Self Directed IRA - LLC

14 Replies

My wife just opened a self directed IRA account with Quest Trust Company. She was told by the attorney that Quest won't allow her to be the manager of LLC. Attorney said that most other custodians allow that. I got great recommendations about Quest from BP. So I don't understand how this can be true???

@Harpreet Singh

They are probably protecting you from having problems. You should have asked Quest that question when doing your "due diligence". Who put your checkbook LLC together-what custodian did they suggest? Do you really need an LLC? I do not recommend the Ira owner be the manager of their Ira LLC.

Do you really need an LLC for your IRA?? Most people that I know and borrow from have their IRA at Quest, but I have never seen anyone use an LLC. They buy properties in addition to lending but never seen an IRA.

If you are dead set on having one, have someone you trust be the manager. I am sure that you will be telling the manager what to do anyway, right??

Updated almost 2 years ago

Meant to say I have never seen an IRA LLC.

@Harpreet Singh

The IRA owned LLC structure has been around for 25+ years. The IRA account holder can be the manager, so long as they adhere to the IRS rules and limit their role purely to administrative actions wholly for the benefit of the IRA. There are thousands and thousands of such structures out there. We have setup structures like this for clients who have subsequently been audited and the IRS had no difficulties - precisely because these folks had been following the rules.

Some IRA custodians support the IRA LLC model and some do not. Whatever reasons they may provide to you, the real reason that many custodians do not like the IRA LLC is that it eliminates the majority of their fee revenue. Plain and simple.

In the last few years, several custodians have come up with the requirement that someone other than the IRA account holder be the LLC manager. This is purely a mechanism to make the structure more cumbersome, so that their custodial processing services will look more appealing by comparison.

Here is the big joke in all of this. The custodians are essentially telling you, "You should not trust yourself with this much responsibility". They promote the idea that it is very easy for investors to break the rules and that the risk is too great. Do you trust yourself and are you willing to learn about and follow rules? If so, then there is no issue with a Checkbook IRA LLC where the account holder is the manager.

The truly cynical point about custodians saying you should not trust yourself to follow the rules is that the corollary of their marketing effort is "We have your back when it comes to IRS compliance."  Unfortunately, that is a big lie.  Read the disclaimer on the investment direction of any custodian.  Here is what is on the Quest form:

"I acknowledge that the Custodian has not provided or assumed responsibility for any tax, legal, structuring or investment advice with respect to this investment.  I understand that the Custodian has not reviewed nor will review the merits, legitimacy, appropriateness or suitability of this investment for my account, and certify that I have done my own due diligence prior to instructing the Custodian to make this investment for my account.  I understand that the Custodian does not determine whether this investment is acceptable under the Employee Retirement Income Security act (ERISA), the Internal Revenue Code (IRC), or any applicable federal, state, or local laws, including securities laws.  I understand that it is my responsibility to review any investments to ensure compliance with these requirements."

This translates to; "so long as you provide all of the appropriate paperwork to document the transaction, we will generally process the transaction".  That said, if there is something glaringly wrong with a planned transaction that the custodian sees, they will usually put the brakes on things, but they have no obligation to do so.  

So, ultimately, you are the one responsible for ensuring your IRA transactions are within the rules, regardless of which structural approach you choose - custodian held or truly self-directed with the checkbook LLC model.

In some cases where the dollar value is lower and the account is being invested in relatively static assets without time-sensitivity or frequency of transactions, a custodian serving as intermediary can be a fine solution. For investors who will have larger or more dynamic portfolios in the IRA, a plan offering checkbook control will provide much greater utility and eliminate a considerable amount of processing delays and fees inherent in the custodial model.

Kindgom Trust Co. and IRA Services Trust Co. are two of the larger custodians that fully support the IRA-owned LLC and have a long track record of doing so. There are several others.

As an aside, starting the checkbook IRA LLC process from the custodial side will generally result in an inferior overall service. The specialty firms that provide turnkey solutions for this type of program will integrate the process and work with a custodian that supports this concept. Quality providers will also be able to fully support you as you utilize the tool with meaningful guidance about IRS rules compliance. Starting with the custodian, especially if they merely accept but do not embrace the LLC concept, will generally result in a hand-off to an outside legal firm that produces a set of LLC documents at low cost and nothing more. Support is usually minimal or non-existent.

@Brian Eastman thanks for the wealth of information on this subject. I'm just starting out in the REI world as well and I'm looking at ways to utilize an IRA I have to help get me started. I've been reading different articles on SDIRAs and I like the flexibility it would give me to get started.

I found an interesting article on BP from 2010 about using a 401a as another option instead of the SDIRA. Do you have any experience with this area that could help me better understand the pros/cons of either option? My current IRA is about $170k which I thought would allow me to get into this business. I just want to look at my options to minimize fees, keep control of the money and be able to access the money as income without taking be tax hits along the way. My goal is to make this business work well enough that I can do it full time because its a lot more exciting than my day job. ;-)



@Chad Ackerman

An IRA or 401(k) is not a means for YOU to get into real estate. These tools are simply a means for your tax-sheltered retirement savings to be diversified and invested into non-traditional assets such as real estate. All activities are 100% enclosed within the retirement plan and you cannot personally benefit via creating "today" income.

@Brian Eastman thanks for the confirmation and explanation on this. I've been researching online and haven't seen it clearly stated that the money definitely stays in the IRA or there are penalties/tax involved. But I assumed that was the case. In any event I like the option as a better means of investing that money and if I go this route the lessons learned will be valuable as well.

I appreciate the quick feedback.

@Chad Ackerman

If you are self-employed with no full-time employees and have funds in a former employer plan and/or non-Roth IRA, you can set up a Solo 401k, rollover the funds and then take a 401k participant loan. You could then use those funds in your business.

First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & you do not have any full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise.

The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the Solo 401k loan. This means that the typical Solo 401k real estate rules (i.e. purchasing property from an unrelated person, NOT living in the property, NOT working on the property, etc.) do not apply.

Here is more information regarding Solo 401k loans:

I have a couple of questions regarding SDIRAs......maybe one of you knows the answers.

1.  If I was to use a SDIRA to fund the down payment and/or repairs for a "fix and flip", and other means for the rest of the finacing (such as a conventional loan or hard money) assuming I make a profit on the flip, how much of the profits would need to be deposited back into the SDIRA?   100%, or a portion based on the percentage of the investment that was provided by the SDIRA?

2.  Are there any time restrictions on the transaction?  In other words, if I take money out of the account to fix and flip, does it have to be repaid by certain time?

Thanks in advance for your support.

B.R. Marshall

@B.R. Marshall
What you propose is not possible with IRA funds.

When an IRA invests, it is the IRA that is the investor, not you. The way you have phrased it sounds like "I want to do a deal, and I am going to use some IRA money to make that happens." That would produce an IRS rules violation and disqualification of the IRA.

When an IRA invests in real estate the entire transaction takes place via the IRA with no co-mingling of funds or personal credit. The IRA could purchase a property and the IRA could obtain a hard money loan to have rehab work done. The loan would need to be non-recourse meaning no personal guarantee from you. You would not be able to work on the property and all return generated would go back to the IRA. Unfortunately, in the case of a flip with leverage, the IRA would be creating two kinds of taxable income it would be exposed to, based on use of debt-financing and engaging in a trade or business (flippng) as opposed to receiving passive income such as interest or rental income.

A better use of IRA funds would be to act as a hard money lender to other flippers and receive passive interest income.