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Self-Directed IRA LLC Investments


 

What You Can Invest in With a Self-Directed IRA

A Self-Directed IRA LLC offers you the ability to use your retirement funds for almost any type of investment. You can do this without custodian consent. The IRS only describes prohibited investments, which are few.

The main advantage of using a self-directed IRA is to make investments that generate tax-deferred or tax-free gains. Additionally, you can now invest in what you know and understand.

For 2019, the following are examples of investments you can make with your Self-Directed IRA LLC:

  • Residential or commercial real estate
  • Domestic or Foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds/Notes
  • Hard money lending
  • 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
  • Bitcoins
  • Hedge Funds
  • Private Equity Funds

Using a Self-Directed IRA LLC to make investments offers the ability to make traditional as well as non-traditional investments in a tax-efficient manner.

Below are some of the most popular reasons to purchase non-traditional assets with your Self-Directed IRA LLC.

 

Diversification

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. Typically, the more diversified your portfolio, your assets are less likely to move in the same direction. However, diversification does not assure profit or protect against loss.

The use of non-traditional asset classes can help protect your portfolio when the market is down and help protect you from losing more than the market.

 

Invest in Something You Understand

Many Americans became frustrated with the equity markets after the 2008 financial crisis. Thankfully, we have seen the financial markets rebound since then. Nevertheless, many Americans are still somewhat shell-shocked from the market swings. They are not 100% sure what goes on in 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 are 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. Still, many investors feel more comfortable buying and selling real estate than they do stocks.

 

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.

 

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.

 

Tax Deferral

Tax deferral literally means that you put off paying tax. 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 accumulates 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, with using a Traditional IRA as a 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.

The concept of tax-deferral stems from the notion that all income and gains the pre-tax 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. This allows the investment to grow unhindered.

For example, if an IRA investor invests $100,000 into a Self-Directed IRA LLC in 2019 and the account earns $10,000 in 2019, the investor doesn’t owe tax on that $10,000 in 2019. Instead, the Self-Directed IRA investor must pay taxes when he or she withdraws the money from the IRA. This could be many years later. Assuming the IRA investor is in a 33% federal income tax bracket, she will have to pay $3,333 in federal income taxes on the $10,000 earned on the IRA in 2019. That leaves $6,667 in the account. At a 8% annual return, those earnings go on to produce $533.36 in 2019.

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 she would have to pay taxes that year. At a 8% annual return, she'd earn $800 in 2019. 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.

Example #1:

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.

 

Real Estate

The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Real estate is the most popular investment you can make with a Self-Directed IRA. Making a real estate investment is as simple as writing a check.

Since you are the manager of your Self-Directed 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 IRA is that all gains are tax-deferred until a distribution is taken.

Traditional IRA distributions are not required until the IRA owner turns 70 1/2. In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

For example, if you purchase a piece of property to flip homes with your Self-Directed IRA for $75,000 and later sold the property for $150,000, the $75,000 of gain is generally tax-free.

Whereas, if you purchase the property using personal funds (non-retirement funds), the gain is subject to federal income taxes and in most cases state income tax.

 

Tax Liens

The IRS permits the purchase of tax deeds and tax liens with a Self-Directed IRA LLC. By using a Self-Directed IRA LLC to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until you take a distribution.

There is no requirement to take out a distribution with a Traditional IRA until you reach 70 1/2.

More importantly, as the manager of the IRA LLC, you have "checkbook control." This allows 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 & Notes

The IRS also permits the use of IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA LLC to make loans or purchase notes from third parties, all interest payments you receive are tax-deferred until a distribution is taken.

Again, traditional IRA distributions are not required until the 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 IRA LLC to loan money to a friend, all interest received would flow back into your IRA tax-free.

Whereas, if you loan your friend money from personal funds (non-retirement funds), the interest received is subject to federal and in most cases state income tax.

 

Private Businesses

With a Self-Directed IRA LLC you can 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 IRA funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules the Unrelated Business Taxable Income rules.

