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
John Thedford: Thanks for the info. Unfortunately I can't move my Traditional IRA into a 401K without taking a big tax hit - but I can see where a Solo 401K would be a lot easier. Will sure consider this with future income investments.
Leslie E.,
There is no tax consequence for rolling over your traditional IRA to a Solo 401k. The solo 401k is the best choice if you have a corporation or LLC.
You really need to sit down with an accountant to talk about it. If you'd like I can get a recommendation of another accountant that might be more local for you.
-Steven
Since this thread is resurrected, I'd like to update my previous comments.
I still have two solo 401(k) accounts at Equity Trust, but I hate dealing with them because their customer service is such a nightmare. It would be difficult for me to move them because I hold some land in one of them. I don't have confidence in their diligence to provide all original documents that they are holding.
I did discuss with my accountant about the Checkbook IRA, and he has never heard of anyone getting audited or having their IRA disallowed because it held a checkbook control LLC. So when I inherited an IRA, I moved it to Udirectira.com and created an LLC inside it. UDirect gave great customer service and provided daily email updates. They actually answer the phone, and you can speak to the person you ask for. Imagine that. It was a comparatively simple process relative to the hassle of dealing with Equity Trust.
I don't think they provide solo 401(k)'s. If they do, I will definitely move my accounts over.
So I have taken the plunge and opened a Checkbook IRA and the process of conducting transactions is very easy. We won't know if they are disallowed until it happens.
Thanks Ann for the info. I looked at UDirect's site - are they a "passive" custodian for your IRA/LLC or did they set up the LLC?
Thanks again.
Thanks - I would appreciate it if you could recommend someone in the Boulder/Denver CO area.
I might have an account with Equity Trust. Or maybe its Sterling Trust. I don't know, since both names are on the statements. Their fees have gone through the roof, and I'm in the process of moving it over to IRA Services, who I already have another another account and my IRA LLC with. Sterling Trust was like molasses in winter trying to get something done quickly.
Leslie E.,
My attorney set up the LLC. If I remember, UDirect provided some guidelines that I provided to my attorney. The attorney then set up the LLC online and provided the operating agreement and the EIN. Normally I would set up my own LLC, but when it's inside an IRA, that is prohibited. Also the fee for the attorney must be paid by the IRA, not by you. So you give instructions to UDirect to pay the attorney.
Once your LLC is set up, with you as manager and your IRA as the sole member, you go and set up a bank account with the EIN provided by the attorney.
There was one challenge I didn't expect. Usually when you set up a new bank account, they want you to deposit some money, even if only $10. You can't do this with your new LLC, because the funds have to be wired or mailed from the IRA. Once you explain that to the bank rep, then if they require a copy of the operating agreement, you may run into a rep who says the bank doesn't allow accounts where the single member is an IRA.
This happened to me with Bank of America. My regular rep was on vacation, and the assistant branch manager refused to open the account, because she called Merrill Lynch (owned by B of A) and they told her that an IRA can't own an LLC.
Well, that is of course false, but Merrill Lynch employees don't work with self directed IRA's so they are told "You can't do that". THEY can't, but that doesn't mean it's illegal, it means that Merrill Lynch won't.
I wanted to use BofA because of the excellent online banking, so I kept calling until I found the 1 business rep in the entire state who understood what I was doing and gave me no hassle.
Just a heads up on that part of the process.
This happened to me with Bank of America. My regular rep was on vacation, and the assistant branch manager refused to open the account, because she called Merrill Lynch (owned by B of A) and they told her that an IRA can't own an LLC.
Well, that is of course false, but Merrill Lynch employees don't work with self directed IRA's so they are told "You can't do that". THEY can't, but that doesn't mean it's illegal, it means that Merrill Lynch won't.
...
That's because there are dimwits who think the "A" in "IRA" stands for "Account" and those who know better know that's not the case ...
Ann Bellamy
Thanks for the head's-up regarding the challenges we might face opening our IRA/LLC account.
I wonder why have udirectira write the check to the lawyer who sets up the IRA-owned LLC? Once you have checkbook control you could do this yourself, correct? Or is this for the lawyer who perhaps wants a retainer before beginning any work?
Steven Hamilton II
There is no tax consequence for rolling over your traditional IRA to a Solo 401k. The solo 401k is the best choice if you have a corporation or LLC.
