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What is a Self-Directed IRA?

Self-Directed IRA LLC

The IRA Financial Group will take care of setting up your entire Self-Directed IRA or Self-Directed IRA LLC structure in a matter of days. Our in-house tax and ERISA professionals will work with you directly to customize a structure that satisfies your tax and investment goals. Best of all, the entire process can be done through our app.

Self-Directed IRAs

A Self-Directed IRA is a retirement account that allows you to invest in traditional and alternative investments. Frequently, large financial institutions that manage retirement accounts limit investment opportunities to stocks, bonds, and mutual funds. A Self-Directed IRA allows you to invest in almost anything. In fact, there are only three things you cannot invest in life insurance, collectibles, and transactions with a disqualified person.

Many investors open a Self-Directed IRA to diversify their retirement funds.

If you’re an IRA investor who only invests in traditional assets (stocks, bonds, mutual funds, ETFs, etc.), you can expand your investment horizons into nontraditional assets with a Self-Directed IRA. These include:

Advantages of a Self-Directed IRA

Invest in What You Understand

Americans became frustrated with the equity markets after the 2008 financial crisis. Thankfully, we have seen the financial markets rebound since then. Yet, many investors are still shell-shocked from the market swings. They are not 100% sure what goes on with Wall Street and how it all works.

Real estate, for comparison, is often a more comfortable investment for the lower and middle classes because they grew up exposed to it. Whereas the upper class is more familiar with Wall Street and other securities.

We always hear people talk about the importance of owning a home and the amount of money one can make by owning real estate. From Donald Trump to reality TV, real estate is fast becoming mainstream and a trusted asset class for Americans.

Of course, it’s not without risk, but many investors feel more comfortable buying and selling real estate than they do stocks. With a Self-Directed IRA LLC, you can make real estate and other alternative asset investments tax-deferred or tax-free with the Roth IRA. Inflation Protection

Related: How to Open a Self-Directed IRA Online


Most Americans have an enormous amount of financial exposure to the financial markets. Whether it is through retirement investments, such as IRAs or 401(k) plans, or personal savings, many of us have most of our savings connected to the stock market.

In fact, over 90% of retirement assets are invested in the financial markets. Investing in non-traditional assets, such as real estate, offers a form of investment diversification from the equity markets. With a more diversified Self-Directed IRA, it is less likely that your assets will move in the same direction. However, diversification does not assure profit or protect against loss. Nevertheless, the use of non-traditional asset classes can help protect your portfolio when the market is down and prevent you from losing more than the market. Invest in What You Understand.

Learn more about Self-Directed IRA Myths.

Inflation Protection

Rising food and energy prices, along with high federal debt levels and low interest rates have recently fueled new inflationary fears. As a result, some investors may look for ways to protect their portfolios from the ravages of inflation.

It is a matter of guesswork to estimate whether these inflation risks are real. For some retirement investors, protecting retirement assets from inflation is a big concern. Inflation can have a nasty impact on a retirement portfolio because it means a dollar today may not be worth a dollar tomorrow.

Inflation also increases the cost of things that are necessary for humans to live and enjoy life. Some examples are gas, shelter, clothing, and medical services. It decreases the value of money so that goods and services cost more.

For example, if someone has an IRA worth $250,000 at a time of high inflation, that $250,000 will be worth significantly less or have significantly less buying power. This can mean the difference between retiring and working the rest of your life.

Many investors have long recognized that investing in commercial real estate can provide a natural protection against inflation. This is because rents tend to increase when prices do, acting as a hedge against inflation.

Related: Do Self-Directed IRAs Have Income Limits?

Hard Assets

Many non-traditional assets, such as real estate and precious metals are tangible hard assets that you can see and touch. With real estate, for example, you can drive by with your family, point out the window, and say “I own that”.

For some, that’s important psychologically, especially in times of financial instability, inflation, or political or global upheaval.

If you are looking to use your retirement funds to make alternative asset investments and expect to have a high level of transaction frequency (i.e. rental properties), are concerned about liability (real estate), wish to have greater control over your IRA, or are concerned about privacy, then the self-directed IRA LLC is the smart choice.

Learn More: Alternative Investments in an IRA

Tax Deferral

Tax deferral literally means that you put off paying taxes. The most common types of tax-deferred investments include those in IRAs or Qualified Retirement Plans. Tax-deferral means that all income, gains, and earnings accumulate tax-free until the investor or IRA owner withdraws the funds and takes possession of them.

As long as the funds remain in the retirement account, the funds will grow tax-free. This allows your retirement funds to grow at a faster pace than if the funds were held personally. As a result, you can build for your retirement faster.

When you do withdraw your IRA funds in the form of a distribution after you retire, you will likely be in a lower tax bracket and be able to keep more of what you accumulated.

