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Buying Stocks in a Self-Directed IRA

buying stocks with a brokerage account
5 Minute Read

Last Updated on April 3, 2020

As you probably know, you can invest in just about anything with a Self-Directed IRA. Here at IRA Financial, we stress the importance of properly diversifying your holdings. Generally, we tout the benefits of alternative asset investments in your IRA. These include real estate, precious metals, tax liens and cryptocurrencies. Today, our focus is on a traditional asset, stocks! Stocks are an essential part of everyone’s retirement plan. Over the last several years, we’ve seen huge gains in the stock markets. Of course, that all came crashing down due to the current pandemic that’s spread across the globe. However, now may be a good time to look at stocks in your Self-Directed IRA. It seems we have bottomed out, and the markets can only go up right now. Using a brokerage account to invest in stocks with an IRA is very tax-advantageous.

Key Points
  • A Brokerage Account allows you to buy and sell stocks
  • A Self-Directed IRA can be used for traditional and alternative investments
  • Checkbook Control gives you the freedom to make any investment you want

What is a Brokerage Account?

A brokerage account is a type of investment account that one can open with a brokerage firm.  The brokerage account can be opened by an individual or an entity, such as an LLC. It can be funded by depositing money into this account by writing a check, wiring money, or a fund transfer. Once funds have been deposited, the available funds can be used to buy or sell different types of investment securities, such as individual stocks, exchange traded funds (ETFs), mutual funds, bonds, etc.

A brokerage account is the only way one can invest in traditional securities.  There is no limit on the number of brokerage accounts you can open.  One should be aware of the financial strength of your broker and the extent of its Securities Investor Protection Corporation or SIPC coverage. This is the insurance that compensates investors if their stock brokerage firm goes bankrupt.

The “big five brokerages” is the term commonly used to describe the five largest brokerage houses in the nation by the number of customers and assets: TD Ameritrade, E-Trade, Fidelity Investments, Vanguard, and Charles Schwab.

Opening a Brokerage Account with a Self-Directed IRA LLC

When making an investment with a Self-Directed IRA LLC, it is important to remember that the investment should be made in the name of the LLC and not the IRA, which is the owner of the LLC.

A single member limited liability company (“LLC”) owned by an IRA is treated as a disregarded entity for Federal Income Tax purposes.  In other words, the LLC is treated as an “invisible” entity for tax purposes and the sole owner of the LLC, the IRA, is treated as the owner.  Accordingly, when opening a brokerage account for a single member LLC owned by an IRA, the account should be opened in the name of the LLC. However, from a Federal Income tax perspective, the LLC is ignored for tax purposes and the IRA is treated as the sole owner of the account.  Therefore, even though the account is opened in the name of the LLC, from a tax standpoint, the IRS is the beneficial owner of the account, generally resulting in tax-exempt treatment for all income and gains earned by the IRA LLC.

Best Brokerage Firm for Self-Directed IRA Investors

In general, one can open a brokerage account using a Self-Directed IRA LLC with any brokerage firm.  However, TD Ameritrade is the only brokerage firm that has a specific application for Self-Directed IRA investors.  The advantage of opening a brokerage account for your IRA LLC with TD Ameritrade is that the tax reporting on the account would be repressed. This is because TD Ameritrade is aware that the beneficial owner of the LLC is a tax-exempt IRA.

Rules of the Self-Directed IRA to Buy Stocks

Above all else, it is important that the IRA is the entity that benefits from an investment. In no way should an IRA benefit you (the IRA owner) or any other disqualified person. A disqualified person includes your spouse, children, grandchildren, parents, grandparents and entities controlled by such persons. As soon as someone other than the IRA gains something by an IRA investment, the IRA will be disqualified. This means you lose out on all the tax benefits of the plan. Traditional IRAs benefit with tax-deferred savings (with an upfront tax break). On the other hand, a Roth Self-Directed IRA offers tax-free withdrawals during retirement (no upfront tax break).

The other part of the prohibited transaction rules is the types of investments not allowed by the IRS. Essentially, these include life insurance, most collectibles and, as mentioned above, transactions involving a disqualified person. All public stocks and mutual funds are fair game. Therefore, you can invest in any stock with your brokerage account in a Self-Directed IRA.

Checkbook Control

The other main advantage of a Self-Directed IRA is the checkbook control structure. The use of an LLC allows the IRA holder the ability to make IRS-approved investments more quickly and with less fees.  The beauty of a Self-Directed IRA LLC is that, as manager of the IRA LLC, you will have total control over the assets. You have the choice to make traditional investments, such as stocks and mutual funds, as well as alternative assets, such as real estate. We’ve always stressed that it’s your money, invest it the way you see fit! No need to ever ask IRA Financial when you want to make an investment.

Opening a Brokerage Account in a Self-Directed IRA

  • Establish Self-Directed IRA with an IRA custodian or trust company that allows for alternative investments, such as IRA Financial Trust.
  • Transfer (or rollover) your retirement assets that you will be using for investing tax-free to your new IRA custodian.
  • A special purpose LLC will be established that will be wholly owned by the IRA.
  • Establish a brokerage account for your LLC at any brokerage firm. You will need to have the LLC article of formation, a Tax ID#, as well as a Self-Directed IRA LLC operating agreement. The brokerage account should be opened in the name of the LLC and not the IRA. TD Ameritrade has a special brokerage account for Self-Directed IRA LLC investors.
  • Notify your IRA custodian that you wish to have the funds sent to the newly established brokerage account.  The IRA assets/cash will then be transferred 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 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 be required to be filed. All income and gains from the stock investments will flow back to the IRA without tax.

Buy, Sell and Trade Stocks

Once your brokerage account is all set up, you can then buy, sell and hold stocks within your Self-Directed IRA. Using a Self-Directed IRA LLC affords the IRA holder a considerable amount of freedom when it comes to making IRS-approved investments, whether traditional or alternative.  Now, may be the best time to invest your retirement money in stocks, bonds and mutual funds. Bear in mind, it’s still important to properly diversify your portfolio. The easiest way to do that is by looking at alternative investments.

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