You really need to sit down with an accountant to talk about it. If you'd like I can get a recommendation of another accountant that might be more local for you.
I'd really appreciate any contacts you have, Steven. Thanks! :-)
Bruce M.
Not sure if you are still following this chain, Bruce - but if so, could you please pass on the name of the Phoenix atty? Thanks also!
Thanks for the head's-up regarding the challenges we might face opening our IRA/LLC account.
I wonder why have udirectira write the check to the lawyer who sets up the IRA-owned LLC? Once you have checkbook control you could do this yourself, correct? Or is this for the lawyer who perhaps wants a retainer before beginning any work?
No, its for the check to do the legal work to set up the LLC. My attorney would have waited for me to pay him, that's not a problem. I'm not sure about the distinction, but UDirect was adamant, so it must have to do with IRA regulations about SDIRA's. It wasn't a big deal, you simple direct the IRA to pay the bill.
I don't think they provide solo 401(k)'s. If they do, I will definitely move my accounts over.
Ann, thanks, this was helpful. I'm trying to decide whether to roll an old employer 401K into an IRA/LLC or solo 401k. I'm pretty sure I understand the IRA/LLC. It's good to hear that a custodian like UDirectIRA will provide guidelines so that your own attorney can set the LLC up. This should be less expensive than the 1200-1500 that is normally quoted by specialty outfits to do the whole setup for you.
On the solo 401K, I'm less clear but it appears to be even better, as you seem to be saying as well. It also offers checkbook control through a local bank with you in total control, and I THINK is perceived as being above scrutiny by the IRS. I've read that you can use mortgage financing as leverage without triggering Unrelated Business Taxable Income.
Questions: Is the soloK more expensive to set up? Is it more burdensome administratively? Do you HAVE to use a 3rd party custodian as you do with the LLC/IRA or traditional IRA? Any other pros/cons?
The main difference between and IRA/LLC and a Solo 401k is that the IRA is sponsored by you and the 401k is company sponsored. That is, you make your IRA contributions personally but your business makes those into the 401k on your behalf. Thus, you have to have business income to fund a solo 401k.
To update my old post above, depending on your age, IRA contributions are limited to about $6.5k per year but a 401k can be used to shelter roughly $51k annually or about $102k for you and your spouse. There is no LLC required for a solo 401k. It can be sponsored by any type of business, even a sole proprietorship, and is remarkably easy to set up.
My CPA created ours based on the plan he uses at his firm, but there are many providers that customize these. The cheapest I've seen lately is about $1200 (anyone have a cheaper reliable source?). What you pay for is a dishearteningly simple 3-ring binder containing "The Plan." You take this to a bank and open a separate checking account and roll your existing retirement money (except Roth funds) into the account. It can't be any simpler and there is no separate LLC.
One minor drawback is your solo 401k has to file a form 5500 tax return (so there is IRS scrutiny, David) and there might be some nominal annual fees for paperwork your provider will likely send each year to keep your plan current. The rest is just bookkeeping, which you would have to do for an IRA/LLC anyway (plus a more complicated tax return).
One benefit is there are no junk fees. You're now the trustee and custodian and you must completely understand what you can and cannot invest in and with whom. There is no one like Entrust or Udirect to watch over your shoulder and guide you out of trouble. If you're not comfortable with this, then neither a solo 401k or IRA/LLC are for you.
Jeff
I just called Guidant Financial and their IRA/LLC set up fees run around $3K, ballpark. They also offer custodial services at $105 /yr.
Has anyone used IRA Financial Group/Adam Bergman, ESq. They/he run around $1500 to set up and recommends 'IRA Services' as the custodian which charges $115/yr;
Or - Broad Financial? (No idea about their fees.)
Wondering how they all compare.
My attorney set up the LLC. If I remember, UDirect provided some guidelines that I provided to my attorney. The attorney then set up the LLC online and provided the operating agreement and the EIN.
David Beard said
I've seen set up fees as high as $3000... so I can see how it might be more cost-effective to hire a local attorney, but I wonder how safe is it to have someone set this up who is not well versed in it, especially in terms of on-going support? Is this risky? Guidant Financial charges $3000 to set it up (the most expensive I've found so-far) but they 'sell it' based on claims of superior support as well as a "safer, stronger system" than the others. If this is true then it is money well spent, but perhaps the LLC is set up the same regardless of who does it, and the more expensive outfits are just hype.
