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
Hello All,
Relative to SDIRAs, I see the form 5498 is filed each year with the IRS for contributions or current account value; or 990-T for UBIT-related.
Would anyone happen to know what is filed at the State level (I expect this is rather variable by State). I happen to reside in PA, where my LLC is located pertaining to my SDIRA.
regards, Bruce
Relative to SDIRAs, I see the form 5498 is filed each year with the IRS for contributions or current account value; or 990-T for UBIT-related.
Would anyone happen to know what is filed at the State level (I expect this is rather variable by State). I happen to reside in PA, where my LLC is located pertaining to my SDIRA.
regards, Bruce
For tax years beginning prior to January 1, 1998, non-profit corporations were required to file PA Corporate Tax Reports (RCT-101) if they had the authority to issue capital stock.
For years beginning after December 31, 1997 all non-profit corporations are subject to the capital stock/franchise tax and corporate net income tax unless exempt by statute. To be exempt from these taxes a corporation must meet one of the following criteria:
1. Is an exempt organization as defined by section 501 of the Internal Revenue Code of 1986.
2. Is organized as a not-for-profit organization under the laws of this Commonwealth or the laws of any other state meets one of the following:
a. would qualify as an exempt organization as defined by section 501 of the Internal Revenue Code of 1986.
b. would qualify as a homeowners association as defined by section 528(c) of the Internal Revenue Code of 1986.
c. is a membership organization subject to the Federal limitations on deductions from taxable income under section 277 of the Internal Revenue Code of 1986, but only if no pecuniary gain or profit inures to any member or related entity from the membership organization.
d. is a nonstock commodity or a nonstock stock exchange.
I agree with @Steven Hamilton II Jeff and others who commented bringing up Solo 401k benefits. For those who qualify, self directed Solo 401k route is much better than self directed IRA. Several major advantages, but the key point is to qualify for it (not everyone would qualify).
@Dmitriy Fomichenko - why wouldn't everyone qualify to roll over regular IRAs, 401k's, et al, into a solo K account. Anyone can sign up for $50 to be a distributor for Juice Plus (a nutritional product), for example, and voila, they're a small business owner. Do you disagree?
I have this question for you as well, since you're a pro in the field: Could I open a SDIRA and solo K, make regular contributions to the SDIRA, and then roll those contributions into the solo K periodically?
@David Beard I see three reasons why not:
1) Most people can easily create a self-employment activity. But there are those who simply does not want to become a juice distributor (or distributor of something else). Therefore they don't qualify.
2) Someone owns a business with full time employees, therefore they are not eligible for Solo 401k.
3) Someone has current Roth IRA that they wish to invest in Real Estate, and Roth IRA can not be moved into Solo 401k.
@David Beard yes, you can contribute to Traditional IRA (it does not have to be self-directed, save on to set up cost) and then transfer the funds into Solo 401k.
1) Most people can easily create a self-employment activity. But there are those who simply does not want to become a juice distributor (or distributor of something else). Therefore they don't qualify.
2) Someone owns a business with full time employees, therefore they are not eligible for Solo 401k.
3) Someone has current Roth IRA that they wish to invest in Real Estate, and Roth IRA can not be moved into Solo 401k.
Thanks, Dmitriy - I still hold that your refutation in #1 has no substance. In essence, anyone can have a small business at virtually no cost! Unless one is psyschotically opposed to owning a tiny business, then there is no barrier (and they might want to even seek counseling, LOL).
Awesome, the best of both worlds!
Good conversation here. The key is you only have to qualify when it is opened up. It does not have to be an ongoing qualification.
Thanks (belated) to Steve H. regarding my earlier question on whether a SDIRA's LLC is to report to the PA Dept. of Revenue. I now see it does not per the info you provided!
Thanks.
Bruce
Hello Alfred, I currently have my Self Directed IRA with Provident Group. The only asset owned by my IRA is an LLC which I manage. I did everything on this set up myself. There are lots of cuss-todians who try to make the process sound very difficult, but it is just not that hard. You definitely don't need to spend a few thousand buck to get an LLC set up. Mine cost me about $300 including the state fees.
I have a online blog that chronicles my adventures with my IRA with checkbook control, but I'm not sure that a link to it is allowed.
So far, my LLC owns rent houses, notes, mortgages, and cash.
