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
Have you looked into the solo 401k plan as it does not require an LLC for investing in real estate and it generally has less red tape.
Following are the similarities and differences between the solo 401k and the self-directed IRA.
The Self-Directed IRA and Solo 401k Similarities
The Self-Directed IRA and Solo 401k Differences
I went back and re-researched multimember IRA/LLC's and this is what I found:
- There is disagreement on whether or not subsequent contributions are allowed. However, the Department of Labor addressed this issue in Advisory Opinion 2003-15A. Although this opinion specifically referenced retirement plans under ERISA, the DOL stated that its opinion should be read with the same effect as IRC4975. This can be relied on in the IRA context and makes clear that subsequent contributions do not constitute a prohibited transaction. They should be done on a pro rata basis to protect agains a transfer of ownership between an IRA and a disqualified person.
This information came from the book cited below. I encourage anyone to read it if they want to learn more.
Sorensen, Mat. The Self Directed IRA Handbook. SoKoh Publishing, LLC. 2014.
The DOL opinion letter you reference has no nexus that I can see with the concept of a multi-member LLC where the ownership is fractionally held by IRA accounts belonging to disqualified parties. I have not seen Mr. Soresen's commentary on the topic, but I think it would be quite a stretch to find applicability here. I am not a tax attorney, but I work very closely with one and have been around this field for a very long time.
Again, there is no 100% certified, IRS approved answer on this topic. You can choose an aggressive and potentially risky strategy, or a conservative and risk averse strategy.
Regardless, the extra administrative overhead of having to file partnership tax returns for such a multi-member LLC often negates the perceived cost-savings of a combined single entity. In the early years of our business, we formed partnership LLC's - with the caveat of no additional funding. We stopped doing that long ago because they became unmanageable and did not provide a significant benefit relative to the cost in both time and money for our clients.
I won't go so far as to say "don't do it", but I did want to share the wisdom that comes from a decade of doing this stuff, so that you can be sure to look at all the angles before making your decision.
The best solution is an IRA checkbook trust. Thousands of people use it. I've been using it for over 13 years. Most custodians coast to coast approve it. You pay one annual fee, about $300. The custodian buys the beneficial interest of the trust, which is in your corner bank. No LLC, expensive set up, annual fees, annual reports or registered agent.
All rent and note payments go to your corner bank and are ready to be reinvested rapidly, without the cost or delay of going through the custodian. Google "IRA checkbook trust" for details
Hello Everyone,
Regarding the UBIT taxes, I have a SDIRA account with an LLC setup and the assets held by the trust are in the form of a promissory note. This was done when the funds were transferred to the LLC for investments. In other words, the Trust does not have visibility of what assets the LLC has been investing on. So I wonder if this could be a way to avoid any UBIT taxes ?
Thanks for any perspective so far.
No, you can't avoid UBIT taxes by using the Checkbook IRA or IRA LLC model; after all, the IRA still owns the investment.