The IRS rules have always permitted a retirement investor to use retirement funds to make almost any type of real estate investment, aside generally from any investment involving a disqualified person.
Even though the IRS allows retirement account holders to use retirement funds to make real estate investments, the IRS does not require all IRA custodians and administrators to offer the investment option. This is the reason why the majority of IRA custodians and administrators, such as Vanguard, Fidelity, Chase, Bank of America do not offer real estate investment options to their IRA holders. Since they are not required to offer real estate and other non-traditional investment options to their IRA clients, they do not do so and require their IRA clients to invest in the financial products they offer, which generates revenue for them. When an IRA holder uses retirement funds to make real estate and other non-traditional investments what happens is the funds are taken out of the financial institution’s account and sent to a third-party. The result of this investment is that the IRA holder has less IRA funds at the financial institution (IRA custodian) and, thus, less funds to invest, which means less money for the financial institution.
In order to make real estate and other non-traditional investments with IRA funds, one would need to work with an IRA administrator/custodian who allows for these types of investments. These IRA administrator/custodians, often referred to as passive custodians, will be the party that simply moves the IRA funds from the IRA custodian account to the real estate seller or in the case of a self-directed IRA LLC to an IRA LLC bank account. Unlike a traditional financial institution, like Vanguard, an IRA administrator-passive custodian does not earn fees from selling financial products, such as stocks and mutual funds. Instead, an IRA administrator-passive custodian earns fees from maintaining the IRA account – a very different business model then a traditional financial institution.
With a “checkbook control” self-directed IRA LLC, making a real estate investment is as simple as writing a check. No longer will you have to pay high IRA custodian fees or have to endure long delays and risk losing your deal as a result of having to have every aspect of your real estate transaction pre-approved by the custodian. The Self-Directed IRA LLC is an IRS approved structure that allows you to use your retirement funds to make real estate and other investments tax-deferred and without custodian consent. The Self-Directed IRA involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the IRA Administrator and managed by you or any third-party). In essence, your IRA funds are transferred tax-free from your current retirement custodian to a new IRA administrator-passive custodian. Then, at your direction, the funds are sent to the newly established LLC’s bank account, which can be opened at any local bank. Thus, the IRA administrator is investing your IRA funds into a newly established LLC in return for a 100% interest in the LLC. As manager of the IRA LLC, you will have control over the IRA assets and be able to make investments directly from your LLC bank account, which can be opened at any local bank. If there is a real estate investment you want to make – simply write a check or wire the funds straight from your IRA LLC bank account. Don’t waste time and money relying on a custodian to be involved in every aspect of your real estate transaction. The IRS gives you the ability to have more control and authority over your IRA assets.
To learn more about the self-directed IRA real estate structure, please contact a tax expert at 800-472-0646 or visit www.irafinancialgroup.com