So, by using a traditional IRA retirement savings vehicle:

  • You don’t pay taxes on the money you invested
  • You may pay taxes at a lower rate when you finally do “take home” your money

If the funds remain in the account, they grow without taxes eroding their value. This enables assets to accumulate at a faster pace, giving you an edge when saving for the long term.

Types of Self-Directed IRAs

In order to expand your investment opportunities, you must establish a Self-Directed IRA. There are two types of Self-Directed IRAs.

  1. Custodian-Controlled IRA- A traditional Self-Directed IRA
  2. Checkbook Control IRA – Self-Directed IRA LLC

What’s the difference between the two? A custodian-controlled IRA is offered by some large financial institutions. However, they often restrict the types of investments you can make and you will need custodian consent on all investment decisions.

Whereas a checkbook control IRA is the true form of self-directing your individual retirement account. With checkbook control, there’s no need for custodian consent. You’re in charge of what investments you wish to make – when you want to buy and when you want to sell. It’s the ultimate retirement vehicle for IRA investors who want control and the opportunity to invest in alternative assets.

So, to clarify:

Types of Self-Directed IRAs

* A Self-Directed IRA and a Self-Directed IRA LLC can also be established as a Roth IRA. Additionally, if you are self-employed, you may benefit from a Self-Directed Solo 401(k).

The Self-Directed IRA LLC

A Self-Directed IRA LLC (SDIRA) is a type of individual retirement account that allows retirement investors to use their IRA funds to make alternative asset investments.  Self-Directed IRAs are similar to traditional IRAs, but they provide more investment options to IRA holders. By using this retirement structure, you can diversify your investment opportunities and invest outside of stocks, bonds, mutual funds, and other traditional assets. You can still make traditional asset investments, but if you’re more comfortable investing in assets like real estate and precious metals, the Self-Directed IRA LLC allows you to do so. Ultimately, this diversifies the assets inside of your retirement account.

This self-directed plan gives you more control over your retirement funds. However, it’s important to note that not all Self-Directed IRAs are the same. As a result, you will not find this term anywhere in the Internal Revenue Code.

With a Self-Directed IRA LLC, there are two investments you cannot make: life insurance and collectibles. Furthermore, you cannot make transactions under Internal Revenue Code (IRC) Section 4975(c). These are prohibited transactions that are broken down into categories: direct prohibited transactions and indirect prohibited transactions. Other than these three restrictions, you can make any type of investment with the Self-Directed IRA LLC.

The plan works for all types of individual retirement accounts:

In other words, you can self-direct any of these IRAs to make alternative asset investments.

Establish the Self-Directed IRA LLC with IRA Financial by downloading our new app. With the app, you can also perform basic account maintenance.

Checkbook Control

Discover the advantages of establishing a Self-Directed IRA LLC with checkbook control.

  • Invest in what you know and understand tax-free, such as real estate, tax liens, hard money loans, private businesses, cryptocurrencies, 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
  • Gain asset & creditor protection
  • IRA Financial charges a low flat fee annually. Unlike other companies, IRA Financial does not charge account valuation fees. Furthermore, when you make an investment with your new Checkbook IRA LLC with IRA Financial, your investments are FDIC insured.

Advantages of the Self-Directed IRA LLC

A self-directed IRA LLC is also known as a “checkbook IRA”.  With a self-directed IRA LLC, a limited liability company (“LLC”) is established typically in the state where the investment will be made.  The IRA, care of the IRA custodian, will own the LLC, and the IRA holder (you) or any third party can serve as the manager of the LLC.  Once the retirement funds have been transferred to a new IRA custodian (i.e., IRA Financial), the IRA custodian will then transfer the IRA funds directly to the new IRA LLC bank account tax-free.  As manager of the LLC, you will have checkbook control over the IRA funds allowing you to make investments by simply writing a check directly from your IRA LLC bank account.  Once the IRA investment is made, all income and gains would generally flow back to the self-directed IRA LLC tax-free. Using a self-directed IRA to make investments has several advantages, including limited liability protection, speed, lower IRA custodian costs, tax deferral, and diversification.

A self-directed IRA with “checkbook control” is popular with IRA investors seeking to invest in alternative assets, such as rental properties, fixes and flips, tax liens, or cryptocurrencies that require a high frequency of transactions.  In addition, the self-directed IRA LLC is also popular with investors seeking limited liability protection as well as a higher degree of privacy since the investment is made in the name of the LLC and not in the name of the IRA.

Frequently Asked Questions About Self-Directed IRA LLC’s

What is an LLC?

Limited liability companies (“LLCs”) are a creation of state law.  An LLC is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal income tax purposes.  An LLC offers the limited liability the benefit of a corporation and the single level of taxation of a partnership.  The owners, not the entity, are then responsible for the payment of the tax, if any.

LLCs are owned by investors known as members. The company is typically managed by a designated member or group of members.  Like shareholders of a corporation, the members’ liability is limited to the amount of their investment. For tax purposes, LLCs with more than one owner are treated as partnerships, and LLCs with one owner are disregarded.  In both cases, the LLC income is taxed to the owner directly without any entity-level tax.

