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IRA LLC v Traditional IRAs

IRA LLC v. Traditional IRA

There are many kinds of IRAs (Individual Retirement Accounts) and sometimes it can be hard to keep track of the differences. Wouldn’t it be great if you had a quick and easy reference guide? Say no more. Here is a breakdown of IRA LLCs, standard self-directed IRAs, and traditional brokerage accounts.

IRA LLC v Traditional IRAs Takeaways

  • UDFI – Unrelated Debt-Financed Income – is a tax that must be paid for any retirement assets that were purchased using a loan.
  • UDFI is not applied to the entire value of the asset, but rather just for the percentage that was purchased using leverage.
  • UDFI is paid using IRS Form 990-T and must be submitted by the tax deadline of April 15.

Know Your IRA

Brokerage IRA

This is a classic retirement account normally handled by one of the big brokerages. Major players in the field include Charles Schwab, Fidelity, and TD Ameritrade. Asset options include market products like stocks or mutual funds.

Self-Directed IRA

This typically refers to an IRA account that is held by a Custodian who is specialized in self-direction. A popular choice in this niche industry is Madison Trust. Asset options are expansive and are only limited by IRS rules.

IRA LLC

This is a kind of self-directed IRA that gives account holders more transactional freedom and fewer fees. It works by setting up a dedicated LLC which the IRA account holder uses to place investments.

Account Setup

Brokerage IRA

Setup is simple and usually just involves filling out a few forms.

Self-Directed IRA

The initial setup is a quick form. If you are rolling over an existing IRA, the Custodian will walk you through the process.

IRA LLC

The setup is similar to the self-directed IRA. Additional elements include opening up a specialized IRA LLC and then setting up a bank account. Broad will take care of opening the LLC for you. Once it’s established, you’ll be able to go to the bank of your choice and open a checking account in the name of the IRA LLC.

IRA Fees

Brokerage IRA

This is normally the cheapest to open with most major brokerages not charging any fees up front. However, fees are charged on the backend and they can come in a variety of different forms. These fees can include a fixed percentage of AUM (assets under management), transaction fees, annual maintenance fees, and interest charges.

Self-Directed IRA

There are two classic fee structures for custodian-based self-directed IRAs. Some charge a low annual fee while also charging transaction fees. Others use a system where the fees are asset based and are raised according to the size of the IRA account. In both cases, there is usually a low annual maintenance fee as well.

IRA LLC

An IRA LLC has an initial setup fee which is higher than other kinds of accounts. This is because the IRA LLC setup is more labor intensive. However, the continuing fees are usually much less. Although you will pay the Custodian a low annual maintenance fee (for holding the IRA), you will never pay any transaction or asset based fees. For transaction heavy assets, this kind of fee schedule is almost always more economical. To find more about IRA LLC fees, please see our Fees page.

How To Invest

Brokerage IRA

The brokerage will typically supply you with a set of market-based assets that you can choose from. Check the ones you want and you’re good to go.

Self-Directed IRA

Once you decide on the asset you want to invest in, fill out an Investment Authorization form and submit it to the Custodian. The Custodian will then purchase the asset on behalf of your account. This process is similar for any transaction that you want to perform. Fill out the relevant form, submit it to the Custodian, and the Custodian executes the transaction on your behalf.

IRA LLC

With an IRA LLC investing is super simple. Choose the asset you wish to purchase, write a check from your IRA LLC checkbook, and that’s it. The asset is now officially part of your retirement account. Transactions are handled in the same way. If you have to pay a worker, buy supplies, or do anything else asset-related, just write a check and you’re finished.

Investing In Real Estate

Brokerage IRA

Real estate is usually not an option.

Self-Directed IRA

Most self-directed investors like to invest in properties that they themselves personally manage. Such an arrangement is usually high in maintenance transactions and thus is not a great fit for a Custodian based self-directed IRA. The transaction fees add up quickly and detract from the profitability of the investment. However, there are certain types of real estate investments which do well in the Custodian model. Private placements or REITs are usually transactionally light and thus can work well with Custodian involvement. For these kinds of investments, the Custodian self-directed IRA is ideal with lower setup fees and easier setup.

IRA LLC

An IRA LLC is usually the go-to choice for real estate. This is due to its checkbook capability. Most real estate investments require a lot of management. You have bills to pay, workers to hire, rents to deposit – the list keeps going. With a Custodian you would have to fill out a form for almost every transaction and then wait. With an IRA LLC, you can manage the asset in real time with no paperwork hassle. Just write a check and you’re good to go.

Get Educated about the IRA LLC

You don’t have to go at it alone. Speak with a specialist, tell them what you would like to do, and get some solid advice about how to move forward.

Choosing The Right IRA

Now that you have a general sense of the differences between an IRA LLC and other IRA platforms, how do you choose the right one? The answer will depend on two key factors:

  1. Your personal investing capacity
  2. The kind of asset you would like to place in your IRA

Investors generally fall into one of three categories.

The first is the busy investor who simply does not have the bandwidth to manage another project. For this individual, a brokerage IRA would be the route to take. It’s hands-free and truly plug and play. You don’t have to worry about managing any investments and you’ll be updated regularly on your account’s status.

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The second type of investor is also time strapped, but has an interest in real estate. To make it happen, this investor should look into a private placement or a REIT. These kinds of investments will also be maintenance free while delivering increased asset choice. The ideal platform for a private placement or a REIT is a standard self-directed IRA. Setup is easy, costs are low, and it will do a great job of holding real estate.

The third kind of investor is one who wants to actively manage an asset and help it grow. This will often take the form of buying a property and renting it out or rehabbing a fix-and-flip. If you have the time and the focus to learn about these kinds of investments, this option could readily be the most profitable of the three. In that case the IRA LLC is your IRA platform of choice. It gives you the flexibility you need to manage the asset properly, while at the same time keeping fees low.

Learn More About How It Works

What is an IRA LLC? ›
How To Set Up an IRA LLC ›
Roth IRA LLC ›
FAQ ›

Buying Real Estate With an IRA

Learn more about the IRA LLC and how it is optimized for purchasing real estate.

Learn More ›

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