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5 Steps to Understanding How a Self-Directed IRA Works

How a Self-Directed IRA Works by IRA Financial Group

How a Self-Directed IRA Works

Understanding how a Self-Directed IRA works isn’t as simple as some may think. For starters, a Self-Directed IRA is a type of IRA structure that gives you more control over your retirement funds. There are, essentially, three types of Self-Directed IRAs. Of course, not all are the same. We’ll delve into that shortly. The Self-Directed IRA is the most popular way to use retirement funds to make alternative asset investments.

You’re likely familiar with some already: real estate, notes, cryptocurrencies and gold, for example. With your Self-Directed IRA, you can make these investments, and much more, without tax or penalty.

First, to understand how a Self-Directed IRA works, learn the two main types of Self-Directed IRAs. These are:

(i) Custodian controlled

(ii) Checkbook control IRA LLC

Custodian Control

With the custodian controlled self-directed IRA, a special self directed IRA custodian serves as the custodian of the IRA. The custodian allows you to make alternative asset investments. like real estate and cryptocurrency. The IRA custodian then invests 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 is responsible for making all payments regarding the IRA investment, including paying expenses.

Checkbook Control

However, in the case of a checkbook control IRA, an LLC (limited liability company) is formed. The owner of the LLC is the IRA (individual retirement account). The manger of the LLC is the IRA holder (you). Therefore, with checkbook control, you eliminate the need for a custodian. As a result, you eliminate costs and delays when you use a full-service 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:
    1. Real estate
    2. Precious metals
    3. Tax liens
    4. Hard money loans
    5. Private businesses
  • 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

Self-Directed IRA LLC with IRA Financial Group

At IRA Financial Group, we will establish a LLC that your IRA owns. Below is a step-by-step breakdown of how the set-up will work:

  1. Select an IRA custodian to establish your Self-Directed IRA. Make sure that the custodian you choose allows for both types of Self-Directed IRAs.
  2. Your IRA assets/cash can roll over to the IRA custodian tax-free. Additionally, you can make IRA contributions up to $5,500 or $6,500 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. Professionals recommend that you open your LLC in a 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.

For more information on this topic please call 800-472-0646.

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Posted in Self-Directed IRA