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:
- Investment Flexibility: Account holders have the freedom to choose from a wide array of investment options beyond the traditional stocks, bonds, and mutual funds.
- 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.
- Diversification: By diversifying their retirement portfolio with alternative assets, investors can potentially mitigate risk and enhance returns.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
