A Self-Directed Roth 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 tax-free! The IRS only describes the type of investments that are prohibited, which are very few. Self-Directed Roth IRA investments can range from stocks and bonds to real estate and cryptocurrencies.
The following are some examples of Self-Directed Roth IRA investments:
- Residential or commercial real estate
- Domestic or Foreign real estate
- Raw land
- Foreclosure property
- Mortgage pools
- Private loans
- Tax liens
- Private businesses
- Limited Liability Companies
- Limited Liability Partnerships
- Private placements
- Precious metals and certain coins
- stocks, bonds, mutual funds
- Foreign currencies
The IRS permits using a Self-Directed Roth IRA LLC to purchase real estate or raw land. Real estate is the most popular investment made with a Self-Directed Roth IRA. Making a real estate investment is as simple as writing a check. Since you are the manager of your Self-Directed Roth IRA LLC, you have the authority to make investment decisions on behalf of your IRA. One major advantage of purchasing real estate with a Self-Directed Roth IRA is that all gains are tax-free and will not be subject to tax upon withdrawal or distribution. This is because unlike traditional IRAs, you are generally not subject to any tax upon taking Roth IRA distributions once you reach the age of 59 1/2.
For example, if you purchased a piece of property with your Self-Directed IRA for $75,000 and later sold the property for $150,000, the $75,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.
The IRS permits the purchase of tax liens and tax deeds with a Self-Directed Roth IRA LLC. By using a Self-Directed Roth IRA LLC to purchase tax-liens or tax deeds, your profits will grow tax-free!
More importantly, with a Self-Directed Roth IRA LLC, you, as the manager of the IRA LLC, will have “checkbook control” over your Roth IRA funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!
Loans and Notes
The IRS permits the use of Roth IRA funds to make loans or purchase notes from third parties. By using a Self-Directed Roth IRA LLC to make loans or purchase notes from third parties, all interest payments received would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the Roth IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all interest received would be tax-free.
For example, if you used a Self-Directed Roth IRA LLC to loan money to a friend, all interest received would flow back into your Roth IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.
With a Self-Directed Roth IRA LLC you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using Roth IRA funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512. The retirement tax professionals at the IRA Financial Group will work with you to develop the most tax-efficient structure for using your IRA to invest in a private business.
Precious Metals and Coins
Internal Revenue Code Section 408(m) lists the type of precious metals and coins that are permitted investments using IRA funds:
- One, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure) and be legal tender coins.
- one ounce silver coins minted by the Treasury Department;
- any coin issued under the laws of any state;
- a platinum coin described in 31 USCS 5112(k) ; and
- gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).
By using a self-directed Roth IRA or Solo 401(k) plan to purchase IRS approved precious metals or coins, one is able to seemingly better diversify their retirement portfolio as well as generate tax-free gains on the sale of the metals or coins.
Internal Revenue Code Section 408(m) identifies the types of coins and precious metals that may be purchased using a Self-Directed Roth IRA.
Section 408(m)(3)(A) lists the type of coins that may be purchased with retirement funds, which generally are American Eagle and U.S. state minted coins of a certain finesse. The Technical and Miscellaneous Revenue Act of 1988 also allowed for the purchase of state minted coins. Whereas, IRC 408(m)(3)(B), refers to gold, silver, or palladium bullion of a certain finesse which must be held in the “physical possession” of a U.S. trustee, as described under subsection IRC 408(a), and which essentially refers to a bank, financial institution, depository, or approved trust company.
IRA Financial Group suggests that all clients seeking to purchase IRS approved coins or precious metals/bullion with their retirement account hold them in the physical possession of a trustee, such as a depository. The IRS, as outlined in IRC 408(m)(3)(B) clearly does not allow any individual to hold IRS approved coins or precious metals/bullion personally, such as in their house. However, the Technical and Miscellaneous Revenue Act of 1988 Senate amendment seems to suggest that state minted coins can be held by a person other than the IRA holder, without referencing the term trustee, as defined in IRC Section 408. Nevertheless, we recommend that IRS approved coins should not be held personally by the IRA holder and should be held at a trustee, as defined in IRC 408.
For Self-Directed IRA LLC or self-directed Solo 401(k) plan clients seeking to hold IRS approved coins and precious metals at a bank safe deposit box, we believe that this position has some risk, as the IRS has not offered any formal guidance. In the case of a Self-Directed IRA, if the bank where the safe deposit box is not the trustee of the IRA that purchased the metals or coins, an argument can be made that the metals or coins would not satisfy the physical possession definition outlined in IRC section 408 since the bank could not serve as the IRA trustee. This argument would seemingly not have much strength in the case of a Solo 401(k) plan, where an individual or individuals associated with the adopting employer would likely serve as the plan trustee and not the bank holding the plan’s assets, thus not creating any trustee relationship between the bank and the plan, but still satisfying the definition of a trustee under IRC 408.
In addition, the language in IRC Section 408(m)(3)(B) uses the term “a” trustee” and not the “the” trustee” offering some support for the position that the metals/bullion can be held at any trustee, as defined under IRC 408(a) and not just the trustee of the IRA holding the metals. This would make sense since a depository is considered a trustee pursuant to IRC 408(a), but may not be the actual trustee of the IRA that owns the coins or bullion/precious metals. Nevertheless, the safest approaching to holding IRS approved coins or bullion/precious metals is at a trustee, as defined in IRC Section 408, such as an approved depository. One thing that is clear, is the one should not ever hold IRS approved coins or precious metals/bullion personally.
In general, the rules surrounding the ownership and possession of IRS precious metals or coins are complicated. Therefore, it is crucial that one works with a firm, such as IRA Financial Group, that has the expertise and resources to help one navigate the IRS rules without being preoccupied with selling you coins or precious metals.
The advantage of using a Self-Directed Roth IRA LLC with “checkbook control” to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the LLC at a financial organization (at any local bank) safe deposit box eliminating depository fees.
The IRS does not prevent the use of Roth IRA funds to purchase foreign currencies, including Iraqi Dinars. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.
Purchasing foreign currency, such as the Iraqi Dinar, with a Self-Directed Roth IRA LLC is as easy as writing a check. As manager of the Roth IRA LLC, you will have “checkbook control” over your Roth IRA funds, providing you with the ability to make investments without requiring custodian consent. In addition, the foreign currency notes, including Iraqi Dinars, can be held in the name of the LLC at a financial organization (any local bank) safe deposit box eliminating depository fees.
By using a Self-Directed Roth IRA LLC to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-free!
Stocks, Bonds, Mutual Funds, CDs
In addition to non-traditional investments such as real estate, a Self-Directed Roth IRA LLC may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Self-Directed Roth IRA LLC with “checkbook control” is that you are not limited to just making these types of investments. With a Self-Directed Roth IRA LLC with “checkbook control” you can open a stock trading account with any financial institution. By using a Self-Directed Roth IRA LLC, all income and gains will flow-through to your Roth IRA tax-free!
These are just a sampling of Self-Directed Roth IRA investments. Your investment opportunities are virtually endless!