With a Self-directed IRA you have two methods for making investments. You can have the Self-directed IRA make the investment or you can establish a LLC that is owned by the IRA and have the LLC make the investments. Because of the benefits of establishing a LLC and having the LLC make the investment, most self-directed IRA account holders establish a LLC to make the investments. And if you establish a self-directed LLC, you almost certainly have to have a LLC operating agreement.
If you do not establish a LLC for your Self-directed IRA, then the funds are held in the IRA, you must receive approval of the custodian to make investments, and you must generally pay an annual fee based on the value of the investment held by the custodial account and a fee based on each transaction (e.g. buying and selling of real estate). The full benefits of having a Self-directed IRA LLC are outlined below.
- With a Self-Directed IRA LLC, you have what’s called “
- ” As manager of the Self-Directed IRA LLC you will have the ability to buy real estate or make other investments simply by writing checks or wiring funds from the LLC bank account. You do not need the consent of the self-directed IRA custodian. Instead, all decisions are truly yours.
Access: With a Self-Directed IRA LLC, you will have direct access to your IRA funds allowing you to make an investment quickly and efficiently. There is no need to obtain approvals from your custodian or deal with time delays in awaiting approval from your custodian or pay any review fees.
Speed: With a Self-Directed IRA LLC, when you find an investment that you want to make with your IRA funds, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account to make the investment. The Self-Directed IRA LLC allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
Lower fees: Another advantage to a Self-Directed IRA LLC account is that you can save a lot of money on custodian fees. With the “checkbook control” Self-Directed IRA LLC structure, you will not be required to seek custodian investments when making IRA investments allowing you to eliminate custodian transaction fees and account valuation fees. The fee savings can be as much as $1,200 a year.
Limited Liability: By using a Self-Directed IRA LLC with “Checkbook Control”, your IRA will benefit from the limited liability protection afforded by using an LLC. By using an LLC, all your IRA assets held outside the LLC will be liabilities claims. This is especially important in the case of IRA real estate investments where many state statutes impose an extended statute of limitation for claims arising from defects in the design or construction of improvements to real estate.
Asset & Creditor Protection: By using a Self-Directed IRA LLC with “Checkbook Control”, the IRA holder’s IRA will be protected for up to $1 million in the case of personal bankruptcy. In addition, most states will shield a Self-Directed IRA from creditors’ attack against the IRA holder outside of bankruptcy. Therefore, by using a Self-Directed IRA LLC, the IRA will be generally protected against creditor attack against the IRA holder.
Tax Deferral: With the Self-Directed IRA LLC structure, all income and gains from investments will generally flow back to your Self-Directed IRA tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes, all income and gains of the LLC will generally flow-through to the IRA tax-free!
More than One Investor- If the investment will be made by more than one IRA (whether another IRA or an outside person), it is essential to use a LLC to coordinate and manage ownership interests, division of income and distributions. And manage business decisions.
NEED FOR AN OPERATING AGREEMENT
If you form an IRA owned LLC to take advantage of “checkbook control”, you will almost certainly have to have a LLC Operating Agreement. In fact most custodians will require it before they will transfer funds from the IRA to the LLC and almost all banks will require an Operating Agreement as a condition to opening the LLC bank account. An Operating Agreement is a legal document that governs the operation of the LLC, the rights and responsibilities of the owners of the LLC, and the financial and management decisions of the LLC. The LLC Operating Agreement is the most important document for your Self Directed IRA LLC. It is extremely important that you have an Operating Agreement for your Self Directed IRA LLC. Moreover, if there is more than one IRA or person making the investment, it is imperative to have an Operating Agreement to delineate the ownership interests, the allocation of income and profits, how the investment will be managed, and how disputes will be handled.
You generally need a “special purpose” Operating Agreement for your Self-Directed IRA LLC. A template or standard Operating Agreement will not contain the provisions appropriate for an IRA owned LLC. Specifically, a self-directed IRA LLC Operating Agreement should include special tax provisions relating to “Investment Retirement Accounts” and “Prohibited Transactions” pursuant to Internal Revenue Code Sections 408 and 4975. In addition, since the LLC will be managed by a manager and not the IRA owner/ member, the Operating Agreement would need to include special management provisions.
The specialists at IRA Village have commissioned special software that allows you to create and download your special purpose attorney drafted Operating Agreement immediately after responding to a simple questionnaire. You do not have to wait weeks or days as you would with law firms or attorneys that offer special purpose operating agreements. IRA Village’s Operating Agreements are:
- Attorney Drafted (our forms were drafted and approved by experienced IRA attorneys)
- Customized for each state
- Designed specifically for Self-Directed IRA LLCs
STEPS FOR FORMING A SELF-DIRECTED IRA OWNED LLC
- Open a Self-Directed IRA account with a custodian and fund the account. For a list of some of the custodians who provide self-directed IRA services click here.
- Form the LLC and related documents (IRA Village offers this complete package of services-all you have to do is purchase the package of services)
- Form the LLC. The LLC is formed by filing Articles of Organization (in some states this is called certificate of formation or certificate of organization) with the state in which the LLC is to be formed. The LLC will be owned by your Self-directed IRA.
- Draft the Operating Agreement. This is a necessary and critical document. This document governs the operation of the LLC and is generally required by the IRA custodian and by most banks to open a LLC bank account. This document should be drafted to account for the specific rules that apply to IRAs and be specific to the requirements of each state.
- Obtain a tax identification number for the LLC (referred to as an EIN). This is required to open a bank account and for filing the LLC tax returns.
- Open a bank account in the name of the LLC. For this you will need the Articles or Organization, the Operating Agreement, and the EIN of the LLC.
- Transfer funds from your Self-Directed IRA to the LLC bank account.
- Then make any investment allowed at your discretion and timing.
- Timeframe for entire process:Establish Self-Directed IRA and transfer funds – 2 days to two weeks depending upon the policy of the administrator holding your current funds and the custodian you select to hold your self-directed IRA.Form LLC and related documents:
- IRA Village Operating Agreement – Immediate
- LLC Formation – Depends upon state processing times but can range from one day to a week
- EIN – 1 day