Why do many IRA investors and advisors rave about having a self-directed IRA LLC? Today’s article attempts to answer the question by expounding on what a self-directed IRA LLC is all about.
In this article:
- What Is a Self-Directed IRA?
- What Is a Self-Directed IRA LLC?
- Self-Directed IRA LLC with Checkbook Control
- Self-Directed IRA LLC Rules
- Self-Directed IRA LLCs vs. SDIRA Trusts
Self-Directed IRA LLC | Everything You Need to Know
What Is a Self-Directed IRA?
Also called SDIRA for short, it’s a type of IRA where the IRA investor has complete investment decision-making control.
Conventional IRAs and SDIRAs can be set up as either a Traditional IRA or a Roth IRA. Compared to Conventional IRAs, Self-Directed IRAs provide more options for investing.
Given the high degree of control IRA investors have over their self-directed IRAs, they need to be a lot more proactive and diligent in managing their investments. That’s why not all IRA investors may choose to go for a self-directed IRA.
There are two general types of self-directed IRAs: custodial and checkbook.
Custodial SDIRAs involve holding the IRAs money in an account with a third party custodian, i.e., a bank. To move funds out of the account, SDIRA owners have to request it from their custodian, who will write and send out the check on their behalf.
Setting up a custodial SDIRA is very simple. Investors simply open an SDIRA custodial account with a custodian bank under their own name.
Checkbook IRAs give SDIRA owners complete control over their money and the custodian plays a passive role only. The main function of custodians in checkbook IRAs isn’t to hold owners’ money but to simply move it per the owners’ instructions.
There are two kinds of checkbook SDIRAs: IRA LLCs and IRA Trusts. Unlike custodial SDIRAs, checkbook IRAs are set up under the name of the IRA itself, not the owner’s name.
What Is a Self-Directed IRA LLC?
It’s an individual retirement account that provides total control over IRA-related investment activities, in accordance with the internal revenue code. Self-directed IRA LLCs also give IRA investors total control over their IRA investments.
The LLC part of the name stands for Limited Liability Company. An IRA LLC is a business entity that an IRA owns, which gives it the same benefits as IRAs.
LLCs are legal entities through which IRA investors completely control their IRA investments. Under this setup, an IRA investor or an appointed custodian can manage such LLCs.
Part of the manager’s responsibilities is keeping the LLC’s money in an LLC bank account of the manager’s choosing. Any LLC-related transaction takes place from that LLC bank account.
When IRA investors convert their current 401(k)s or IRAs to a checkbook control IRA, such as a self-directed IRA LLC, they don’t pay taxes or penalties. This is because these accounts enjoy the same preferred tax status all IRAs enjoy.
Self-Directed IRA LLC with Checkbook Control
A self-directed IRA LLC is also called a checkbook control IRA because of the complete control it gives to IRA investors. The level of control they enjoy over their LLCs’ investments is practically the same as with their personal checkbooks.
As mentioned earlier, IRA investors can invest in just about any type of asset, provided IRA rules allow them. These include:
- Mutual Funds
- Private Equity,
- Private Loans,
- Real Estate,
- Tax Liens and Deeds,
- Venture Capital, and
- Anything else IRA rules allow.
Self-Directed IRA LLC Rules
A self-directed IRA LLC must register with the state in which it is located. As such, it’ll incur filing and annual renewal fees, among others.
Here are the fees that some states levy on self-directed IRA LLCs:
- California: A $70 establishment fee and an annual maintaining fee of $800
- Delaware: A $90 establishment fee and an annual maintaining fee of $300
- Florida: A $125 establishment fee and around $140 in annual fees
- Illinois: A $500 establishment fee and an annual maintaining fee of $250
- Maryland: A $100 establishment fee and an annual maintaining fee of $300
- Massachusetts: A $500 establishment fee and an annual maintaining fee of $500
- Nevada: A $75 establishment fee and an annual maintaining fee that can reach $500
- Tennessee: A $300 establishment fee and over $300 in annual maintaining fees
Each state requires that LLCs have a registered/statutory agent with a physical mailing address in the same state. This agent can be an actual person or a legal entity, whose registered address is considered as public record.
IRA investors that live in the same state as their IRA LLCs can become their LLCs agents. If the IRA investors and their IRA LLCs are in different states, investors need to hire officially registered agents in their IRA LLCs’ states.
Self-directed IRA LLCs also must comply with the reporting requirements of Secretaries of States where they’re registered in. And in some very strict states, delinquent LLCs face very stiff penalties for not complying with reporting requirements.
And finally, every state has different rules regarding “foreign” LLC investments. Depending on which state they plan to invest in, LLCs investing outside of their own states may need to register with the states where they plan to invest in.
Self-Directed IRA LLCs vs. SDIRA Trusts
A SDIRA Trust is very similar to an IRA LLC, being another kind of self-directed IRA. In particular, an SDIRA Trust also allows IRA investors total control over their IRAs’ assets.
Despite their very striking similarity to each other, an IRA LLC and an IRA Trust (SDIRA Trust) have differences most IRA investors tend to overlook. One of them is state registration.
As mentioned earlier, IRA LLCs need to register with the states they’re located in. And if they plan to invest in states other than their own, they may also have to register in those states as well.
SDIRA Trusts don’t need to register with State Secretaries’ offices. This results in another key difference: states’ reporting requirements.
Because they don’t have to register, SDIRA Trusts also don’t need to comply with their states’ reporting requirements.
On the other hand, Self-Directed IRA LLCs need to register with their own states and with other states. As a result, IRA LLCs need to comply with reporting requirements while SDIRA Trusts don’t have to.
Finally, SDIRA Trusts provide privacy to IRA investors that IRA LLCs don’t. Because they don’t need to register with states, their owners’ and agents’ personal information aren’t public records.
IRA LLCs don’t provide such privacy. Because they need to register with their own and in some cases, other states, their owners’ and agents’ information is a matter of public record.
The Only Self-Directed IRA LLC Benefit
SDIRA Trusts have more advantages over IRA LLCs but there’s one situation when a self-directed IRA LLC may be the better option. That situation involves real estate investments.
Because some states aren’t keen on SDIRA Trust real estate investments, getting property insurance for such investments can be problematic, unlike with IRA LLC real estate investments.
A self-directed IRA LLC is also more appropriate for real estate investments because of better access to financing. Because self-directed IRA LLCs are legal entities with juridical personalities, they can more easily get financing for real estate investments compared to a SDIRA Trust.
Self-Directed Traditional and Roth IRAs offer more investment options to investors than their managed counterparts. And between a self-directed IRA LLC and a SDIRA Trust, the latter offers more practical advantages except when it comes to real estate investments.
Given your IRA’s current or planned portfolio composition, do you think you should go for a self-directed IRA LLC? Let us know in the comments section below.