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HOW TO SELF DIRECT YOUR IRA

We’ll help match you with an SDIRA custodian that aligns with your investment goals. Since SDIRA custodians are prohibited from providing investment advice, we act as your trusted resource—guiding you through the process, ensuring IRS compliance, and coordinating with your custodian to secure final approval before any transaction is completed.

SELF-DIRECTED IRA LLC (SDIRA LLC)

What is a Self-Directed IRA?

A Self-Directed IRA (Individual Retirement Account), also known as an SDIRA, is a type of retirement account that allows account holders the flexibility to invest in a broader range of assets such as real estate and making promissory notes. A SDIRA can be set up as either a Traditional, Roth, SEP, SIMPLE, ESA, or HSA and account holders are allowed to have multiple types. Traditional and Roth SDIRAs are the most common. Learn more about Traditional and Roth IRA's. Key features of a SDIRA include:


  1. Investment Flexibility: Account holders have the freedom to choose from a wide array of investment options beyond the traditional stocks, bonds, and mutual funds.
  2. Control: Investors have greater control over where their retirement funds are allocated, allowing them to pursue investment strategies that align with their financial goals and risk tolerance.
  3. Diversification: By diversifying their retirement portfolio with alternative assets, investors can potentially mitigate risk and enhance returns.
  4. Tax Advantages: Contributions to Traditional SDIRAs may be tax-deductible, and investment gains grow tax-deferred until distributions are taken during retirement. Income and gains from Roth IRA investments grow tax-free.


The IRS allows rollovers and transfers from qualifying retirement plans tax-free and penalty-free into SDIRA accounts. This includes:


  • Traditional IRA
  • Roth IRA
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit-sharing plans
  • Money purchase plans
  • Keoghs/Qualified Retirement Plans (QRPs)


If you're still actively employed by the company sponsoring the 401(k) plan, you may not be eligible to rollover funds from the plan unless certain conditions are met. Qualifying events include leaving your job, retiring, or reaching the plan's designated retirement age. If you're eligible for a rollover, you can typically choose between a direct rollover, where funds are transferred directly from the 401(k) plan to the IRA custodian, or an indirect rollover, where you receive the funds personally and then have 60 days to deposit them into an IRA to avoid taxes and penalties. 

What is a Self-Directed IRA LLC with Checkbook Control?

An SDIRA LLC is a specially structured Limited Liability Company owned exclusively by your SDIRA accounts and managed by you, the account holder, or any third party of your choosing. Your SDIRA custodian grants you Power of Attorney through an operating agreement, providing you with complete autonomy over the SDIRA LLC. This includes establishing bank and investment accounts in the name of the SDIRA LLC. At your direction, the SDIRA custodian will transfer your retirement funds into your SDIRA LLC bank account(s).


Typically, a separate bank account is established for each SDIRA to avoid commingling funds from different retirement plans. This ensures proper reporting and structure when distributions are allowable. As the manager of the SDIRA LLC, you have complete control of the bank accounts, enabling you to fund investments effortlessly by writing checks, wiring funds, using debit cards, etc. This is known as an SDIRA LLC with Checkbook Control. Benefits of using an LLC include:


  1. Limited Liability Protection: The financial liability or exposure of its members are typically limited to a fixed sum, most commonly the value of a investment. If a company with limited liability is sued, then the plaintiffs are suing the company, not its owners or investors. In addition, members are generally not liable for the company's debts and liabilities. This means personal assets are usually protected if the business incurs debt or is sued.
  2. Pass-Through Taxation: LLCs typically enjoy pass-through taxation, where the company's income is reported on the owners' personal tax returns, avoiding double taxation (at both the corporate and individual levels). Since the SDIRA LLC is owned by retirement accounts, there is no federal tax liability unless early distributions are made.
  3. Flexibility in Management: LLCs can be treated as a disregarded entity (owned by one owner) or treated as a partnership if owned by two or more owners.
  4. Fewer Formalities: Compared to corporations, LLCs have fewer mandatory formalities, such as regular board meetings and extensive record keeping requirements, making them easier to operate.
  5. Flexibility in Ownership: LLCs can have an unlimited number of members, including individuals, corporations, other LLCs, and foreign entities. There are no restrictions on the type or number of members.
  6. Ease of Formation and Maintenance: LLCs are relatively easy and inexpensive to set up and maintain compared to corporations. Many states have streamlined processes for forming and maintaining LLCs.
  7. Flexible Tax Treatment:  LLCs can choose how they are taxed. By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. A single-member SDIRA LLC is not required to file a tax return. However, a multi-member LLC must file a partnership tax return (IRS Form 1065) but does not pay federal tax unless an early distribution is made. Any tax filings should be handled through your SDIRA custodian to ensure proper compliance. 
  8. Enhanced Privacy: In some states, LLCs can provide a level of privacy protection for their owners, as they may not require the names of members to be publicly disclosed in the formation documents.


These benefits make LLCs an attractive entity for SDIRA providing a balance of liability protection, tax flexibility, and operational simplicity. Become a member today and we'll help you establish a SDIRA LLC with Checkbook Control.

