When you use a Single Member IRA LLC arrangement, it means that you are using funds from a Self-Directed IRA to purchase an LLC, which is characterized as a Single Member LLC. This is an interesting arrangement that investors might use to exercise checkbook control over retirement funds. How does it work? Because the IRA owns the LLC, and the LLC has a checking account, the ultimate owner of the IRA controls that checking account.
This is in contrast to a Traditional Self-Directed IRA, wherein you might have ease of use, but you don’t have that direct checkbook control—instead you work through a custodian, who executes trades on your behalf, handling the paperwork.
Let us dig more into how a Single Member LLC can impact a Self-Directed IRA.
The Advantages of the Single Member LLC Within a Self-Directed IRA
If you use a Single Member LLC within a Self-Directed IRA, you begin a concept that is known as a “Checkbook IRA.” But really, this is a matter of having a Self-Directed IRA that simply owns an LLC.
Because of the LLC administration and setup, this arrangement will be a bit more complex than a traditional Self-Directed account. But the advantages can be numerous, including:
- Checkbook control. Having direct checkbook control over the funds within the LLC gives an investor a lot of freedom—freedom they do not normally experience within a retirement account. This does not mean that the rules no longer apply to you; it simply means you have the flexibility and convenience of using the LLC to make retirement investments.
- Lower administration fees. Because you are essentially administering this system yourself, you will have lower administration fees. After all, a Self-Directed IRA requires some administration fees because you will not be handling the paperwork directly when you make an investment; you are directing an IRA custodian to fulfill certain obligations.
When you look at these advantages, it is not difficult to see why investors might flock to Single Member LLCs within a Self-Directed IRA. They see the opportunity and flexibility possible with these accounts, and they understand that with the right decisions made along the way, they can have highly lucrative retirement protections available.
The Disadvantages of the Single Member LLC Within a Self-Directed IRA
This is not to say that the Single Member LLC arrangement is for everyone. There may be some investors for whom a Self-Directed IRA in the more traditional sense is preferable. Let us look at the specific disadvantages of using a Checkbook IRA arrangement:
- Higher up-front fees. Setting up a Single Member LLC and getting all of the paperwork groundwork out of the way will include certain fees along the way. This front-loads the fees, since administration fees would then be lower later on, but it’s something to consider.
- Vesting review. When doing a traditional Self-Directed arrangement with American IRA, for example, you would have American IRA reviewing the vesting on all documents to make sure everything is correct. With a Checkbook IRA, you are “on your own,” meaning it is a good idea to hire someone to help you, such as an accountant.
When you look at these different impacts that a Self-Directed IRA with a Single Member LLC can have, it is important to look at your own strategy and ask yourself some basic questions. What are your goals? What is your investing style? What types of arrangements do you prefer? When you look at it that way, you will see whether or not this is the strategy for you.