People will tell you that your IRA is safe. I mean come on, it's a retirement account. Yet in reality, they're wrong. Your IRA isn't safe.
The only protection you get by default with an IRA is that it's separate from your personal assets. What this means is someone can't sue you and your IRA at the same time. They'd have to choose to sue either you or your IRA.
But that doesn't make your IRA safe from litigation, especially if your IRA is invested in a lawsuit-prone asset class such as real estate. Also, your IRA is exposed in the sense that it can be disqualified if any of its transactions aren't IRS-approved.
The last thing you want is for the IRS to disqualify your IRA. The penalties are extremely costly.
There are two things you can do to protect your IRA.
The first thing you can do is split your IRA into multiple accounts. Doing this would limit your exposure. For example, if someone sues one of your properties, or if the IRS disqualifies one of your IRA's, the damage would be limited to only one IRA.
The second thing you can do is set up a self-directed IRA with an LLC. I personally like to use a series LLC. What this allows you to do is take each different asset belonging to your IRA and put it into its own "series." Each series functions as its own LLC.
Let's say someone then sues one of your IRA held assets, which happens to be in a series. Worst case scenario, you lose the lawsuit. In that lawsuit only one of your assets would be affected. The majority of your IRA holdings and wealth will be protected.
By default your IRA is largely unprotected. This means that until you implement asset protection your IRA is exposed to attack, either by the IRS or someone else. If you've invested into multiple properties with your IRA I recommend implementing an asset protection right away.
I hope this information was useful to you, if you have any questions feel free to comment and ask me. Check out my other blogs to learn more about asset protection. If you need help setting up a Self-Directed IRA LLC or asset protection plan, schedule your personal consultation today.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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