Any thoughts anyone?
$3,000 to spit out an IRA operating agreement that has mostly boilerplate? Absolutely ridiculous. Found this attorney who will do it for $750.
http://iracapitalpartners.com/services.htm
IRAServices.com seems to be an inexpensive custodian that is widely used for these plans. The custodian really does very little, so I don't think it makes that much difference who you use, and they're mostly charging $100-150/year.
Leslie : When I set mine up in 2006 there were less companies knowledgable enough to do it, but, now I think you can get it done safely and easily with less expense. Be sure you get checkbook control without strings attached. I agree with David that this isn't rocket science and shouldn't be expensive.
David Beard, Jeff S did a better job of answering your questions than I could have.
My local attorney had set up 4 LLC's within IRA's - not 401k's. It turned out the operating agreement and the LLC was no different than any other. It's just the process of being sure you don't do anything for yourself that is different. So normally I would set up the LLC with the state online myself, and get my own EIN. Can't do that with an IRA. But other than that, it was no big deal.
I would not be comfortable enough to manage my own 401k plan at a local bank (even though I manage my LLC within my IRA), although if Equity Trust gives me more grief, I'll be motivated enough to do the research to become comfortable. There is more to managing a company 401k plan than there is to managing an LLC.
Be careful, I'm not a lawyer but the LLC operating agreement must contain specific clauses not found in the standard boilerplate provided by most attorneys or the likes of LegalZoom. The LLC is plain vanilla but the operating agreement is not. Make sure your attorney knows and can explain this.
I recommend anyone considering an IRA LLC spend $40 and buy Create Your Own Self-Directed IRA LLC by Eric Archer. It’s an eBook with an unbelievable wealth of information.
Archer answers many questions and explains various interpretations of the law, which is quite vague in some areas. He gives a great and detailed explanation of prohibited transactions, applicable to any retirement plan, and provides links to an amazing number of websites and citations. Archer then goes step-by-step into how to set up and fund the LLC under an SDIRA company such as Entrust or Pensco, and he even includes an LLC operating agreement, he says is suitable for use as a guide in Arkansas, as well as a subscription agreement.
Even if you live in Arkansas, you’d be crazy to blindly follow this kit on your own, in favor of speaking with your attorney and CPA. But the education is truly worth the 40 bucks and highly recommended. There’s also a “special” email address you can use to ask questions of the author.
Jeff
My CPA created ours based on the plan he uses at his firm, but there are many providers that customize these. The cheapest I’ve seen lately is about $1200 (anyone have a cheaper reliable source?).
Jeff
Found this solo K provider, which allows the full range of alternative investments, at considerably less. Two options available: $395 set-up and $195/yr, or $595 set-up and $125/yr. Of course, need to investigate the company further, but sounds good on price.
Thank you everyone for your helpful suggestions!
I will put a call in to the lawyer in OH. From his website it looks like he offers the same service the others offer. I will get the book Jeff S recommended so I know what questions to ask. I think this will help clarify some things for me.
There are some legal professionals which question if the IRA LLC Checkbook structure is valid....at least from the IRS perspective.
I went down this road with Corporate HRA accounts and in the end decided that since the cattle, which is the US population, have given the IRS dictatorial and tyrannical powers over us, legal opinions do not mater. What maters is what the IRS will do or not do. The IRS is the Judge, Jury and executioner. The IRS could crack down tomorrow on the IRA LLC structure and the penalties they could levy would be severe.
Don't get me wrong, I want the IRA LLC, but given the state of this country and the over reaching powers, I don't think its worth the risk
Take a look at this legal opinion...it casts doubt, hence it could be the view of the IRS:
http://www.ritaus.org/assets/documents/IRAMythArticle5.12.09_000.pdf
http://thompsonhall.com/ira-llc-how-to-use-an-llc-for-a-self-directed-ira/
A solo 401k is a much better vehicle. I also recommend that you consider being your own administrator, but KNOW AND FOLLOW the rules.
A Checkbook LLC is fine provided you follow rules and keep it arms length and avoid prohibited transactions. This is the part people struggle with.
How is it better than a Self-Directed SEP Checkbook IRA?