How It Works
How to Set Up an IRA LLC
Getting Started with a Self-Directed
The first step in setting up a self-directed IRA LLC is to determine whether you actually need one. If you are looking to invest in real estate, chances are an IRA LLC will be your investment vehicle of choice. This is because many kinds of real estate investments, like rentals and rehabs, involve multiple transactions. The self-directed IRA LLC excels with multiple transactions as it can process them in real-time and with zero additional fees. However, if the investment is passive and not transaction heavy, like a private placement or a REIT, then a standard self-directed IRA would work better. If you’re not sure, just schedule a call with a Specialist and ask.
- Setting up a standard IRA LLC involves opening a Self Directed IRA account, establishing an LLC, and then opening a checking account for the IRA LLC.
- After the IRA LLC is set up, it can invest in both Wall Street products and alternative assets.
- If setting up an IRA LLC is not recommended, you can explore alternative platforms like an IRA Trust.
How to Set Up a Self-Directed IRA LLC?
Are you more of a detailed person?
Let’s take a closer look at how an IRA LLC works.
1 Open a self-directed IRA account
An IRA LLC facilitator like Broad Financial will create an IRA LLC for you:
- First, they will register a Limited Liability Company with the Secretary of State’s office (generally in the state where the IRA property is located).
- They will prepare a specialized Operating Agreement with provisions related to IRS restrictions (such as prohibited transactions, disqualified persons, undue compensation, etc.) The Operating Agreement is drafted by ERISA Attorneys to ensure compliance with all IRS rules.
- Additionally, they will obtain an Employer Identification Number for the IRA LLC from the IRS. The EIN will be associated with your IRA, alerting the IRS that the LLC is a tax-advantaged entity.
- Your IRA LLC facilitator will also provide you with an IRA LLC handbook. This is an easy-to-use guide that outlines what you can and cannot do with an IRA LLC.
2 Establish an IRA LLC
You will open a new IRA with a Self-Directed IRA Custodian such as Madison Trust Company and transfer your existing IRA or 401k into the new IRA.
3 Open a checking account for your IRA LLC
You will open a business checking account at a bank of your choice.
4 Use the IRA LLC checking account to make investments for your IRA
The Self-directed IRA custodian will send your IRA money to your IRA LLC checking account.
You will place your real estate investment by simply writing a check from your IRA LLC checking account.
All real estate transactions going forward will flow through your IRA LLC checking account. With an IRA LLC, you have complete authority to handle transactions on your own, unlike standard Self-Directed IRAS where you need to submit a written request to an IRA custodian for every transaction.
Common Self-Directed IRA LLC Questions
No. The IRS does not allow an individual to transfer a personal asset to their IRA. Doing so is a prohibited transaction that will result in the IRA being distributed and taxes being due. An IRA LLC must be a newly created entity where the IRA is the member from the very beginning.
No. An IRA LLC is not limited to real estate investments - it can be invested in virtually any asset (The two most common exceptions are life insurance and collectibles as these are restricted by the IRS).
Yes. Many investors deposit the proceeds/income from their real estate investments into a brokerage account. The only process element that is different is that the brokerage account must be opened in the name of the IRA LLC, not the IRA holder’s personal name.
No, that would qualify as a prohibited transaction. However, you may use a debit card (from your IRA LLC bank account) for all asset-related expenses.
Are you ready to move your investing forward?
Get going with an IRA LLC today.
IRA LLC Alternatives
The process for setting up an IRA LLC is usually great for most real estate deals. That's why it’s the go-to platform for most investors. However, there are a few scenarios where alternative platforms may achieve better results. Since Limited Liability Companies are registered with a Secretary of State’s office, the process varies from state to state.
In most cases, an LLC can be filed quickly and the annual cost associated with it is low. But what are you to do if you encounter one of the following scenarios:
- You want to move quickly on a real estate deal, but the Secretary of State’s office in your state takes a long time to register LLCs.
- Your investment property is located in California where the state charges an annual $800 LLC franchise tax.
- You want to register the IRA LLC in one state even though you reside in another. State laws dictate that an LLC have a local address for “Service of Process”. You can pay a company to act as Registered Agent on your behalf but that comes along with an annual cost.
Not to worry, you still have options.
A handful of self-directed IRA LLC facilitators offer a solution for the scenarios above. When an IRA LLC is not a viable option, then an IRA Trust is created for the investor instead. An IRA Trust is similar to an IRA LLC in that it is drafted by ERISA attorneys, contains IRS provisions, and has an Employer Identification Number associated with it. However, since an IRA Trust is not registered on the state level, it avoids processing times, annual costs, and Registered Agent issues. Both an IRA LLC and an IRA Trust have significant advantages. If you’re not sure which is best for your specific situation, please give us a call to discuss.
Whether you opt for an IRA LLC or IRA Trust, you will be free to invest your IRA without the hassle and time lag associated with third-party custodians. Both vehicles offer checkbook control for maximum flexibility and efficiency.