I have had zero problems so far, but the night is young so you never know.
Good Luck
DePriest
I just wanted to add that I use IRA Financial Group, and they charged $900 to set up the 401k trust, with very small annual fees thereafter (I think $125/year). I have checkbook control, so have not needed to check back with them very often; however, when I do send an email asking for guidance, they typically return my email within a day. (disclosure - I have no other financial connections with them)
I agree with others that the key is first qualifying for a 401k. For me, this part was easy since I already run my own business with no employees. The second thing is to make absolutely sure that you understand the limits (no active management, no insider deals ("prohibited transactions"), no sweat equity, strict limits to how much you can borrow, etc.). For those like me that just want to buy rental property, have a third party manager, and receive rent, the 401k Trust is a pretty sweet deal.
I wonder if everyone here is completely aware of the rules surrounding IRA LLCs? It seems as though people are really just trying to avoid using a self-directed IRA the way they are designed...with a custodian. I strongly encourage people to think twice, make that five times, before setting up an IRA LLC!
Please read the following articles by a trusted advisor and attorney on these entities and understand there are serious implications for using these setups incorrectly (such as a 39.6% tax rate!).
http://bit.ly/1ga9uDV or http://1.usa.gov/1syFp17 (for the actual court case)
I would highly recommend the use of a self-directed 401k as a trustee since there is much more precedence around these types of plans, as well as regulation in place.
Of course you can do anything you want...until you get caught! I personally do not want to be caught up in anything with the SEC or IRS personally, which is why I steer clear of IRA LLCs and advise clients to do the same.
Please read the following articles by a trusted advisor and attorney on these entities and understand there are serious implications for using these setups incorrectly (such as a 39.6% tax rate!).
http://bit.ly/1ga9uDV or http://1.usa.gov/1syFp17 (for the actual court case)
I would highly recommend the use of a self-directed 401k as a trustee since there is much more precedence around these types of plans, as well as regulation in place.
Of course you can do anything you want...until you get caught! I personally do not want to be caught up in anything with the SEC or IRS personally, which is why I steer clear of IRA LLCs and advise clients to do the same.
Jeff, how much protection does using a Custodian provide? Have any of the custodians completely avoided disqualification of their clients' IRSs/401Ks?
A qualified, regulated Self-Directed IRA or Solo(k) custodian will be sure its clients are fully aware of all the IRS and DOL regulations regarding investing in alternative assets. Many "custodians" are actually "facilitators" who charge higher fees and will actually set up the IRA-owned LLC for the client, and may also have some management role in it, preparing tax returns and so forth. They sometimes sub out the custodial or administrative role to an outside bank or other financial institutions - and work those fees into their own.
A truly Self-Directed Custodian is passive and has no involvement in the IRA-owned assets. It does not give tax, legal or investment advice, nor assist with the structuring of any IRA owned investment vehicle.
For IRA-owned single member LLCs, sometimes referred to as "checkbook control" IRAs, the more premier custodians will require that the IRA owner appoint a special advisor - a licensed CPA or attorney - who is responsible for reviewing every transaction of the LLC to ensure it's not running afoul of any self-dealing or other prohibited transactions.
Before deciding on any investment type or any custodian/administrator/facilitator, it's advisable to do your due diligence as running afoul of the IRS or DOL laws will result in loss of tax advantaged status of your IRA or Solo(k), as well has taxes and penalties.
Hiring a licensed CPA or attorney to review each transaction could quickly become quite expensive. Is this a requirement, or can the review be done by the owner?
The reason being due to the outside payments to the state.
It is not required to have every IRA LLC transaction reviewed by legal counsel. Some custodians may try to drive you towards such a model as a way to make the checkbook IRA LLC less appealing. This has nothing to do with compliance, and is a tactic to drive you to forgo the flexibility and control of the LLC offers and remain within the custodian-managed IRA model where you are paying more transaction fees.
NO CUSTODIAN provides any kind of legal or tax guidance when you transact directly via their account, If you give them the paperwork to process X, they will process X unless it is very clearly a prohibited transaction such as issuing a check to yourself. Read the fine print on any custodian's Investment Directive form and they by no means provide any guidance or tax compliance oversight. You are encouraged to seek your own counsel.
