Does anyone use a Checkbook IRA LLC?
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
I currently utilize a self-directed IRA. My IRA monies have been invested in a real estate project. I'm coming out of that investment soon and I now want to use those IRA monies for buying at trustee sales. This "Checkbook IRA LLC" seems like it could be the ideal vehicle for this. I'm not familiar with their workability, validity with IRS, etc.
Does anyone use or know about these? Thanks in advance.
I see this was an old thread that was resurrected. There’s another option you might consider, that's gaining popularity.
But first, if you're breaking into a cold sweat because you're afraid or don't understand the process, then don't do it. Open a plain vanilla SD IRA under a custodian and learn the rules. If it's simply about money, and you are making income and paying yourself, then you might consider a self-directed 401k, with (or without) checkbook control, instead. It has many advantages. Among them:
1) Depending upon your age, you can shelter approximately $49k per year compared with $5 to $6k in an IRA.
2) An SD 401k will also cost several thousand dollars to open (once) but you won't have an LLC to maintain or pay California's $800 minimum annual franchise tax. Long term, this will save you a lot of money.
3) The prototype plan you obtain will come with an approval letter from the IRS, eliminating any worry that the IRS would disallow it.
4) You can still go the SD 401k route but without checkbook access and save some money. Here, you’ll still have a custodian.
There are other 401k benefits, such as a UDFI exemption (income attributed to a mortgage) that might or might not benefit you.
And just to scare you, in all cases (SD IRA and SD 401k) there are concerns about the amount of participation you are allowed over the property. That is, can you manage it, perform repairs, or even just do the books? The IRS is unclear about much of this so even if you scrupulously follow the investing rules through a custodian, you can still get into trouble. With this in mind, my opinion is that it's best to leave the physical real estate assets out of a retirement plan and use it only to invest in paper (notes, syndications, LP's, etc.). These topics have been well covered in other threads here and you might also do a search.
Jeff
Alfred,
A "Checkbook IRA LLC" is a combination of an IRA and a single member manager managed LLC. In this strategy the single member is the IRA and your are the manager of the LLC. As the manager you have complete investment authority which allows you to bypass the normal process of having to deal with the IRA custodian in traditional self-directed IRAs.
I currently do not have any clients that have used this structure. In theory they should work. However, it is very advisable to do your due diligence on the company you chose. There are some prohibited transactions they need to make you aware of when you are interacting with a business owned by your retirement account.
Traditionally, the IRS takes a hard look at IRA transactions, especially Roth IRA transactions.
FOUND OUT THAT BETTER THAN AN IRA LLC IS A IRA IN A TRUST SO THAT YOU CAN AVOID THE TAXES AND COSTS ON AN LLC. YOU BECOME THE TRUSTEE AND HAVE THE CHECKKBOOK SO THAT YOU CAN INVEST AS YOU SEE FIT, NO CUSTODIAN IN THE WAY. NEXT POINT TO GET DATA ON... DO I REALLY HAVE TO PAY $3500 TO HAVE SOMEONE SET UP THE TRUST FOR ME, OR CAN I SET THE TRUST UP MYSELF AND SAVE SOME MONEY? ANYONE KNOW ABOUT THAT?
All caps is shouting. Please don't shout.
I don't believe this is true. If you want to avoid all taxes, use a Roth. The Unrelated Business Income Tax (UBIT) was set up specifically to address trusts and other tax free entities. If you've found a legitimate way to avoid UBIT in an ordinary IRA, please provide a pointer. I don't think this is possible.
Sorry for the caps.
I don't understand this UBIT. Will have to talk to my CPA about it, and that costs $.
But can anyone give me a bit of an understanding on it. If you buy a rental property or a business with your IRA monies... the income would be going back into your IRA and an IRA is tax deferred. Why and how could there be a tax (UBIT) on that income? If this is the case then an IRA isn't a tax deferred retirement account. Could someone possibly clear this one up? Thanks in advance.
Alfred,
I agree with John on this transaction. What type of trust is it?
Normally, you can have rental properties with out incurring UBTI in an IRA. Once you start investing in entities such as trusts I don't see how this tax would be avoided using a trust where you are the trustee.
I would learn as much as you can and then proceed with caution.
IRAs are treated as non-profits for tax purposes. There is a tax set up to "level the playing field" for non-profits that run businesses. For example, a book store ran by a university. This book store is subject to "unrelated business income tax" on the profit from the bookstore even though the university is a non-profit entity.
