Do it Yourself: How to Set Up a Self-Directed IRA LLC

A Self-Directed IRA allows you to make your own decisions about your investments, but it comes with one big catch: you must hire a custodian to hold the account.

This custodian facilitates all of your investments and actually makes the investments for you, giving you some security but costing you money and delaying potential investments.

We discussed the benefits of a Self-Directed IRA here.

However, there is a specific type of IRA that gives you more control. A Self-Directed IRA LLC with checkbook control allows you to make your own investments simply by writing a check.

What is a Self-Directed IRA LLC?

A Self-Directed IRA LLC is a type of IRA that gives you control over your retirement funds. That means you can make the types of investments you’d like – such as real estate, REIT, promissory notes, and limited liability companies – without having to get custodial approval.

When you add checkbook control to your Self-Directed IRA LLC, you can buy real estate or other investments simply by writing a check. This means your transactions won’t be delayed by a custodian.

How to Create a Self-Directed IRA LLC

The process to set up a Self-Directed IRA LLC can be tricky, so it is wise to use a professional to help you with the process and paperwork. However, once you get it set up, you can do most of the day-to-day management yourself.

A financial consultant will help you with the actual creation of an IRA LLC. Mistakes here can lead to fines and penalties, so it’s important to have someone to help with the paperwork.

After the custodian approves the paperwork, there are three main steps to creating your Self-Directed IRA:

1. Transferring Funds

Once you create the Self-Directed IRA LLC is created, you’ll have to transfer the funds in your current custodian IRA account to the new IRA. When done correctly, this is a tax-free transaction.

2. Set Up Checkbook Control

The IRA will actually own your new LLC, while you will likely serve as the manager. After your funds arrive in your new IRA, the IRA has to invest those funds into the LLC.

To invest in the LLC, you’ll have to open a checking account in the LLC’s name and deposit the funds from the IRA there. You can use any bank that you’d like to do this.

3. Make an Investment

Now that you’ve invested into your IRA and deposited the funds into the LLC’s bank account, you can use the money to invest as you’d like, simply by writing a check. Any income or gain you receive from your investments will automatically go back into the IRA for you to continue investing.

The Benefits of a Self-Directed IRA LLC

There are many benefits of a Self-Directed IRA LLC in addition to the obvious perk of being able to control your investments. These benefits include the following:

  • Lower fees – You will no longer need to pay custodian fees for someone else to manage your account for you. Your previous high transaction fees and account value fees will be a thing of the past.
  • Fewer delays – Because you can write a check whenever you want to make an investment, there is no more waiting for custodial approval of the investment. This eliminates all of the delays that come with a more traditional IRA without checkbook control.
  • Increased options for investing – The Self-Directed IRA LLC allows you to invest in all sorts of investment types. You are no longer limited to what your custodian offers or allows.
  • Deferred taxes – All of the gains and income that are associated with your investments will go through your LLC and back to your IRA tax-free. This is due to the fact that the IRS considers your LLC a pass-through entity. In fact, in many cases you don’t even need to file an income tax form for the LLC.
  • Liability protection – Because the LLC signs all documents when making an investment, such as a real estate purchase, the LLC accepts the liability coming from that purchase. You will have limited liability, protecting you and your family if any issue arises.

For many people, a regular IRA serves their investment needs, as they’d rather a more hands-off approach. However, if you prefer to play an active role in your investments, a Self-Directed IRA LLC gives you the control you need.

Still, it’s important to seek guidance when setting an account up to ensure it’s done properly. To see if a Self-Directed IRA LLC is the right investment choice for you, contact the financial experts at BP Financial today.