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How Do Self-Directed IRAs Work?

How the Self-Directed IRA Works
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Self-Directed IRAs

A Self-Directed IRA is a type of retirement account that allows individuals to invest in alternative assets that are prohibited in traditional IRAs. Commonly held alternative assets include:

Learn More: What Can I Invest in With a Self-Directed IRA?

Self-Directed IRAs differ from traditional IRAs by using passive custodians. Contrasting traditional IRA custodians, Self-Directed IRA custodians do not offer advice or sell investments.

A Self-Directed IRA can also be an LLC. While Self-Directed IRA’s provide investors with additional freedoms to invest in what they know, the Self-Directed IRA LLC allows individuals more freedoms to manage their transactions.

Learn More: What is a Self-Directed IRA? Top Benefits!

The Self-Directed IRA LLC “Checkbook Control Solution”

The Self-Directed IRA LLC with “checkbook control” is a tax court and IRS approved retirement plan. With the Self-Directed LLC, you must establish a Limited Liability Company (LLC). The IRA will own the LLC and the IRA holder manages it. This setup gives the IRA holder “checkbook control” over his or her retirement funds. Begin to make any IRA investment as easily as writing a check or wiring funds from the Self-Directed IRA LLC bank account.

With checkbook control, you no longer need custodian consent. As a result, there are no delays when making an IRA investment. You, as manager of the LLC, determines which investments you want to make. The Self-Directed IRA LLC structure provides maximum flexibility and is ideal for IRA holders who plan to make multiple investments.

How a Self-Directed IRA LLC Works

With a Self-Directed IRA LLC, after the LLC is established, the IRA holder’s IRA funds are then transferred by the Custodian to the LLC’s bank account. This provides the IRA holder with “checkbook control” over his or her IRA funds.

The Self-Directed IRA LLC “Checkbook Control” structure is approved by the U.S. tax court and has been widely popular for over 20 years. The notion of using an entity the IRA owns in order to make investments was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996).

The Self-Directed IRA LLC allows you to eliminate the delays from an IRA custodian, and immediately make investments as the opportunity presents itself.

Read More: What is a Self-Directed IRA LLC

Types of Plans

Custodian vs. Checkbook Control

Again, not all Self-Directed IRAs are the same. For example, many traditional IRA custodians advertise themselves as offering Self-Directed retirement accounts, because you direct them to make investments. However, with traditional institutions, like Fidelity and Vanguard, you will need approval from a custodian before making an investments. Furthermore, most IRA custodians limit you to stocks, bonds and other traditional investments. You will not be able to buy real estate, precious metals, or any alternative investment, because traditional institutions do not make money this way.

As a result, if you wish to diversify your retirement and make non-traditional investments, you will need to work with a Self-Directed IRA custodian, such as IRA Financial Trust.

In the case of a “truly” Self-Directed IRA, a limited liability company (LLC) is established that the IRA account owns and the IRA holder manages. This provides the IRA holder with “checkbook control” over his or her funds.

There are three categories of Self-Directed IRA structures. You can distinguish them by the level of control the custodian exercises over your IRA investments.

Read More: Self-Directed IRA FAQ

Financial Institution Self-Directed IRA

With a financial institution Self-Directed IRA, you can direct your IRA investments in the financial products that the institution offers. These are traditional investments, such as stocks, bonds and mutual funds. Again, most financial institution Self-Directed IRAs will not allow you to make non-traditional investments, also known as alternative asset investments.

Custodian Controlled Self-Directed IRA Without “Checkbook Control”

A second type of structure is custodian controlled. With the custodian controlled Self-Directed IRA structure, many types of nontraditional investments, such as real estate, are permissible. However, you need custodian consent to enter into and execute transactions.

For example, before you engage in an IRA investment, you must receive the consent of the custodian. To this end, you have to provide the custodian with the transaction documents for review as part of their transaction review process.

