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5 Steps to Understanding How a Self-Directed IRA Works

A self-directed IRA is a type of IRA structure that allows the IRA holder (you) to have more control over your retirement funds. Unknown to some, not all self-directed IRAs are the same.  The self-directed IRA is the most popular way to use retirement funds to make alternative asset investments, such as real estate, notes, cryptocurrencies, gold, investment funds, private businesses, and much more without tax or penalty.

There are two main types of self-directed IRA: (i) custodian controlled and (ii) checkbook control IRA LLC.

With the custodian controlled self-directed IRA, a special self directed IRA custodian will serve as the custodian of the IRA and allow you to make alternative asset investments, such as real estate. The IRA custodian will then invest the IRA funds at the sole direction of the client.  The investment will be held in the name of the IRA custodian.  The IRA custodian will be responsible for making all payments regarding the IRA investment, including paying expenses.  Whereas, in the case of a checkbook control IRA, a special purpose limited liability company (“LLC”) is established which will be owned by the IRA and managed by the IRA holder (you).  The “checkbook control” self-directed IRA allows one to eliminate certain costs and delays often associated with using a full -service IRA custodian.  The Checkbook IRA LLC structure allows the investor to act quickly when the right investment opportunity presents itself cost effectively and without delay.

The following are the primary advantages of establishing a self-directed IRA.

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

We will establish a LLC that will be owned by your IRA.  Below is a step-by-step breakdown of how the set-up will work:

  1. Select an IRA custodian to establish self-directed IRA.  You should make sure that the custodian you choose allows for both types of self-directed IRAs
  2. Your IRA assets/cash can be rolled over to the IRA custodian tax-free.  In addition, you can make IRA contributions up to $5500 or $6500 if over the age of 50.
  3. A special purpose LLC will be established that will ultimately be owned 100% by the IRA  and managed by the IRA holder. It is recommended that the LLC be opened in the state where the IRA asset will be located, especially in the case of real estate.
  4. You as manager of the LLC will open a bank account for the LLC at any local bank.
  5. The IRA assets/cash will then be transferred to the LLC tax-free in exchange for 100% interest in the LLC

You as manager of the LLC will then have checkbook control over all the assets/funds in the IRA LLC to make the crypto investment. 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 required to be filed. All income and gain from the real estate investments will flow back to the IRA without tax.

Adam Bergman is the founder of the IRA Financial Group & IRA Financial Trust Company.  For more information on this topic please call 800-472-0646.

Posted in Self-Directed IRA