Have you been wondering how to gain more control over your investments within your self-directed IRA? In this blog, we'll address some of the most frequently asked questions about IRA LLCs.
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An IRA LLC, also known as a checkbook IRA, is an investment structure where your self-directed IRA invests in a newly created LLC and owns 100% of the membership units. As the IRA owner, you will manage the LLC, which must be set up specifically for investments held within the IRA LLC. An existing LLC owned personally cannot be used within the IRA. All IRA LLC documents must be tailored to the IRA as the owner and must comply with IRS guidelines for self-directed IRAs. As the manager and IRA owner, you will handle all LLC transactions, including managing the bank account, making investment decisions, signing investment documents, and ensuring compliance with self-directed IRA guidelines. The IRA LLC structure offers protection from personal liability for the company's debts, obligations, or any legal actions filed against the IRA LLC. |
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If the IRA LLC is set up correctly and the IRA owns 100% of the checkbook IRA, no tax reporting is required. The IRA LLC is treated as a single-member LLC and does not need to file a tax return with the IRS. It is disregarded for tax purposes; however, you may still need to file state-level taxes depending on the state to maintain the LLC's active status. Any profits generated by the IRA LLC can be reinvested to continue growing tax-deferred or tax-free until they are distributed from your retirement account. Be sure to consult IRS guidelines regarding the IRA LLC and speak with your tax professional before creating an IRA LLC and making investments. Renewal requirements for your IRA LLC depend on the state where it is established. For example, if your IRA LLC was formed in Nevada, you will need to renew the state registration annually to keep the LLC in good standing. This expense must be paid using a credit card linked to the LLC or from funds within the IRA LLC's bank account. |
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| Your custodian will assist with the creation of the IRA LLC. You can choose to create the LLC in any state you prefer, but it's important to ensure that the Operating Agreement and LLC documents are specific to the IRA. Certain language must be included in the corporate documents to comply with IRS guidelines. Once the IRA LLC is established, the IRA owner will open a bank account for the LLC, and your self-directed IRA custodian will issue a check in the name of the newly created IRA LLC. This check represents the ‘investment amount’ from the IRA. If you choose to open an IRA LLC in a state outside of your custodian's specialty, it's advisable to have your custodian review the corporate documents before proceeding with the creation in your state of choice. |
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An IRA LLC is ideal if you're seeking a more hands-on approach to your investments. As the client and account owner, you will manage all investment transactions yourself, without depending on the custodian’s processing times. However, it’s crucial to remember that when investing within an IRA LLC, you must still follow IRS guidelines for self-directed IRAs and avoid disqualifying transactions. There are several benefits to owning a self-directed IRA LLC. You can execute investments quickly, as you handle all investment documents and provide the investment funds directly. Typically, if you invest within the IRA, the custodian’s compliance department must review the documents to ensure IRS compliance. The IRA LLC also offers asset protection, shielding you, your IRA, and the custodian from liabilities related to assets owned by the IRA LLC. For example, if your IRA LLC owns a rental property and an accident occurs at the property, the injured party can sue the IRA LLC but cannot sue the IRA, you as the IRA owner, or the custodian. If privacy is a concern, an IRA LLC may be the right choice. While investing individually, your personal information might be shared or become public in certain situations. By using an IRA LLC, you can protect the privacy of your personal information, as investments are made in the name of the LLC. The most important thing to remember when using an IRA LLC for investments is to keep all transactions IRS compliant to avoid disqualifying your retirement account. |
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| A standard self-directed custodian may not be licensed to hold publicly traded assets, which is where an IRA LLC offers more flexibility. You can easily trade stocks within the IRA LLC. While purchasing stocks, bonds, and mutual funds within the IRA LLC is allowed, it is typically unnecessary unless you're also using the LLC to invest in other alternative assets. |
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| You can purchase precious metals using the funds from the IRA LLC, as long as the metals are IRS-approved. It's important to note that not all gold, silver, platinum, and palladium qualify for IRA inclusion. The IRA LLC must adhere to the same requirements as a traditional IRA when holding precious metals. The metals must be stored in an approved depository, not in your personal safe at home. Storing metals in your home, such as under your bed, constitutes an IRA violation and could lead to disqualification of your entire retirement account. Any expenses or depository fees related to the storage of precious metals must be paid from the IRA LLC using qualified funds. |
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| Yes, you can use your IRA LLC to purchase rental property. It's important to ensure that the property is purchased in the name of the LLC and that all transactions comply with IRS guidelines to avoid disqualifying the retirement account. You cannot personally handle repairs or maintenance on the property, nor can a disqualified person perform these tasks. It is recommended to hire a property manager to handle the property transactions, as you cannot personally benefit from the rental property. There is no limit to the number of rental properties you can own within an IRA LLC. Many experienced real estate investors prefer the IRA LLC structure because it allows for greater control when directly investing in real estate. |
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| No, you cannot take a distribution directly from your IRA LLC. All funds must flow through your self-directed IRA. If you wish to take a distribution, you will need to send the funds back to your custodian and complete the necessary paperwork to process the distribution from your retirement account. It's important to follow the correct procedure to avoid any penalties or potential disqualification of your IRA. This ensures that the funds are properly accounted for within the guidelines set by the IRS, allowing you to maintain the tax-advantaged status of your retirement account. |
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| No. Like a distribution, all funds must flow through your self-directed IRA. You will need to send the funds to your custodian and complete the required paperwork to transfer those funds from the IRA into the bank account associated with your IRA LLC. |
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In conclusion, an IRA LLC, also known as a checkbook LLC, can be an excellent option for those seeking greater control and flexibility over their investments. However, before moving forward, it’s essential to consult with your CPA or financial advisor to determine if creating and investing through an IRA LLC aligns with your financial goals. By understanding the benefits and requirements, you can make an informed decision that supports your long-term retirement strategy.