What types of real estate can I purchase with my SDIRA LLC?

With a SDIRA LLC, you can invest in various types of real estate properties, offering a wide range of investment opportunities. The following are examples of approved real estate investments: 


  • Single-family homes
  • Multi-family homes
  • Apartment buildings
  • Condos/Townhomes
  • Commercial properties, such as hotels, office complexes, and retail stores
  • Vacant land 
  • Real estate developments
  • Boat slips
  • International property
  • Mortgage and promissory notes
  • Hard money loans
  • Real estate purchase options
  • Tax lien certificates
  • Tax deeds
  • Real Estate Investment Trusts
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private Placements
  • Real Estate Syndications and Joint Ventures

Frequently Asked Questions

IRA law does not prohibit investing retirement funds in real estate, but many custodians and trustees do not support it due to lacking infrastructure and inability to monetization it. Their primary focus and fee structure revolve around traditional securities such as stocks, bonds, and mutual funds, which do not generate fees through real estate transactions.


We can partner you with a IRA custodian that allows investments in real estate.


YES, if properly structured, you may invest your personal funds in the same investment as your retirement funds along with the funds of friends, family and others. We can help structure transactions to ensure compliance with IRS laws and regulations.


The "50% rule," also known as the "disqualified person rule," typically applies when a retirement account invests in an existing entity. This rule is part of the IRC § 4975 (e)(2)(G) regulations to prevent self-dealing and conflict of interest. The rule states that a retirement funds cannot be invested into an existing entity in which a combined ownership of 50% of more is held by Disqualified Persons.

 
For new entities, this rule can be avoided if the initial investment is structured correctly. Since a new entity has no existing ownership, the investment can be designed to comply with IRS regulations, avoiding prohibited transactions.  


Real estate owned by an SDIRA LLC must be held solely for investment purposes. The IRA owner and disqualified persons cannot live in or personally benefit from the property. Any income generated from the property must be paid directly to the SDIRA LLC or its owners. 


We can help you structure a new entity to avoid investing a a prohibited transaction. 


 A retirement account can be transferred to a different custodian using one of the following methods:


  1. Trustee-to-Trustee Transfer: This tax-free method involves moving retirement funds directly from the current custodian to a self-directed IRA custodian without the account owner handling the funds. For instance, if your brokerage IRA at Fidelity is transferred directly to a self-directed IRA custodian, no tax reporting or withholding is required.
  2. Direct Rollover: This method transfers funds directly from a 401(k), 403(b), or other employer account to a self-directed IRA custodian without the account owner receiving the funds. A Form 1099-R is issued with distribution code H in box 7, indicating a tax-free direct rollover.
  3. 60-Day Rollover: This occurs when funds are distributed to you from your current retirement account and must be redeposited into a new retirement account within 60 days. If not redeposited within the timeframe, the distribution may be subject to taxes and penalties. Additionally, your custodian may withhold 20% for taxes, and only one 60-day rollover per account is allowed per year. Trustee-to-trustee transfers or direct rollovers are generally preferred for their simplicity and tax advantages.


View the IRS rollover chart for more details.


Yes! Since your SDIRA LLC is designed exclusively for investing retirement funds, you cannot personally guarantee a loan, as this would be a prohibited transaction by extending personal credit for the plan's investments. Instead, any loans made to your SDIRA LLC must be non-recourse, meaning the real estate itself serves as collateral.


We can help facilitate a non-recourse loan for your SDIRA LLC through our network of SDIRA LLC members or FDIC-insured banks that offer non-recourse lending options.


A self-dealing prohibited transaction occurs when the IRA owner or other disqualified persons personally benefit from the IRA's investments. It is also known as a conflict-of-interest prohibited transaction.  The specific definition of a self-dealing prohibited transaction from IRC § 4975 (c)(1) is when an IRA engages in a direct or indirect:

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; or

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.


SDIRA investments must be for the exclusive benefit of the SDIRA and not for personal use or financial gain of the SDIRA account holder or any disqualified persons. The IRS defines disqualified persons as lineal descendants, ascendants, and their spouses. Under Internal Revenue Code Section 4975, a disqualified person does not include siblings (brothers and sisters) or aunts, uncles, and cousins of the IRA owner.  


If you're interested in a property personally, we can assist. Allow one of our other SDIRA LLC to purchase the property for you and provide favorable terms and feel free to offer the same service to other members as well. 


The IRS does not allow an IRA owner or a disqualified person from performing any services on real estate owned by a SDIRA LLC they are affiliated with as it is considered a prohibited transaction. This includes property management services as well as labor. Best practice is to have property owned by a SDIRA managed by a third-party to avoid prohibited transactions. 


Learn more about our Property Management services.


A disqualified person may not receive any financial compensation such as real estate commissions, management, or other fees related to an investment made by their SDIRA LLC as the transaction  would constitute a self-dealing Prohibited Transaction.


We are able to assist with all real estate and management services for your SDIRA LLC.


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Disclaimer: The information provided herein is for educational and informational purposes and shall not be construed as financial advice.


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