How do Self-Directed IRAs and LLCs Work Together?

Are you looking for closer control of your retirement funds? You might want to think about adding a Limited Liability Company (LLC) to your Self-Directed IRA. Is it imperative that you have an LLC? No, it is not. You can buy any alternative asset, except collectibles and life insurance, without an LLC. But it could be helpful to understand how Self-Directed IRAs and LLCs can work together to give you more flexibility with your investing.

So, how do Self-Directed IRAs and LLCs work together?

When you establish an LLC, it is a legal entity that can purchase assets, giving you more freedom to manage your retirement funds. Since you will have direct access to your Self-Directed IRA, you will get funds quickly for real estate purchases or maintenance. Just remember that these funds are the Self-Directed IRA’s assets and do not belong to you personally.

Any funds cannot return to you but must go back to your Self-Directed IRA. If your LLC wants to purchase an investment by borrowing money in the form of a non-recourse loan, you might be required to make additional filings for your Self-Directed IRA. It is always a good idea to consult a tax advisor if you have questions.

It is fairly common for retirement investors to establish an LLC as a subset of a Self-Directed IRA, which makes it possible to combine personal funds or Self-Directed IRAs from other investors to fund the LLC. Many of these investors then open a Self-Directed Checkbook IRA, making it easier to manage the LLC.

What is a Self-Directed Checkbook IRA?

Often called “checkbook control,” the Self-Directed Checkbook IRA gives the owners of a Self-Directed IRA signing authority over an account that gives access to their retirement funds. Because the LLC is a business entity, it can have a checking account. Funds for the checking account are provided from the retirement assets in the Self-Directed IRA.

After the LLC is set up with a checking account, you (the Self-Directed IRA holder) will have “checkbook control” over your Self-Directed IRA funds. You will now be able to disburse funds quickly and possibly avoid certain administrative fees.

And while Self-Directed IRAs and LLCs can work well together with checkbook control, there is also increased responsibility placed on the IRA owner, for example, understanding the prohibited transaction rules. You will need a specially prepared operating agreement, Tax ID number, a bank account, financial books, and provide recordkeeping and accounting. You will also need to understand the IRS rules that pertain to Self-Directed IRAs and to abide by them.

Keep in mind these advantages of a Self-Directed IRA LLC with checkbook control

  1. More control of your investments

With a Self-Directed IRA with LLC, you can protect and diversify your retirement funds. As soon as you find an investment you want to buy, you write a check. You avoid all the paperwork that goes with depending on your administrator and waiting for them to write it. Having this control can be a big advantage when there are time issues, such as with an auction.

  1. Fewer administrative costs

With checkbook control, you do not pay the administrative and transaction fees that usually come with Self-Directed IRAs. If you have several investments in your LLC, your administrator only charges you for one asset, the LLC. As a result, more of your retirement dollars are working for you.

  1. A word of caution on due diligence

Before you make the final decision to register as an LLC, protect yourself with due diligence. Find out if there might be drawbacks or costs you were not expecting. There could be tax requirements, fees from your state, or certain limitations.

Rules for LLCs vary by state, and just as with any other Self-Directed IRA investment, you need to be careful to avoid prohibited transactions that could endanger the tax-advantaged status of your IRA.

American IRA requires that all Single-Member IRA LLC documents be prepared by a qualified professional with an understanding of Self-Directed IRAs and LLCs. Self-prepared documents cannot be accepted.

Interested in learning more about Self-Directed IRAs or LLCs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Owning a Self-Directed IRA LLC

Self-Directed IRA LLCAre you interested in starting an LLC that receives many of the benefits of an IRA? A self-directed IRA LLC is one possible path on your journey to investing success with American IRA! Otherwise known as a “single-member IRA owned LLC” or “checkbook control IRA”, this classification means that you use funds from a self-directed IRA to purchase 100% of an LLC that you set up with the help of your professionals.

Once this account has been set up, you can then purchase assets, make investments, or write checks on behalf of your IRA – multi-member LLCs work much the same way, and setting one up with American IRA is only one call away. A self-directed IRA LLC can be advantageous when making either large or numerous investments since you don’t have to obtain pre-approval from an account custodian every time you make an IRA transaction.

According to most state laws, one of the main benefits of an IRA LLC is closely associated with its limited liability. For example, say your IRA invests half of its money in an LLC and the other half in mutual funds. If the LLC experiences a liability issue, the mutual funds would still be protected.

