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Self-Directed IRA LLC: Investment Guide


If you’re looking for more variety when it comes to investing for retirement, you might consider a self-directed IRA (SIDRA). Self-directed IRAs allow you to invest in the usual suspects—stocks, bonds and mutual funds—but you can also use them to hold alternative investments, such as real estate, cryptocurrency or precious metals. Setting up a self-directed IRA LLC allows for flexibility when directing investment choices. Before making a decision on your investments, you may want to talk to a financial advisor who can help you reach your investing and retirement goals.

How Does a Self-Directed IRA Work?

A self-directed IRA is an individual retirement account that can be used to hold a variety of investments. At first glance, that doesn’t sound much different from a traditional or Roth IRA and in reality, it’s not. Self-directed IRAs are subject to the same tax rules and annual contribution limits as other IRAs. What sets them apart is what you can use them to invest in.

Some of the investment options for a self-directed IRA include:

  • Real estate
  • Land
  • Tax lien certificates
  • Precious metals
  • Cryptocurrency
  • Mineral rights or water rights

In short, a self-directed IRA can allow for greater diversification in your portfolio compared to the standard IRA options. There are, however, a few additional rules to know about these accounts.

First, investing in a self-directed IRA requires a custodian or trustee that can help with facilitating alternative investments. If you have an IRA, your current brokerage might offer self-directed options but there are certain firms that specialize in this type of IRA.

Next, you’ll need to pay the IRS tax rules in order to enjoy the associated tax benefits of an IRA. Otherwise, you won’t be able to take advantage of tax-deductible contributions or tax-free distributions, depending on what type of self-directed IRA you’re setting up.

What Is Not Allowed With a Self-Directed IRA?

There are certain prohibited transactions that the IRS doesn’t allow with a self-directed IRA. Prohibited transactions include:

  • Transfers of plan income or assets to any disqualified persons or the use of plan income and assets by a disqualified person.
  • Breach of fiduciary duty or self-dealing.
  • The sale, exchange or leasing of property between the plan and a disqualified person.
  • The lending of money between the plan and a disqualified person.
  • Furnishing any goods or services from the plan to a disqualified person.

Examples of prohibited transactions include borrowing from a self-directed IRA, using it as security for a loan, selling property to it and buying property for personal use with IRA funds.  But who is a disqualified person? Under IRS rules, it can be the IRA owner’s fiduciary and any members of his or her family.

What Is a Self-Directed IRA LLC?

A self-directed IRA LLC is a limited liability company that is owned by the IRA. With this type of structure, the LLC is able to enjoy the same tax-sheltered status as the IRA. The IRA account holder, meanwhile, has control over investment activities.

This type of arrangement is also referred to as a checkbook IRA or checkbook control LLC. That name stems from the fact that the IRA account holder can be the LLC manager, giving them control over the funds being invested. You can establish a separate bank account for the LLC and deposit money into it which can then be invested through the self-directed IRA.

The IRA owns the LLC. As long as you’re observing the IRS rules for prohibited transactions and disqualified persons, you can reap traditional or Roth IRA tax benefits with your self-directed IRA.

It’s important to note that if any prohibited transactions occur, the account will stop being an IRA. The IRS views that as a distribution of assets to the IRA owner, based on their value on the first day of the year. If the value exceeds the basis, that can result in a taxable gain which you’d need to report on your tax return.

Advantages and Disadvantages of a Self-Directed IRA LLC

self directed ira llc

Investing in a self-directed IRA LLC can yield some benefits that might make it a more attractive option. For example, you may be able to reduce fees if you’re able to hold multiple assets in a single LLC vehicle.  Keeping fees as low as possible allows you to hold on to more of your investment gains.

A self-directed IRA LLC with checkbook control can also make it easier to facilitate investment transactions. That could be important if you’re hoping to make an investment and time is of the essence.

Finally, an LLC is by nature designed to provide liability protection.  For example, if you purchase real estate through a self-directed IRA, a limited liability company structure could protect personal assets or other investments against lawsuits brought by creditors or other entities.

Is a self-directed IRA LLC always the best choice? Not necessarily, as there are a few disadvantages to be aware of.

For one thing, liquidity can be a concern. If the bulk of your self-directed IRA assets is concentrated in real estate, for instance, it may be much more challenging to liquidate those assets compared to selling off stocks for cash.

Self-directed IRAs can also be more complex to set up than other IRAs and cost you more in fees. Not to mention, they can also cost you more in terms of the time commitment required to manage your investments.

Finally, while self-directed IRA LLCs can lend some tax benefits, they can take away others. For example, holding real estate in a self-directed IRA might mean sacrificing certain tax breaks that you’d otherwise be able to take advantage of if you owned the property directly.

How to Set Up a Self-Directed IRA LLC

If you’d like to set up a self-directed IRA LLC, you’ll first need to find a trustee or custodian. As mentioned, you could start your search with your current brokerage to see what’s available. Your financial advisor may also be able to point you in the right direction as to where you can open a self-directed IRA LLC.

Once you find a trustee or custodian, the next steps are fairly simple. You’ll need to fill out the paperwork to create your self-directed IRA on paper, then fund your account. Once the account is funded, you can set up the LLC separately. Again, your custodian should be able to guide you through the necessary steps.

At this point, you’ll invest your self-directed IRA funds into the LLC. You’ll also need to set up a separate bank account to hold the LLC funds. From there, you can begin using those funds to purchase investments for your IRA.

The Bottom Line

self directed ira llc

A self-directed IRA LLC might appeal to you if you’re interested in adding real estate or other alternative investments to your portfolio. After all, diversification can be a good thing when it comes to managing risk. The most important thing to keep in mind with a self-directed IRA is that violating any of the IRS rules on prohibited transactions could cost you their tax-advantaged status.

Retirement Planning Tips

  • Consider talking to your financial advisor about whether a self-directed IRA might be right for you and whether it makes sense to set up an LLC for retirement investing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’d like to invest in real estate but aren’t sure whether a self-directed IRA LLC is a good fit, there are other options. For example, you could invest in a real estate investment trust (REIT), real estate fund or ETF or in crowdfunded property investments. Each one offers pros and cons but all three can allow you to invest in real estate without having to own property directly. Comparing the risks, rewards and costs can help you to evaluate whether any of them align with your needs and goals.

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