How It Works

What is an IRA LLC?

An IRA LLC is a kind of self-directed IRA that differs from a standard account in two important ways.

Retirement Asset Choice  

A standard IRA is usually limited to market products like stocks or mutual funds. An IRA LLC can diversify with alternative assets like real estate or startups.

Easy Transactions

An IRA LLC allows account holders to make transactions in real-time without going through a Custodian. This is great for investors because it takes away the paperwork, gets rid of the transaction fees, and allows you to make payments immediately.

The Takeaways

  • An IRA LLC is a self-directed retirement account that makes it easy to invest in alternative assets.
  • The process works by setting up a specialized LLC for your IRA and then using that LLC to invest your retirement funds.
  • An IRA LLC is most suited for assets like real estate whose upkeep and management involve numerous transactions.

The IRA LLC process is actually quite easy to understand. When you invest in a standard company, you give the company some money and the company uses it to turn a profit. That’s exactly what happens with an IRA LLC. You give an LLC some of your retirement funds and the LLC seeks to turn a profit. The only difference is that this LLC is managed by you. In essence, you’re investing in an LLC that owns a property that you manage.

Let’s dig a little deeper with some of the technical details. An IRA LLC is a Limited Liability Company registered with the Secretary of State’s office (This is generally done in the state where the IRA investment property is located). IRA LLC facilitators like IRALLC.com retain top ERISA attorneys to prepare the LLC’s specialized operating agreement. The LLC operating agreement stipulates that the entity is wholly owned by your IRA and designates you, the IRA account owner, as the non-compensated manager of the LLC. The IRA facilitator processes the LLC formation documents and obtains an employer identification number. The IRA LLC is a vehicle through which you perform IRA investments without the involvement of an IRA custodian.

Here is a quick outline of the process:

  1. You will reach out to an IRA LLC facilitator like IRALLC.com.
  2. They will help you open a Self-Directed IRA with a Self-Directed IRA Custodian.
  3. They will create a customized LLC geared specifically for IRA investments.
  4. You will open a business checking account at your local bank for the IRA LLC.
  5. The IRA custodian will send your IRA money to the IRA LLC checking account by check or wire.
  6. You will purchase real estate, pay bills, and make deposits from the IRA LLC checking account.

An IRA LLC is great for buying real estate. Many Americans are interested in diversifying their retirement portfolios to include real estate but never thought it possible. What they don’t know is that the IRS allows individuals to invest IRAs in virtually any asset class (other than life insurance and collectibles). The common misperception actually comes from the brokerage firms like TD Ameritrade and Charles Schwab who do not accommodate real estate investments. Rather, they limit assets to publicly traded investments like stocks, bonds, and mutual funds.

In order to invest your IRA in real estate, you need to open a self-directed IRA with a Custodian that specializes in holding alternative assets. Once the self-directed IRA is open, you can instruct the Custodian to purchase real estate on behalf of your IRA. The challenge is that since the Custodian holds the real estate on your IRA’s behalf, the Custodian is responsible to execute all real estate transactions. You will need to submit a written request (along with supporting documentation) each time you have to pay a bill, purchase supplies, or place an investment. This can become expensive and inefficient. That’s where an IRA LLC comes in.

An IRA LLC is an upgraded version of the Self-Directed IRA discussed above. With an IRA LLC, your IRA can own real estate and YOU handle the real estate transactions on your own. You avoid having to reach out to an IRA custodian each time you want to write a check or make a deposit.

ROTHs and retirement rules are actually some of the most frequently asked questions about IRA LLCs.

Q: Can a ROTH IRA be invested in an IRA LLC?
A: Yes.

Q: Can I rollover my current IRA or 401k into an IRA LLC?
A: Yes.

Q: Can I live in a house that is owned by my IRA?
A: Not yet.

The IRS established retirement accounts like IRAs to encourage Americans to save for retirement. Such accounts come along with tax benefits; Traditional IRAs are tax-deferred and the profits of ROTH accounts are tax-free. Because IRAs offer these tax advantages, the IRS does not allow for individuals to personally benefit from their retirement money until distribution. This means your IRA LLC can buy real estate, but the profits have to be deposited back into your IRA. Also, you cannot live on a property owned by your IRA LLC because then you would personally be benefiting from your retirement account asset.

As per IRS guidelines, your IRA LLC can purchase any kind of real estate including rehabs, rentals, commercial properties, residential properties, and foreclosures. However, your IRA can only purchase or sell real estate with third parties. The IRS does not allow your IRA to transact with close family members or business partners (referred to as Disqualified Persons) as the transaction may unfairly benefit you or your IRA LLC.

Another thing to keep in mind is that you may not perform any active work on the property as that would be considered a “non-cash contribution” to your IRA. This is a source of confusion to some IRA LLC managers. A good rule of thumb is that if the work can be performed remotely then the IRA Owner can generally do it. If the work has to be done on-premises, then it may be a prohibited transaction.

Here are some examples:

IRA LLC Activity Prohibited Transaction
Paying vendors No
Ordering supplies No
Hiring workers No
Doing landscaping yourself Yes
Repairing things on your own Yes

Find out more about Prohibited Transactions here.

IRA contributions and distributions must be reported to the IRS. Therefore, these transactions must flow through your IRA custodian. When you want to make an IRA contribution, you will deposit money into your self-directed IRA account, not your IRA LLC. And when you want to take an IRA distribution, you will also take it from your IRA account and not your IRA LLC.

IRA LLC Transaction Overview

Transaction Process
IRA contribution Submit to IRA custodian
IRA distribution Request from IRA custodian
Purchase real estate Issue check from IRA LLC checking account
Pay vendor Issue check from IRA LLC checking account
Purchase supplies for real estate Issue check from IRA LLC checking account
Receive rental income Deposit into IRA LLC checking account

Are you ready to move your investing forward?

Get going with an IRA LLC today.

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Do I need an IRA LLC?

An IRA LLC is only necessary if your investment requires hands-on involvement. If you are investing in a “passive” investment like a private placement, REIT, or real estate fund, then a self-directed IRA with a Custodian is sufficient. “Active” investments on the other hand, like real estate rentals and flips, are better suited for an IRA LLC. This is because an IRA LLC is the least bureaucratic retirement account. You handle all the investment transactions on your own without being dependent on a custodian every step of the way. Happy Investing!

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Buying Real Estate With an IRA

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

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