With that in mind, there are a number of additional factors to consider. For example, a self-directed IRA LLC offers the following benefits:

-Checkbook control

-Ease of use

-Lower administration fees

-Tax-free and tax-deferred gains

 

The following aspects should also be considered:

-Higher set-up fees

-Full responsibility for complying with IRS rules and regulations, including prohibited transactions

-Responsibility for completing required IRS compliance documents

 

So, is a self-directed IRA LLC right for you? Click here for more information or call 1-866-7500-IRA(472).

If you have any questions about opening a new account, contact us at 1-866-7500-IRA(472) or info@americanira.com. If you’d like to transfer your existing portfolio, contact us at 1-866-7500-IRA(472) or transactions@americanira.com.

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James Hitt Offers An Expert Opinion On Owning A Business Within Your Self-Directed IRA

James Hitt, CEO of American IRA, a national provider of Self Directed IRAs, offers an expert opinion on owning a business within self-directed IRAs. With the latest National Association of Realtors housing statistics showing a monthly increase in home sales of 4% and an overall yearly increase in home sales of 12.2%. It is not surprising that investors are forming businesses and purchasing real estate within those businesses.

Mr. Hitt reports “You can run a small business within your self directed IRA without having to worry about taking a chunk of your profits out of it every year to pay income taxes. Further you can buy and sell property as much as you want, within your small business, and you won’t have to worry about capital gains taxes.”

How It Works

While most people don’t realize that IRAs aren’t just restricted to stocks, bonds, annuities, CDs and mutual funds, when they think about the mechanics of it, it’s obvious that they can own a business in their IRA. After all, what is stock ownership but ownership of a fractional interest in a business? Owning a whole business in an IRA, then, is no different than owning all the stock of the business in the IRA. In fact, they can invest their IRA assets in nearly anything they can conceive, as long as it is not expressly prohibited by law. As of 2011, the list of prohibited investments is fairly narrow: They cannot invest directly in collectibles, art, rugs, antiques, metals other than gold, silver and palladium bullion, gems, stamps, coins (except certain U.S.-minted coins), alcoholic beverages, and a few other tangible items related to personal property.

They can also use a Roth IRA to own a business. This means that provided they abide by certain rules, they can operate their business income and capital gains tax free for as long as they live!

That said, if they want to use their IRA assets to start or acquire a business they plan to operate themselves– including a small business that engages in buying and selling any of the above items, there are a couple of things they need to do differently.

Mr. Hitt, interjects, “It is important that you abide by prohibited transaction rules.
When you own a business in a retirement account, you can’t treat it the same way as you do the other entities they control. For example, you can’t have the company in your IRA hire your company to clean the air ducts, even if you pay market rates. Nor can you hire your wife or her company to manage the property. In fact, your IRA cannot buy from, sell to, lend money to or borrow from any of your ascendants, descendants, nor their spouses, nor any entities they control. The same applies to your financial experts and attorneys and their businesses. IRS rules require you to keep a strict arms-length relationship between your, your family, and any businesses or entities you control.”

Watch Their Cash Flows

Remember that they can only contribute a maximum of $5,000 to an IRA in any given year. That limit is increased to $6,000 for those over age 50, but that is still a very narrow window for the infusion of new capital. If their business needs additional capital, they will have to fund everything above that number from existing IRA assets. They may be able to roll over contributions to that particular IRA account from other IRA or 401(k) assets. However, they cannot contribute more than $5,000 in new money, plus allowable catch-up contributions, in any given year.

Additionally, they cannot take money out of the business for their own use until they reach the age of 59½. If they do, their distributions will be subject to income taxes and penalties as they would be for any other IRA account. They must reinvest any earnings back into the IRA until they reach age 59½.

Don’t Pledge the IRA as Collateral for a Loan

This can be a problem for IRA owners whose IRA businesses need to raise capital, for whatever reason. Once the available rollover options and new money contributions are exhausted, then the IRA will have to borrow the money from some other source. However, the only loans IRAs are allowed are non-recourse loans: The bank or lender can have no claim on any assets, in the event of default, that are outside of the IRA.

Don’t Make Personal Use of IRA-Owned Property

They cannot use their IRA or property within it for their own personal enjoyment. For example, if their IRA has a real estate investment company inside it, and it owns a vacation property, they cannot stay in that property themselves, even for a night, and even if they pay fair market rates to the IRA for the use of the property.

