How Does an IRA LLC Work?
An IRA LLC or self-directed IRA allows account holders sole signing authority or "checkbook control" for their IRA funds within the structure of an LLC (limited liability company). Account holders can make investments on behalf of the retirement plan without relying on an IRA custodian for approvals or needing to pay custodial transaction fees. Any profits the LLC makes will pass to the IRA as tax-deferred.
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Initial Investment
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You will need to open a bank account to use only for the LLC. Policy requirements vary among banks. Ask your IRA custodian to invest your IRA funds into the LLC to give your IRA legal ownership of the LLC. You will then make your investments through the IRA LLC ,which offers tax-deferred status on your profits. With an IRA LLC account, you have the sole power to write and sign the checks for investments without approval from a custodian.
Diverse Investments
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Large investment companies limit account holders to traditional investment options that will produce a profit for the company, such as certificates of deposit, stocks, bonds, mutual funds, money market funds, and precious metals like silver and gold. An IRA LLC allows account holders to invest in land, commercial property, residential property and condominiums, single family homes, apartments, mobile homes, mortgages, tax liens, real estate notes, vacation properties, health plans, intellectual property, foreign properties, a professional sports team and other diverse areas in addition to most traditional investment options. Investments prohibited for the IRA LLC include artwork, beverages, rugs, antiques, coins, metals, stamps, gems, stock in an S corporation or single taxation corporation, and time shares, among others.
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Moving Accounts into the IRA LLC
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Several of your existing retirement savings accounts can move into the IRA LLC. Eligible accounts might include 401k, 403b, profit sharing plans, money purchase plans, government-eligible deferred compensation plans, Keogh plans, Education Savings Account (ESA), Health Savings Account (HSA), and qualified annuities. Check the conditions of your current 401k with your employer to determine whether the company allows you to move the account into an IRA LLC. You can combine 401ks from previous employers into an IRA LLC using available rollover options.
Avoid Self-Dealing
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"Self-dealing" is investing in assets for your own immediate benefit or for the benefit of a disqualified person and not for the long-term benefit of the IRA LLC. Disqualified persons are defined as "lineal descendants" and include your spouse, your children and your parents. Siblings are not considered disqualified persons. Neither you nor any disqualified persons may live in or lease any real estate property while it is part of your IRA LLC. Your place of business cannot be located on any properties owned by the IRA LLC. You cannot invest in property that you or a disqualified person already own. Co-investing is not a prohibited transaction. You can make loans to friends as long as you follow the proper regulations for loans, but you cannot give a loan to a disqualified person.
Maintain Tax-Deferred Status
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All expenses and profits on investments must be made through the account. For example, if you use IRA LLC funds on a rental expense, then any profits from these improvements are returned to the IRA LLC as tax-deferred. Always invest in the name of the account and not in your name. Escrow must also not be opened in your name but by the account.
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