Forget Wall Street: 6 Reasons Why You Should Form a Self Directed IRA LLC
You’re living in the 21st century now, which means you don’t have to put all your eggs in one basket when it comes to investing.
With a Self Directed IRA LLC (Limited Liability Company) you can take back control of your retirement and receive higher returns from your investment dollars.
Here’s 6 reasons why you should forget about Wall Street and form a Self Directed IRA LLC:
- To Purchase Non-traditional Assets
It’s might be hard for you to forget about Wall Street, when for nearly a hundred years people have been told that they could only invest their money there. But with a Self Directed IRA you can move beyond the invisible walls Wall Street and invest in a whole new world of opportunity.
A Self Directed IRA LLC will allow you to use your IRA funds to make self directed investments in “non-traditional” assets of your choice. Most Wall Street IRA custodians only allow you to invest in stocks, bonds, mutual funds, annuities, CDs and other traditional investments.
The problem is, while traditional investments are numerous, they only make up a fraction of the profitable assets you can purchase and hold for investment.
- Checkbook Control
With an IRA, you can be the manager of your own IRA LLC, but you can’t be compensated for services or use your funds to pay any of the IRA LLC’s expenses. Doing so would make your friends at the IRS angry and cost you big time.
- Asset Protection
In most states the owner of an LLC isn’t liable for the debts or obligations of their LLC.
For example, in Arizona the law is that the members (owners) of an Arizona LLC are not liable for the debts or obligations of the LLC. This is an especially important factor when the IRA LLC has members who are not IRAs.
However, there are rare instances where a member’s personal assets can be pursued by creditors, such as if they act as a guarantor for a loan to fund the LLC and fail to pay it back.
- To Pool Assets with Other Investors
Banks have recently tightened up on their lending regulations, which means it’s become harder for real estate investors to secure capital to acquire property. This has become a major obstacle for many real estate investors.
When the cost to acquire an asset exceeds the funds available to you, combining your money with other investors may be the only way you can purchase an asset. A great way for investors to pool assets is through an IRA LLC.
Your IRA and other investors contribute money to the IRA LLC and then use the LLC funds to purchase the asset. An IRA LLC can have multiple members including more than one IRA, people and entities as long as the prohibited transaction rules are not violated. (I will go over the rules towards the end of the article.)
Not only do you get the benefit of having your money combined under legal and contractual guidelines, but you also get the protection an LLC offers, such as protection from creditors and lawsuits.
- To Create A Legal & Organized Structure When There Are Multiple Members
It can be hard to decide what to do with an asset when several people own it. An IRA LLC provides a legal governing structure, rules and policies to how the joint owners will operate the company and deal with its assets.
You shouldn’t rely on oral statements or agreements. An Operating Agreement signed by all of the members of your LLC will provide the firm foundation from which you all can make decisions together.
For example, an Operating Agreement will prevent members from being “lone wolfs” and doing something that the majority of the members disagree with, such as entering into an unprofitable contract.
- When An Asset Has Liability & Requires Daily Oversight
If you purchased a complex asset, you will want a Self Directed IRA LLC to be the owner of that asset. For example, if you want to purchase a thirty unit apartment complex, you should form an IRA LLC to own and operate the apartments. Why?
Because you and your IRA custodian don’t have time to be involved in the day to day operations of a thirty unit apartment complex, such as paying utilities, depositing rent checks, or evicting tenants.
And then think of the liability involved. Anyone of those tenants could sue you for a variety of reasons. An LLC will protect you from an “unhappy camper”.
What Can’t You Purchase With An IRA?
An IRA LLC may not purchase any of the following three types of assets:
- Life insurance.
- Stock in an entity taxed under subchapter S of the Internal Revenue Code. (This includes membership interests in an LLC taxed as a S corporation.)
- Items classified as a collectible such as cars, furniture, stamps and antiques.
What Are The Most Popular Self Directed IRA Investments?
Real estate is the most popular investment people make with self directed IRA funds.
IRA funds can be used to purchase homes, condos, duplexes, penthouses, raw land, office buildings, shopping centers, factories, mobile home parks and all other types of commercial and residential real estate.
What are the Consequences if an IRA LLC Engages in a Prohibited Transaction?
Okay so I mentioned the prohibited transactions earlier.
If your IRA purchased a prohibited asset (such as life insurance) or engaged in a prohibited transaction, your friends at the IRS would get extremely angry. They could dismantle your IRA, tax you until you bleed and make you pay fees on top of the taxes.
What are the Prohibited Transaction Rules?
All the prohibited transactions rules can be found in IRC Section 4975. The quickest way to sum those up is that a “prohibited transaction” includes any direct or indirect:
- Lending of money or other extension of credit between a plan and a disqualified person.
- Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.
- Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
- Furnishing of goods, services, or facilities between a plan and a disqualified person.
- Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account.
- Sale, exchange or leasing of any property between a plan and a disqualified person.
Who are Disqualified Persons?
IRC 4975(e)(2) states “the term ‘disqualified person‘ means a person who is:
- Your children and your parents.
- A fiduciary.
- An owner, direct or indirect, of 50 percent or more of.
- An employee organization whose members are covered by the plan.
- An employer whose employees are covered by the plan.
- A person providing services to the plan.
The Bottom Line
If you’re looking for more control over your retirement savings, you have multiple options to consider, including traditional self-directed IRAs and self-directed IRA LLCs with Checkbook Control.
There’s also the IRS regulations, which if not followed to the letter could cost you thousands of dollars and waste all the time you spent securing a good investment return.
Depending on your level of investment experience & IRS knowledge, it can be hard for you to figure out all these financial and legal definitions. If you want help taking back control of your retirement call Royal Legal Solutions now at (512) 757–3994 to schedule your free consultation!