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Updated about 5 years ago on . Most recent reply
Self Directed IRA's and LLC's
A client asked me today, "If I am using a self-directed IRA to purchase an investment property, do I have to buy it in an LLC owned by my self-directed IRA or can the IRA purchase the property in its own name. I can think of several reasons why he should use the LLC but I don't know if it is 100% mandatory. Can anyone in this business or an attorney tell me the answer to this question?
Most Popular Reply
A self-directed IRA does not require a LLC, but for most property investments, it will be much more effective and efficient for the LLC to be included.
A self-directed IRA starts with an account held by a specialty custodian. Think E*Trade or Vanguard with different paperwork. Instead of computer systems trading stocks, these institutions rely on people and paper forms to process the more one-off types of transactions that happen in non-traditional assets like real estate.
If you stop at this layer, you have a 3rd party processor that holds the funds and executes transactions at your request. This involves a several day processing queue, execution of necessary documents by the custodian, issuance of funds, etc. With a rental property, for example, this is very inefficient and results in a lot of paperwork, delays and per-transaction fees.
The alternative is to push the IRA to the back end have have it make a single investment into a specially formed LLC. The IRA owns the LLC, but the IRA account holder can serve as the non-owner manager of the LLC and direct the affairs of the entity. This provides what is called "checkbook control", as the client now has signing authority on a bank account held in the name of the LLC. All transacting takes place via the LLC, at the direction of the IRA account holder and without the need for the paperwork, delays and fees of the custodian.
It costs more to establish the legal structure of the LLC on the front end, but generally results in significant long-term savings as well as a more useful and robust investment vehicle.