Single Member LLC

An LLC with one owner is treated as a disregarded entity for federal income tax purposes. Irrespective of whether the owner is an individual, entity, or a retirement account, the LLC would be treated as a disregarded entity.  In other words, the LLC would be treated as a tax nothing or ignored for tax purposes and the owner of the LLC would be treated as the owner of the LLC income. Accordingly, the single-member LLC is not required to file a Federal Income Tax Return and, in most cases, a state income tax return.  In the case of a single-member LLC, the individual owner would report the income on IRS Form 1040 (Schedule C).  In the case of an IRA that owns 100% of an LLC, an IRA is a tax-exempt trust that does not file a tax return, thus, the self-directed IRA LLC does not file a tax return nor does the IRA.  In other words, when one IRA owns a self-directed IRA LLC, generally no federal or state income tax return is required to be filed

Multiple-Member LLC

An LLC with two or more owners is known as a multiple-member LLC. A multiple-member LLC is treated as a partnership for Federal Income tax purposes and, thus, must file a federal income tax return for Federal Income tax purposes. The Federal income tax return is Form 1065.  All states require a multiple-member LLC to file a respective state partnership return. Just like a single-member LLC, all multiple-member LLC income and gains flow through to the members pro rata tax-free.  In other words, just like a single-member LLC, the LLC itself is not subject to income tax, and all income and gains pass through to the members for tax purposes.

Is an IRA LLC a Disregarded Entity?

The income tax filing requirements for an LLC depend on whether the LLC is owned by one or more parties. An LLC owned by one party is a single-member LLC and an LLC with two or more owners is known as a multiple-member LLC.

The Advantages of Using an LLC over a “C” Corporation

An LLC enjoys many of the same advantages of a “C” corporation (a standard business corporation so called because it is taxed under subsection C of the Internal Revenue Code), as well as retaining many of the characteristics of unincorporated entities such as partnerships and sole proprietorships. Like a “C” corporation, the LLC offers its members limited liability (a member is generally only liable up to the amount contributed to the LLC), and like a partnership, the LLC’s earnings are not subject to an entity level of tax (only one level of tax imposes directly to the member), whereas, a “C” corporation imposes a double level of tax (entity level and shareholder level) on distributable income.

Like the shareholders of a “C” corporation, the owners/members of an LLC are generally not liable for the debts of the business beyond the extent of their investment. The owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. There are exceptions, such as an instance when an individual member personally guarantees the debts or liabilities incurred by the LLC.

Unlike a “C” corporation, an LLC is treated as a partnership for federal income tax purposes. This can provide a number of important benefits to the owners. Partnership earnings are not subject to an entity-level federal income tax; instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual tax returns (one level of tax). Thus, the earnings of an LLC are taxed only once. An LLC that is taxable as a partnership can also provide special allocations of tax benefits to specific members.

Pay Taxes Later

The concept of tax-deferral stems from the notion that all income and gains the pretax retirement account generates will flow back into the account tax-free. Instead of paying tax on the returns of a Self-Directed IRA investment, such as real estate, you pay tax at a later date so your investments grow unhindered.

For example, if an IRA investor invests $100,000 into a Self-Directed IRA LLC in 2022 and the account earns $10,000 in 2022, the investor doesn’t owe tax on that $10,000 in 2022. Instead, the Self-Directed IRA investor must pay taxes when he or she withdraws the money from the IRA. This may be many years later. Assuming the IRA investor is in a 33% federal income tax bracket, he or she will have to pay $3,333 in federal income taxes on the $10,000 earned on the IRA in 2022. That leaves $6,667 in the account. At an 8% annual return, those earnings go on to produce $533.36 in 2022.

However, because IRAs are tax-deferred, the Self-Directed IRA investor can earn a return on the full $10,000 rather than the $533.36 he or she must pay in taxes that year. At an 8% annual return, the investor would earn $800 in 2022. The beauty of tax deferral is that the deferral compounds each year.

The following example illustrates the powerful advantage of tax-deferred contributions and compounding through a Traditional IRA versus making contributions to a taxable account


Joe is 40 years old and makes a $5,000 contribution to an IRA. Joe is in a 30% federal income tax bracket. Joe invests his IRA funds and receives a 6% average annual return. When Joe retires at age 70, his $5,000 contribution would be worth $21, 609.71. If Joe invested the $5,000 personally, the account would only be worth $14,033.97.

Keep Reading: Self-Directed IRA Rules


As a Self-Directed IRA investor, it is vital to know the rules that govern the plans, so you don’t violate the law. Contact us to learn more. Or click here to learn how to get started on your retirement savings.

*Did you know investing in real estate is one of the most common self-directed investments? To learn more, see The Beginners Guide to Investing in Real Estate with Retirement Funds or get in touch.


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