If you want to invest in alternative assets like real
estate, private stock, notes, gold, etc., you don’t need an LLC although some
investors choose that structure.
There are many companies that push the LLC structure; some
will even go so far as to say you need an LLC. The fact is, your IRA is fully
capable of holding alternative assets directly without the addition of an
entity like an LLC. If a company tells you that you need the LLC, chances are
that company is making money from some aspect of the sale of the single-member
LLC. The structure is known by various names – the Checkbook Control IRA, the
single-member LLC, the IRA-LLC – but they’re all the same structure.
Here are some concerns to consider when you think about the
Checkbook IRA or LLC structure.
1) The IRA-LLC may not even be legal.
It is still unclear if it is even permissible to own an LLC
with your IRA AND control that LLC personally (as the manager of the LLC). There
have been court cases and private rulings that somewhat cover the issue of
funding a new entity with an IRA. However, none of these cases clarified what
(if anything) the IRA holder can do as manager of the IRA-owned LLC. For this
reason, self-directed IRA companies require an independent attorney opinion
letter specifically stating that this arrangement is not a prohibited
transaction before they will fund the investment. The issue is a grey area at
best.
2) Checkbook Control IRA Costs more money to open.
Many people are quick to think the Checkbook Control/LLC
structure somehow saves money. Let’s examine the details. For instance, our New
Direction annual administration fee is $250 per asset, per year. Most companies
that push the ‘checkbook control IRA-LLC’ charge a sizable up-front fee to open
the LLC. These fees can be anywhere from $2,500-$5,000, before any investment
is made.
3) More difficult to find a custodian.
It is important to note that even with a Checkbook Control
IRA/LLC, the client still needs a self-directed IRA company to provide
custodianship of the IRA that holds the LLC. Fewer and fewer companies are
willing to provide custodianship to IRA LLCs. The ones that are still willing
to hold them are charging higher fees because these investments are considered
‘high risk’ investments by the IRS and the banks don’t like holding assets that
don’t have clearly established values.
4) Annual Valuation can be expensive and annoying.
The custodial bank that holds your IRA is responsible for
getting an annual valuation of the assets your self-directed IRA holds. Banks
are requiring more and more information from clients; particularly clients that
have single member LLCs in their IRA.
5) You might as well become a CPA.
If you elect to structure your investments through a Checkbook
Control IRA/LLC then you (as the manager) are 100% responsible for making sure
every aspect of the company is handled appropriately. Don’t underestimate the
responsibilities that come with managing a company (particularly when you
consider the company is owned by a tax-deferred or tax-free IRA). It is
extremely important that you keep the IRA/LLC assets separate from your personal
assets. You must understand that the rules which apply to the IRA also apply to
the LLC. A violation of the prohibited transaction rules can result in huge
penalties to your IRA, or a complete distribution of the assets.
The bottom line:
If you are an expert in self-directed IRAs AND you
know how to manage the recordkeeping for a business AND are capable of
keeping IRA/LLC assets separate from personal assets AND you’ve talked
to your attorney and they are willing to provide an opinion letter specifically
stating the entire thing is okay AND you are willing to pay extra for
starting costs, then you might want to consider the checkbook control IRA-LLC.
Anything short of that and you are most likely better offer using a
self-directed IRA to purchase assets without an LLC.
