The self-directed IRA LLC solution is an IRS and Tax Court approved structure that allows one to use their retirement funds to make traditional as well as non-traditional investments tax-free and without custodian consent.
When understanding the real estate IRA rules it is important work with a tax professional who has experience in navigating the tax and ERISA rules regarding using retirement funds to make investments. Because the self directed IRA LLC structure is based on very specific tax rules in the Internal Revenue Code as well as case law, working with a tax expert or a company with tax attorneys on staff that you can consult with is very important.
The self directed IRA real estate rules can be best understood by a case study:
Ted, who is 57 years old worked for 20 years for ABC, Inc and accumulated $125,000 in a 401(k) qualified retirement plan. Ted just retired from ABC, Inc and now wants to invest some of that money in real estate. Ted visited with a number of financial institutions who mentioned that he could roll over his 401(k) funds to their institution but he would only be able to invest in financial products and not real estate. Ted understood that he was permitted to use retirement funds to buy real estate because he read it on the IRS’s website. Ted asked his accountant about the Self Directed IRA and Ted’s accountant did some research online and found the IRA Financial Group. Ted then called the IRA Financial Group and spoke to a tax professional who explained that this is how the Self Directed IRA structure will work:
- IRA Financial Group will help transfer Ted’s 401(k) funds tax-free to a new IRA custodian. With a checkbook control IRA, Ted no longer was required to pay excessive custodian fees based on account value and transaction fees. Instead, with a Self-Directed IRA LLC, an FDIC backed IRS approved passive custodian is used. With a checkbook control Self Directed IRA, Ted would be able to take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays.
Once Ted’s IRA funds have been transferred tax-free to the new IRA custodian, the new IRA custodian will then invest Ted’s IRA funds into Ted’s new Self Directed IRA LLC that was established by the tax professionals at the IRA Financial Group. For a Self Directed IRA LLC, a special purpose limited liability company (“LLC”) will be owned by the IRA custodian and the IRA holder or any third-party will serve as the manager of the LLC. The LLC would be formed in the state where Ted will be making his IRA real estate investments. IRA Financial Group will draft a special purpose LLC Operating Agreement that will include the necessary IRS required language. LLC IRA Financial Group will acquire a tax identification number (EIN) for Ted’s IRA LLC. Ted would then simply have to take the LLC Articles of Organization, the LLC EIN, and the special purpose LLC Operating Agreement to the bank to open the new LLC bank account.
Once the funds have been transferred to Ted’s LLC bank account, which can be opened at any local bank or credit union (a simple LLC business account would be opened – not an IRA account since Ted already had an IRA account with the passive custodian), Ted, as manager of the LLC, will have checkbook control over his fund so he will simply be able to write a check straight from the IRA LLC account in order to make a real estate transaction. Once the real estate transaction has been made, all income and gains generated by the real estate investment will flow back to the IRA LLC tax-free.