Mr. Hitt provides further insight, “It is important that you build a team of experts to assist you in the areas that you are not familiar with. The rules governing self-directed IRAs are complex. Not every administrator understands the ins and outs of this very specialized area of financial planning. It is critical to get advice from a qualified expert who has experience specifically with self-directed IRAs, and who understands and follows the various court precedents, revenue rulings and other factors unique to this kind of investing.”

About: American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.

The mission of American IRA is to provide the highest level of customer service in the self directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!

To learn more about American IRA, LLC and self-directed IRAs/self-directed Solo 401(k)s, please contact our office at 1-866-7500-IRA(472).

Own a Business In Your IRA

Suppose you could run a small business without having to worry about taking a chunk of your profits out of it every year to pay income taxes. Suppose further that you could buy and sell property as much as you wanted, within your small business, and not have to worry about capital gains taxes.

Think you could make some money?

The surprising fact is this: It is quite possible to pull this off using a variant of your normal, everyday, garden-variety individual retirement arrangement, or IRA.

How It Works

While most people don’t realize that IRAs aren’t just restricted to stocks, bonds, annuities, CDs and mutual funds, when you think about the mechanics of it, it’s obvious that you can own a business in your IRA. After all, what is stock ownership but ownership of a fractional interest in a business? Owning a whole business in an IRA, then, is no different than owning all the stock of the business in the IRA. In fact, you can invest your IRA assets in nearly anything you can conceive, as long as it is not expressly prohibited by law. As of 2011, the list of prohibited investments is fairly narrow: You cannot invest directly in collectibles, art, rugs, antiques, metals other than gold, silver and palladium bullion, gems, stamps, coins (except certain U.S.-minted coins), alcoholic beverages, and a few other tangible items related to personal property.

You can also use a Roth IRA to own a business. This means that provided you abide by certain rules, you can operate your business income and capital gains tax free for as long as you live!

That said, if you want to use your IRA assets to start or acquire a business you plan to operate yourself – including a small business that engages in buying and selling any of the above items, there are a couple of things you need to do differently.

Abide by Prohibited Transaction Rules

When you own a business in a retirement account, you can’t treat it the same way as you do the other entities you control. For example, you can’t have the company in your IRA hire your company to clean the air ducts, even if you pay market rates. Nor can you hire your wife or her company to manage the property. In fact, your IRA cannot buy from, sell to, lend money to or borrow from any of your ascendants, descendants, nor their spouses, nor any entities they control. The same applies to your financial advisors and attorneys and their businesses. IRS rules require you to keep a strict arms-length relationship between yourself, your family, and any businesses or entities they control.

Watch Your Cash Flows

Remember that you can only contribute a maximum of $5,000 to an IRA in any given year. That limit is increased to $6,000 for those over age 50, but that is still a very narrow window for the infusion of new capital. If your business needs additional capital, you will have to fund everything above that number from existing IRA assets. You may be able to roll over contributions to that particular IRA account from other IRA or 401(k) assets. However, you cannot contribute more than $5,000 in new money, plus allowable catch-up contributions, in any given year.

Additionally, you cannot take money out of the business for your own use until you reach the age of 59½. If you do, your distributions will be subject to income taxes and penalties as they would be for any other IRA account. You must reinvest any earnings back into the IRA until you reach age 59½.

Don’t Pledge the IRA as Collateral for a Loan

This can be a problem for IRA owners whose IRA businesses need to raise capital, for whatever reason. Once the available rollover options and new money contributions are exhausted, then the IRA will have to borrow the money from some other source. However, the only loans IRAs are allowed are non-recourse loans: The bank or lender can have no claim on any assets, in the event of default, that are outside of the IRA.

Don’t Make Personal Use of IRA-Owned Property

You cannot use your IRA or property within it for your own personal enjoyment. For example, if your IRA has a real estate investment company inside it, and it owns a vacation property, you cannot stay in that property yourself, even for a night, and even if you pay fair market rates to the IRA for the use of the property.

Build a Team of Advisors

The rules governing self-directed IRAs are complex. Not every advisor understands the ins and outs of this very specialized area of financial planning. It is critical to get advice from a qualified expert who has experience specifically with self-directed IRAs, and who understands and follows the various court precedents, revenue rulings and other factors unique to this kind of investing.