fee you should understand what is, and what is not, included.
• Additionally, you should confirm that for the fee you pay the firm you will be assisted with every step of the set-up process.
• You should look for a provider that has an in-house certified professional, such as an attorney or CPA that possesses specialized SDIRA tax expertise. The tax law is vast and SDIRA tax expertise is a niche area of specialization.
• Look for independent 3rd party confirmation, such as Better Business Bureau (“BBB”) reviews and other meaningful sources of info.
• Genuine online reviews are a great resource, and to ensure that you’re seeing real reviews it is imperative that you identify many and diverse sources of online validation for a service provider.
• Additionally, you should seek out a provider that can assist you with an array of structures. Providers that don’t offer the full range of structures won’t present you with all available options, and there’s an increased likelihood that you won’t achieve optimal outcomes. A “one-size-fits-all” approach will have multiple hidden pitfalls and costs.
Some common limitations to look out for are:
• Firms that either promote or focus on forming LLCs in a specific state, rather than working with all 51 LLC jurisdictions.
• Firms that either promote or focus solely on LLCs or solely on trusts.
• Firms that promote focus solely on QRPs (401k) and not on IRAs or vice-versa.
The fundamental tenets of Self-Directed Retirement Account investing are recognizing, appreciating, and valuing that each of us – including you – have unique financial profiles and should be able to pursue personalized financial goals. When selecting an SDIRA custodian, you’re looking for a company that will enable you to achieve financial self-determination. With the establishment an IRA-LLC or IRA-Trust, you’re taking SDIRA financial self-determination to an entirely new level and you should ensure that your service-provider can facilitate that through a full suite of services.
About the Author
Bernard Reisz CPA is the founder of ReSure LLC (“ReSure Financial”), which provides specialized tax and financial solutions through multiple websites. 401kCheckbook.com provides investors nationwide with direct control of tax-sheltered funds for self-directed investing opportunities using IRA-Owned LLCs & Trusts and QRP/401k-Owned LLC.
AgentFinancial.com, also operated by ReSure, provides tax strategy, entity and financial services to real estate professionals, including real estate agents, real estate investors, and mortgage brokers.
Bernard has appeared on numerous leading financial shows to provide in-depth insight on a broad array of tax and financial subjects, some of which are accessible by clicking here.
*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.