The “checkbook control” self-directed IRA LLC is a Tax Court and IRS approved structure that will allow an individual to use his or her retirement funds to make traditional as well as a non-traditional investments, such as real estate from the comfort of a local bank and without excessive IRA custodian fees.
So how do I set-up a “checkbook control” IRA LLC myself?
- Establish an IRA account with a passive custodian. The IRS approved and FDIC backed custodian in the “checkbook control” Self-Directed IRA LLC structure is referred to as a “passive” custodian largely because the custodian is not required to approve any IRA related investment and simply serves the passive role of satisfying IRS regulations. The IRA custodian is the FDIC institution that will be the institution that holds the retirement funds before they actually transferred to the LLC. The IRA custodian is also known as a depository for the retirement funds. In many cases the IRA administrator will provide all administrative and record-keeping functions with respect to the IRA. In some cases, the IRA custodian is an FDIC insured bank and the IRA administrator is a trust company that has been authorized to administer IRA funds by the IRS. The IRA administrator will work with a bank or financial institution which will serve as the custodian. The IRA administrator will never have access to your retirement funds but will simply provide all record-keeping functions.
- Establish a special purpose LLC. In order to get checkbook control over your retirement funds, you will need to establish a special purpose limited liability company (“LLC”). The LLC will ultimately be owned by the IRA care of the custodian and managed by the IRA holder or a third-party. Most IRA custodians require that the IRA LLC be formed by a tax professional. In addition, the IRA LLC must have an LLC Operating Agreement, which is a document that outlines the workings of the LLC. More specifically, it details LLC ownership, management, etc of the LLC. With respect to the IRA LLC Operating Agreement, special IRS language must be included in order for the IRA custodian to approve the use of the LLC.
- Open IRA LLC Bank Account. Open a local bank account for the LLC at any bank of your choice. You can open a bank account for your “checkbook control” Self-Directed IRA LLC at any bank or credit union.
- Tax-Free Transfer of Funds to LLC Bank Account. Direct the passive custodian to transfer the IRA funds to your new “checkbook control” Self-Directed IRA LLC bank account. The IRA LLC checking account can be opened at any bank or credit union.
- Make Investments Without Delay From a Local Bank: As the Manager of the self-directed IRA LLC you will have the freedom to make all investment decisions for your “checkbook control” IRA LLC. In other words, you will have “checkbook control” over your IRA funds allowing you to make an IRA investment by simply writing a check or wiring funds directly from the checkbook control IRA LLC bank account.
- Invest Without tax. Since your IRA will become the owner(s) (member(s)) of the newly formed checkbook control IRA LLC, all income and gains generated by an IRA LLC investment will generally flow back to your IRA without tax. Because an LLC is treated as a pass-through entity for federal income tax purposes, all income and gains are taxed at the owner level not at the entity level. However, since an IRA is a tax-exempt party pursuant to Internal Revenue Code Section408 and, thus, does not pay federal income tax, all IRA investment income and gains will generally flow through to the IRA tax-free!
- Reduce Your IRA Custodian Fees: Because all checkbook control IRA LLC investments are being done at the LLC level and not at the IRA custodian level, the IRA custodian has minimum involvement in the self-directed IRA LLC structure. Therefore, the fees the IRA passive custodian will charge with respect to a checkbook control self-directed IRA LLC will be much less than with a full-service IRA custodian.Establishing a checkbook control self-directed IRA LLC structure requires a very detailed and specific knowledge of various tax rules and regulations. Hence, it is vital that one works with a tax attorney or CPA to establish the structure and make sure it satisfies IRS rules. Violating the IRS rules with a self-directed IRA LLC can trigger steep penalties and tax.