Exploring your retirement options can be frustrating. Whether you have a fund through your work, a bank trust, or an IRA custodian, there is always a middle man to oversee and approve your investments. If you are looking for complete checkbook control when it comes to your IRA funds, there is a way to become manager of your own fund. With an SDIRA LLC, or a limited liability company, you can take control of your IRA account.
Forming an LLC can be very beneficial for a self-directed IRA owner, depending on your alternative asset knowledge and your investments. If you are interested in opening an LLC with your account, here are some helpful tips on what a limited liability company is and whether it would be right for your retirement fund.
What is an SDIRA LLC?
A self-directed limited liability company is a distinct legal entity. An LLC is essentially a company owned by your IRA, and you are the sole manager. LLC owners, or ‘members’ have complete checkbook control, meaning you have the authority to sign over funds from the account. This type of account can be helpful in situations where you need immediate access to your retirement funds, like when purchasing real estate investments.
After the LLC is formed, you become the sole owner and owner of the LLC. Your SDIRA becomes a business account. It is used to fund your IRA assets, and everything is deposited through that account. By electing yourself as management, you become the checkbook holder, and can access your funds without having to go through a custodian.
An LLC investment gives you easy access to your funds to react quickly to purchase property, or other assets. You receive a business checking account in your LLC’s name, a tax ID number (EIN), and Articles of Organization for the LLC. As you consider this type of investment, it’s important to perform your due diligence and decide if this method is the right one for you.
How Can an LLC Benefit You?
Owning an LLC has its perks, especially when it comes to real estate investments. One of the most convenient benefits is the ability to write out your own checks. Sometimes the real estate market requires a quick buy, and if you want to build your IRA assets, it’s a good idea to have immediate access to your funds. Having an LLC allows you to write checks in the name of your IRA, making it easier to make the purchases you want.
If your SDIRA owns multiple properties, another benefit to owning an LLC is the cut-down on additional costs. Rather than paying multiple transaction and check writing fees associated with owning a self-directed account, you are only charged for one, rather than all of them. This cuts down on unnecessary costs, especially if you plan on building up a real estate portfolio. In combination with checkbook control, another perk is the reduction of custodian involvement. Owning an LLC gives you more control over your purchases, funds, and overall management of your IRA assets.
Aside from the financial benefits, owning an LLC can provide some security benefits. With a limited liability company, your account has added bankruptcy protection. In addition, owning the company gives your IRA asset protection in the case of any incidents, and protects against certain liabilities that may occur on your property. While many of these perks are legitimate reasons to open an LLC, it’s crucial to be aware of the certain issues that may occur if proper protocol isn’t followed.
What to Avoid When Opening an LLC
LLC accounts follow a strict set of rules put in place by the IRS and the Department of Labor. When opening an account, IRA owners should be aware of all the steps that must be taken in order to avoid tax penalties or account disqualification. In addition to writing up an agreement, you must be sure that you perform your due diligence when it comes to both SDIRA and LLC rules to grow your retirement without distress.
The first step to opening an LLC should be to seek legal advice. An attorney can provide information on the strict rules set in place, and help you make an informed choice. To avoid any entanglements, the LLC must be set up properly.
The most important and easiest pitfall is to avoid any prohibited transactions that can lead to any unintended tax penalties or the disqualification of your account. No compensation can be paid to the account manager, and as the sole manager, this means the IRA account holder. This rule applies to any “disqualified persons” as well. Additionally, this matter should be stated clearly in your LLC agreement. The agreement should also mention information regarding disallowed investments, as well as triggers for UBIT and UDFI.
In the case of UBIT and UDFI taxes, if your LLC debt finances a property, you must pay these taxes using a specific form. Also, the LLC must distribute dividends to owners based on the percentage of ownership outlined in the agreement. Again, the best move before setting up an LLC would be to seek legal advice to be sure your account is set up properly.
Building Retirement Funds for The Future
When purchasing alternative investments with an IRA-owned LLC, it’s crucial to perform your due diligence. If done properly, owning a limited liability company through your IRA can provide you with extra security and cut back on costs. LLC investments can put the checkbook into your hands, giving you complete control of your financial investments. With the future at your fingertips, you can build a solid nest egg for your retirement.