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 & Coins

Internal Revenue Code Section 408(m) lists the type of precious metals and coins that you can invest in with your 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)
  • 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).

When you use a self-directed IRA to purchase precious metals/coins the IRS approves, you can better diversify your retirement portfolio. Also, you generate tax-free gains on the sale of the metals or coins. If you're self-employed or a small business owner, you can use a Solo 401(k) Plan to make the same purchase and reap the same benefits.

IRC Section 408(m)(3)(A) lists the type of coins you can purchase with retirement funds. Generally, these are American Eagle and U.S. state minted coins of a certain finesse.

The Technical and Miscellaneous Revenue Act of 1988 also allows the purchase of state minted coins. Whereas, IRC 408(m)(3)(B), refers to gold, silver, or palladium bullion of a certain finesse. These coins must be held in the “physical possession” of a U.S. trustee, as described under subsection IRC 408(a). Essentially, this 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 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. It does not reference 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. Precious metals and coins are better in the hands of a trustee, as defined in IRC 408.

If you have a Self-Directed IRA LLC or Solo 401(k) plan, we believe you should not hold precious metals and coins at a bank safe deposit box. The IRS has no formal guidance, therefore it has some risk.

For a Self-Directed IRA, if the bank holding the safe deposit box isn't the trustee of the IRA purchasing the precious metals or coins, then the metals or coins do not satisfy the physical possession definition. This is because the bank cannot serve as the IRA trustee.

The safest approach to holding IRS approved coins or bullion/precious metals is at a trustee, such as an approved depository. One thing that is clear, is an IRA holder should never hold IRS approved coins or precious metals/bullion personally.

The rules surrounding the ownership and possession of IRS precious metals or coins are complex. Therefore, it is crucial that you work with a firm, such as IRA Financial Group, that has the expertise and resources to help you navigate the IRS rules.

The advantage of using a Self-Directed IRA LLC with “checkbook control” to purchase precious metals and/or coins is that their value generally keeps up with, or exceeds, inflation rates better than other investments. In addition, the precious metals and/or coins can be held in the name of the LLC at a financial organization safe deposit box. This eliminates depository fees, and can be held at any local bank.

 

Foreign Currencies

The IRS does not prevent the use of 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 IRA LLC is as easy as writing a check. As manager of the IRA LLC, you will have “checkbook control” over your IRA funds, providing you with the ability to make investments without requiring custodian consent.

Additionally, 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 IRA LLC to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken. Traditional IRA distributions are not required until the IRA owner turns 70 1/2. In the case of a Self-Directed Roth IRA LLC, all foreign currency gains are tax-free.

 

Bitcoins

The IRS treats Bitcoin and other cryptocurrency as property and not currency. The IRS is providing a potential boost to investors. However, it's also keeping extensive record-keeping rules and significant taxes on its use. 

With IRA Financial Group’s Self-Directed IRA LLC bitcoin solution, you can use traditional IRA or Roth IRA funds to buy bitcoins tax-free. 

IRA Financial Group’s Self-Directed IRA LLC for bitcoin investors, is an IRS approved structure that allows you to use your retirement funds to make bitcoin and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (LLC) that the IRA owns (care of the IRA custodian) and the IRA holder or any third-party manages.

As manager of the IRA LLC, the IRA owner will have control over the IRA assets to make traditional as well as non-traditional investments.

 

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Self-Directed IRA LLC may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Self-Directed IRA LLC with “Checkbook Control” is that you are not limited to just making these types of investments.

With a Self-Directed IRA LLC with “checkbook control” you can open a stock trading account with any financial institution. You can purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

 

Get in Touch

Do you still have questions regarding Self-Directed IRA LLC investments that we didn't cover in this article? Contact IRA Financial Group directly at 800-472-0646. Our IRA specialists will help answer all of your questions in regards to any Self-Directed IRA LLC investment you wish you make.

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