Individual retirement accounts, or IRAs, exist in many forms. In general, if you have income from working for yourself or someone else, you may set up and contribute to an IRA. The major advantage of using a traditional IRA is that contributions are tax-deductible, whereas, a Roth IRA offers tax-free income and gains. Furthermore, IRA funds can be used for any purpose, including investing in real estate, tax liens, stock, bonds, gold, and even cryptocurrencies. Alternative investments, such as real estate, have always been permitted in IRAs, but few people seemed to know about this option until the last several years. This is because large financial institutions have little incentive to recommend something other than stocks, bonds or mutual funds, which bring in extremely profitable commission and fees for them.
The Self-Directed IRAis the vehicle that is best known for allowing investors to use IRA funds to buy alternative assets, such as real estate. In the last several years, the number of Self-Directed IRA accounts has grown significantly. The significant increase in the number of Self-Directed IRAs formed can be largely attributed to the shaky performance of the stock market, the growth of the real estate market, the lack of liquidity in the small business loan market, and the increase in media coverage by the Wall Street Journal, CNBC, The New York Times, Forbes, and some of the other major financial media companies. It is not entirely uncommon for a tax or financial advisor to have not heard of Self-Directed IRAs, given the fact that the traditional financial institutions have concealed their benefits due to their focus on selling the more profitable financial products, such as equities, bonds, and mutual funds. In the past few years, the movement toward nontraditional investments has picked up steam, specifically real estate and cryptocurrencies in 2017.
According to a McKinsey & Company report, The Mainstreaming of Alternative Investments, global alternatives reached record levels of $6.5 trillion by the end of 2011, having grown at a five-year rate of over seven times that of traditional asset classes. And according to a variety of respected researchers, including those from the Federal Reserve Board, the IRS, and the National Association of Government Defined Contribution Administrators, even institutional investors expect to have 28 percent of their portfolios allocated to alternative investments by 2013, up 26 percent from 2010. The numbers are even higher today.
Why Use a Self-Directed IRA to Make Alternative Asset Investments?
The term alternative assets generally includes any non-traditional asset class and covers investments that do not trade publicly on an organized exchange. This includes any investment outside of public stocks, bonds, money markets or cash. In general, speaking, alternative investments are typically complex, illiquid, and more difficult to value than traditional assets. They typically offer the opportunity to earn investment returns in excess of those generally available in the traditional financial markets.
The Internal Revenue Code does not describe what a Self-Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. In general, as long as the Self-Directed IRA does not purchase life insurance, collectibles, or engage in a prohibited transaction outlined in IRC 4975, then the investment can be made. The advantage of using a Self-Directed IRA to make alternative asset investments, such as real estate, notes, private businesses, hedge funds, precious metals, and cryptocurrencies, is that it is perceived to provide a great way to diversify your retirement portfolio, get some protection from inflation, as well as have the ability to invest in what you know, understand, and love, such as real estate or cryptocurrencies.
The Self-Directed IRA LLC Solution
The Self-Directed IRA LLC structure was affirmed in the Tax Court case Swanson v. Commissioner, 106 T.C. 76 (1996), and further confirmed by the IRS in Field Service Advisory (FSA) 200128011 (April 6, 2001).
A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. Tired of being forced to invest in stocks or mutual funds? Have an investment opportunity, such as real estate or a business investment that you would love to make with your IRA funds? Then the Self-Directed IRA LLC is your solution. In addition to the tremendous IRA benefits (tax-free profits, tax deductions, asset protection and estate planning), the Self-Directed IRA LLC allows you to invest tax-free in investments that you know and understand. Aside from life insurance, collectibles and certain "prohibited transaction" investments outlined in Internal Revenue Code Section 4975, Self-Directed IRAs can invest in most commonly made investments, including real estate, private business entities, public stocks, private stocks, and commercial paper.
The Self-Directed IRA LLC, allows the IRA holder to:
- Use the same Self-Directed IRA LLC to purchase domestic and foreign real estate, private mortgages, gold and stocks, bonds and mutual funds inside the same plan and generate profits tax-free
- Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check and generate profits tax-free
- Buy your retirement home or vacation property now at today’s prices, rent it out, and then move in at the age of 59 1/2!
- Diversify your retirement portfolio and invest in almost any type of investment tax-free
How to use a Self-Directed IRA LLC to Make Investments?
1.Establish Self-Directed IRA LLC with IRA Financial Trust.
2. Your IRA assets/cash can be rolled over to IRA Financial Trust tax-free.
3. A special purpose LLC will be established that will be wholly owned by the IRA. The IRA assets/cash will then be transferred to the LLC tax-free in exchange for 100% interest in the LLC.
4. You, as manager of the LLC, will open a bank account for the LLC at any local bank. IRA Financial will draft LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.
5. You, as manager of the LLC, will then have “Checkbook control” over all the assets/funds in the IRA LLC to make the alternative asset investment.
6. Since the LLC will be owned by one IRA, the LLC will be treated as a disregarded entity for federal income tax purposes and no federal income tax return will be required to be filed. All income and gain from the real estate investments will flow back to the IRA without tax.
Advantages of the “Checkbook Control” Self-Directed IRA LLC
- Invest in what you know and understand tax-free, such as real estate, precious metals, tax liens, hard money loans, private businesses, and much more.
- Take control of your IRA assets and make investments from a local bank account.
- Making an investment is as easy as writing a check or executing a wire transfer
- Save on custodian fees – no transaction or annual account balance fees.
- Invest with limited liability protection.
- Asset & creditor protection.
The IRA Financial Group will take care of the entire set-up of your Self-Directed IRA LLC “Checkbook Control” structure. The whole process can be handled by phone, email, fax, or mail and typically takes between 7-21 days to complete, the timing largely depending on the state of formation and the custodian holding your retirement funds. Our IRA experts and tax and ERISA professionals are on-site greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed IRA LLC "Checkbook Control" structure. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.
To learn more about the Self-Directed IRA LLC structure, contact one of our IRA Professionals at 800-IRA-0646 today!