So, when a custodian that is providing exactly that ZERO level of guidance when you process a transaction through their account asks you to have written confirmation that you have consulted with tax counsel when you transact via an IRA-owned LLC, they are really saying that they want to put obstacles in the path of the IRA LLC model.
Generally speaking, the firms that provide the IRA LLC structure are not custodians, for the very reason that custodians are limited from providing the type of tax or legal guidance that the formation of such a structure entails. In the IRA LLC realm, you generally work with some sort of consulting or legal firm that creates the structure - and most such firms have one or more IRA custodians they utilize to hold the IRA that owns the LLC. There are such firms that are just document providers, and firms that will provide access to quality guidance as you invest with the plan so that you can be sure you are not stubbing your toes on the IRS guidelines.
Do your homework and speak with some custodians and some providers of IRA LLC plans and it should become pretty clear to you who is "for real" and not just selling something.
Sorry for the long rant, but clearly you had been thrown off course, and I felt is necessary to bring some clarity to the topic.
Originally posted by @Brian Eastman:
It is not required to have every IRA LLC transaction reviewed by legal counsel.Sorry for the long rant, but clearly you had been thrown off course, and I felt is necessary to bring some clarity to the topic.
Actually it was you who told me this.
In addition I've seen many postings and articles recommending to have a CPA or attorney file information forms with the IRS and state for an IRA LLC each year, but no direct answer regarding if I can much more simply do this myself, which is what I'd like to know.
As the IRA account holder and manager of the LLC, you can do some of the administrative filings required for the renewal of the LLC. In California, FTB form 568 will be required for the LLC each year and you may wish to have someone licensed assist you with that.
The IRA custodian will annually file form 5498 on behalf of the IRA. You will need to report the value of the LLC to them each year so that they may do this. (same filing as any IRA).
If the LLC has exposure to UDFI or UBIT taxation through the use of leverage or engaging in a business then you would certainly want a CPA to help with the required 990-T federal tax return and any state equivalent.
Good Afternoon,
I am about to get on a call with an attorney in my area to discuss setting up a multi member IRA/LLC that will be 50% owned by my wife's Roth IRA and 50% by my Roth IRA.
The fees involved are higher than a more "mainstream" Roth IRA, however, they are worth it to me.
To set up both IRA accounts and the IRA/LLC will cost $1,325. This includes the custodian's admin fee on both accounts for the next year. For this I get control over the funds in the accounts to invest in real estate associated investments. We plan to start with private lending and branch out from there.
I am fairly knowledgeable about these accounts, but by no means an expert. I am happy to try to answer questions if you have them. Private message me and I will return answers as quickly as possible.
Ed
Forming a partnership IRA LLC is not something we would recommend, as it greatly limits your flexibility and increases your complexity.
While it is technically feasible to create an IRA LLC that is a partnership between multiple IRA accounts, we strongly recommend a 1-to-1 relationship between a distinct IRA account and LLC for reasons of flexibility in future maintenance of the account.
A single member IRA LLC can continue to be funded via IRA contributions or transfers, and the reporting for such an entity is very simple.
By contrast, when an LLC is formed as a partnership between two separate IRA accounts belonging to a husband & wife, the resulting entity is subsequently considered a disqualified party to either account, and no future funding may occur.
This partnership LLC is also required to file a partnership tax return at the federal and state levels. No taxes will be due at the federal level since the recipients of the partnership income are still IRA accounts, but this may not be true in all states. The need to deal with these tax filings introduces complexity and expenses that negate the perceived cost benefit of combining IRA's into a single LLC.
Thank you for the advice.
I have been told by one law firm just the opposite of what you have said. They assured me that I can make additional contributions as long as they are made proportionally so that ownership percentages do no change.
I have a appointment with an attorney to get a second opinion on my plan. I will make sure I bring up your point and get his opinion.
Thanks,
Ed
Being the tax law, there is always room for interpretation. For perspective, our tax attorney has been focusing on self-directed IRA plans for more than 20 years. There are many attorneys with specialty expertise in this field who share his - notably conservative - viewpoint on this matter.
I would also recommend you discuss the matter with the compliance department of the IRA custodian you intend to use. They may not accept future contributions, or may require a letter from your attorney in such an event, so as to cover their backsides.
Sounds good. I will make sure I explore both of those points thoroughly!