An traditional IRA falls into the same treatment. Active businesses, like flipping houses or wholesaling, would be subject to UBIT. This is a nasty tax, and quickly (after $10K in taxable income) escalated to a 35% tax rate. There are exceptions, though. Rental income being the main one. As long as you own a property free and clear in the IRA, the rental income is exempt from UBIT. But, there's an exception to the exception, and that is debt. If you have the property financed, the fraction that's financed IS subject to UBIT. Any debt must be true non-recourse, so big down payments are the norm. Still, you could get a 65% loan, and have roughly two thirds of the rental income, after all the normal deductions, subject to the evil UBIT.
Then, of course, whatever you take out when you retire is suject to taxes, too.
The key is to avoid prohibited transactions. I can use the LLC's checkbook for expenses regarding the property it is buying. Obviously, I can't use it to pay my phone bill.
One thing that you might not like: "sweat equity" is not allowed.
In other words, if my property needs to be painted (which is does), I can not do it. I must get someone else to do it. but I can pay them from the LLC's checkbook.
I find that the IRA / LLC setup is new to most people. I've had to explain it to my lawyer, my banker, my real estate agent, and my property manager.
Can 2 IRA's be used to fund a "Checkbook IRA LLC". Basically wondering if my wife and I can use the LLC concept to increase our buying power?
Thanks
I'm looking to purchase delinquent taxes and want to use my self directed IRA. I'm now being told this sdIRA isn't what I need. I'm unable to get a satisfactory answer on what steps I need to take. I've been quoated form $400 to $4,000 to set this IRA LLC up. If any one can enlighten me on what is necessary to have the checkbook control process set up. I would appreciate it. Any advice on do's and don'ts are also welcome.
Reviving this discussion because I am in the process of doing this right now. I am using a facilitator who is setting up my LLC. The custodian will be IRA Services Tust. I have read a lot of conflicting information about this - most custodians advise against it - but I realize there is a conflict of interest here as they collect more fees if the assets are not held in a LLC.
I am wondering if there are people on the board who can help with what's allowed and what's not? Just like some of the earlier posters, I am unable to find people (even professionals) who are truly educated and have an unbiased opinion about this option.
There is a good attorney in Phoenix that sets these up and that is mostly all he does. I have spoken to him before, and the company I use for the self directed IRA, Pensco, has worked with him before. If you want some additional info., PM me. I have no financial interest in this whatsoever, just passing on some info. His fee is reasonalbe at $1,000 and he knows what he is doing. You most likely will need to go this route (LLC) for what you are trying to do. Be careful too, the IRS is starting to watch these (and audit them) a lot more and if you make any mistakes and get caught they will void the entire thing costing you a ton of money and losing your IRA so be careful and work with the right experts. If you want a CA LLC, it will be the $800 per year too!
Bruce - Tried PMing you but it didn't allow me to because we aren't "colleagues". I'm still very new to BP so maybe I'm not doing it right. Will try one more time.
My facilitator is charging something similar, but it'd be nice to have an alternate contact for future reference. And I can't afford to buy in CA, so won't be incorporating there :)
What is the real benefit of a check book IRA? Unless you are 100% comfortable with all the prohibited transactions and can trust yourself not to ever break them, I always recommend a trust style IRA.
I can complete the paperwork fast and have the funds wired in 24 hours. I don't need speed faster than that for any real estate transaction.
Jim
I had my SDIRA set up by Guidant Financial and it is a checkbook for the LLC and I would recommend this approach. It has worked well for me. Trust Company of America is the trust company. They are hands off, which I like. Some others are somewhat "sticky fingered" and create more hoops to jump through to do your business.
Jon K., I find using Equity Trust that I can usually get 24 hour turnaround when I pay the $50 expediting fee. I do NOT find that paying for a Gold Level of Service helps at all.
Although Equity Trust tends to be over protective when preventing you from doing prohibited transactions, so far, I prefer that to the possibility of losing my tax status of my IRA by using a checkbook style IRA owning an LLC. I am not convinced yet that the IRS won't decide to declare them in violation.
At least I usually prefer it so far. I don't always feel that way when an inexperienced employee is holding up my transaction because they don't understand it and/or I didn't put the comma in the right place.
Jon K.When I did it in 2006 they charged about $5,000 for the whole services, including the LLC setup, registration in the state of choice, setup with the trust co. and one hour of consultation with a lawyer to go over the do's and don'ts of the non allowed transactions etc.. The trust company now charges me $250/ quarter to have the trust, which I think is more than others, but, I like the hands off approach they use and can deal with the cost.
It's still very confusing as to whether this is a good way to proceed or not. I am breaking into a sweat thinking that a single prohibited transaction can jeopardize my entire IRA. Since I've already embarked along this path, I am thinking of the following.