As a result, it is common to experience time delays as well as high annual fees and additional transaction fees. If you’re a moderately active investor with somewhere close to $50,000 in assets, you may pay anywhere from $400 to $600 in aggregate annual fees.

Custodian Control Fees Include:

  • Account value fee
  • Transaction fees
  • Approval letters

In addition, there is no guarantee that the custodian will approve your investment even if it doesn’t violate IRS rules. A Self-Directed IRA with custodian control allows you to make non-traditional investments, but time delays and high custodian fees are the common characteristics of choosing the custodian-controlled structure.

Self-Directed IRA LLC with “Checkbook Control”

With a “truly” Self-Directed IRA, you will have complete control over your IRA funds when you establish a Self-Directed IRA LLC. You no longer need the custodian to approve every investment, because all investment decisions are truly yours. When you find an investment, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account. Self-Directed IRA Custodian – “Passive Custodian”

Self-Directed IRA Custodian – “Passive Custodian”

A passive custodian is an IRS Approved FDIC backed custodian who allows for non-traditional types of investments, like real estate. The passive custodian earns fees by establishing and maintaining IRA accounts, not by selling investment products. Whereas, more traditional custodians, such as Charles Schwab, make money by selling traditional investment products.

The passive custodian provides no advice or recommendations regarding the investments you choose to make. The passive custodian simply executes investment decisions by the IRA owner and performs custodial/administrative duties to maintain the tax-deferred status of the IRA (individual retirement account).

In a nutshell, the passive custodian establishes and maintains retirement accounts. They are in attendance to satisfy IRS regulations. How to Set Up a Self-Directed IRA LLC

How to Set Up a Self-Directed IRA LLC

You can set up a “Checkbook Control” Self-Directed IRA LLC structure in a matter of days.

First, seek the consultation of a professional financial group, such as IRA Financial, the leading provider of checkbook control Self-Directed IRAs. IRA Financial has partnered with Capital One Bank to simplify how you establish your Self-Directed IRA. You will be assigned to a specialist who will set up the structure, open the plan bank account and complete all necessary documentation so you never have to set foot in a bank. Set-up for a Self-Directed IRA can take between 7-21 days to complete. The time-frame is largely dependent upon the state of formation and the custodian holding your retirement funds.

There are many advantages to a Self-Directed IRA LLC, which may be why it’s growing in popularity. It gives your portfolio diversity and enables you to have full control over your finances. Additionally, you can invest in what you know and understand, which can decrease the risk of losing your funds.

With your Self-Directed plan, you have a world of investment opportunities:

  • Domestic or foreign real estate (rentals, foreclosures, raw land, tax liens etc.)
  • Private businesses
  • Precious metals (gold or silver)
  • Hard money
  • Peer to peer lending

In three simple steps, here is how to set-up a Self-Directed IRA LLC with Checkbook Control.

1. Transfer Retirement Funds Tax-Free

First, your retirement funds from your current custodian must transfer to an IRS approved FDIC backed passive custodian. You can make transfers from any retirement account, including:

You can transfer or rollover funds to the passive custodian tax-free.

2. Investment of IRA Funds into New LLC

You, the IRA owner, will direct the passive custodian to invest IRA funds into the new Limited Liability Company (LLC). Because the LLC is treated as a flow-through entity for federal income taxes, generally all income or gains of the LLC will flow to the IRA tax-free.

3. The Power of Checkbook Control

Because you’re the manager of the LLC, you have the authority to direct the LLC to make investments in real estate, precious metals, tax liens and any other alternative asset class. You can also make traditional investments at your choosing. Again, all income and gains of the LLC flow back into the IRA tax-free.

As you can see, how a Self-Directed IRA LLC is works is fast and simple when you with an IRA specialist. 

Did You Know?

A Self-Directed IRA you can help you save for retirement by funding traditional investments like stocks and bonds, as well as in alternative assets, such as private placements, cryptocurrency, real estate, and much more. You can put your retirement funds to work doing what you want them to – and help to build your future security. Contact IRA Financial today to get started!

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