In setting up maximum freedom and flexibility in one’s retirement account, investors sometimes come to the conclusion that the best way to do it is to use a Self-Directed Single Member IRA LLC. But what exactly is this process, and what does it take to set up? Furthermore, what are the benefits that can make something like this worth the effort? Let’s examine how to use a Single Member LLC within a Self-Directed IRA.
The Single Member LLC
The structure for a Self-Directed Single Member IRA LLC is actually straightforward once you dive into the details. Your Self-Directed IRA will own a Single Member LLC. As such, the money received by your LLC will not go to you personally, but to the IRA. That means that any direct financial transaction between you and the LLC is then a disqualified transaction. However, transactions between the IRA and the LLC would be permitted.
In this case, it’s important to remember why retirement accounts are structured the way they are. They receive tax protections, which is why they receive extra scrutiny from the IRS. If someone is not using these funds for retirement, it means that they are looking for tax protections for other reasons. The Self-Directed Single Member IRA LLC is not a way around this. Rather, it’s a way to use the LLC to maximize the flexibility of the IRA. This is usually achieved through what’s known as “checkbook control.” As the IRA technically owns the LLC—and you own the IRA—you’ll have control over the checkbook of the Single Member LLC. That allows you to quickly make investments on behalf of the LLC.
So long as those investments remain under the umbrella of the IRA, they remain retirement investments. That’s why you cannot use these funds for transactions on a personal basis. You will not be renting out retirement investment property to a spouse or a son/daughter, for example—and the Single Member LLC is not a way to get around this. Instead, it’s a strategy for maximizing your flexibility to make new retirement investments when you can.
Who is the “Checkbook IRA” Right For?
Put together, this process is known as using a “Checkbook IRA.” This is more of a nickname than an official designation. Really, it’s a Self-Directed IRA you use that holds an LLC that you have checkbook control over—a Single Member LLC. But it’s become known as a Checkbook IRA because that’s essentially how it works: you will have the power to write checks on behalf of the LLC. That means you can make a fast investment on behalf of the LLC. As long as this investment falls under the rules of retirement investing, it can quickly be held under the umbrella of your IRA.
For this reason, people who like to directly manage their retirement account as much as possible ill gravitate to the Self-Directed Single Member IRA LLC. They use it as a way to get things done quickly. For people with experience in real estate investing, for example, this is an ideal way to get things moving within a retirement account.
The catch? It takes setup and due diligence. You have to work with a Self-Directed IRA administration firm that knows the ins and outs of setting up arrangements like this. It requires both a Self-Directed IRA and an LLC that’s been established the right way. But over the long-term, it’s a low-cost way to manage one’s retirement account.