1. Form a LLC but fund the LLC with only the minimum required to buy 1 investment property
2. Buy another property directly through the SD IRA. The chances of making a prohibited transaction are less here since the custodian is approving everything.
3. In one year, compare the expenses/fees/hassles associated with the two properties
4. If LLC property doesn't yield major cost benefits over the non-LLC property, dissolve the LLC and move the property directly into the SD IRA
Can this be done?
No, I'm pretty sure it can't. You can't just move something into an IRA, there are limits to how much you can contribute, and the property can't be something you already own. The property has to be bought in the IRA to start with, no legal advice intended.
I see this was an old thread that was resurrected. There’s another option you might consider, that's gaining popularity.
But first, if you're breaking into a cold sweat because you're afraid or don't understand the process, then don't do it. Open a plain vanilla SD IRA under a custodian and learn the rules. If it's simply about money, and you are making income and paying yourself, then you might consider a self-directed 401k, with (or without) checkbook control, instead. It has many advantages. Among them:
1) Depending upon your age, you can shelter approximately $49k per year compared with $5 to $6k in an IRA.
2) An SD 401k will also cost several thousand dollars to open (once) but you won't have an LLC to maintain or pay California's $800 minimum annual franchise tax. Long term, this will save you a lot of money.
3) The prototype plan you obtain will come with an approval letter from the IRS, eliminating any worry that the IRS would disallow it.
4) You can still go the SD 401k route but without checkbook access and save some money. Here, you’ll still have a custodian.
There are other 401k benefits, such as a UDFI exemption (income attributed to a mortgage) that might or might not benefit you.
And just to scare you, in all cases (SD IRA and SD 401k) there are concerns about the amount of participation you are allowed over the property. That is, can you manage it, perform repairs, or even just do the books? The IRS is unclear about much of this so even if you scrupulously follow the investing rules through a custodian, you can still get into trouble. With this in mind, my opinion is that it's best to leave the physical real estate assets out of a retirement plan and use it only to invest in paper (notes, syndications, LP's, etc.). These topics have been well covered in other threads here and you might also do a search.
Jeff
Meg O.
The key is to avoid prohibited transactions. I can use the LLC's checkbook for expenses regarding the property it is buying. Obviously, I can't use it to pay my phone bill."
I went to an attorney and asked them to set me up with a self directed plan. They chose to set me up with a self directed 401K known as a Solo 401K. If you have the choice, the 401K is by far better in my opinion. For one, you can contribute much higher deferred salary. Second, unlike the "checkbook" IRA with an LLC, a Solo 401K does not have an LLC which means no state fees (such as yearly renewals in Florida, as well as possibly having an additional IRS tax return for the LLC. My Solo 401K is a "checkbook" style so to speak, with it being at my local bank. When I want to add a new investment into my 401K, I write the check. So, there are similarities, but I do believe that the 401K has advantages over an IRA. I do know that there are rules and guidelines, and that a Solo 401K is not possible in certain circumstances. Consult a good CPA that might be able to give you the pros and cons, as well as tell you what you may or may not be able to do in your specific situation. I just started my Solo last year, and my only regret is now knowing about it and doing it ten years ago.
Best of luck!
John Thedford
Naples, Florida
I've been researching moving my Traditional sdIRA, which is already in a trust of which I am the trustee, to a custodial service that will allow me to invest in rental property. I'd be happy to go with a full custodian service like "Equity Trust" which would not require setting up an LLC and distributes the funds on an as-needed basis if they didn't have such terrible Google Reviews by customers who have missed earnest money and closing deadlines, along a host of other complaints like taking money out of accounts without explanation and refusing to return calls. My sister recently hired them and her first experience closing on a REO property was a nightmare! They almost missed the closing which would have cost her the loss of the property along with her earnest money. As a result I went looking for an alternative and came across the "checkbook IRA LLC". It seemed perfect but Equity Trust, a competitor, has posted some pretty dire warnings. These seem mostly fear-based and outdated since I haven't been able to substantiate them.
I've just started my research but one firm I talked with in NY can set up an IRA/LLC for $1500 and seems to offer a lot of initial support and education. They recommend using a passive custodian service in San Francisco called "IRA Services" who has been around for 38 years with fees at $185 for the first yr and $115 per year thereafter. They are hands off when it comes to your investment transactions, so it's up to you t know the restrictions, but they handle filing your annual assessed IRA value each year.
Before I take the plunge I am doing more research to make sure it's all legit.
Bruce M: I hope you don't mind that I pm'd you for contact info on the lawyer in AZ who sets up IRA/LLC's for around $1000. :-) Thanks in advance for your help.