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Updated about 11 years ago, 10/09/2013
LLC within my IRA
Hello everyone. After years of stalling, I've recently taken the plunge.. Appreciative of all the advice and information the BP community provides and suspect I will be spending my nights reading as much as I can.
I decided to start small, rehabbing small single-family houses with IRA funding. I have moved from my traditional IRA to a custodial IRA and struggled through the paperwork on my first purchase. Looking back, it wasn't too cumbersome but the company was very particular on how the documents and requests were filled out. Resubmitting my way through the process, I'm sure I will get it right the second time.
I'm torn with the idea of setting up an LLC within the IRA. I understand the benefit of "check book control" but am a bit intimidated by the need for an operating document and the risk that an audit would determine a payment disallowed and my IRA standing suffer.
I've bumped up my Personal Umbrella policy to a 2x multiple of my net worth and like the comfort that I have a custodian monitoring the transactions.
Most of what I've read speak to the business benefits of the LLC, where you earn, spend, then tax vs. traditional earn, tax, spend and I certainly appreciate how the LLC would be beneficial outside of the IRA.
I am sure I'm missing something... Should I reconsider the IRA-LLC?
Help appreciated,
Brian Winkler
The reason you might do an IRA LLC vs. a flexible custodian for a true SDIRA would be speed and ease of making investments. I did set up an IRA LLC when I was making direct loans within my LLC to rehabbers. Getting through the process with a custodian (Sterling Trust, in my case) was slow and painful. The IRA LLC made it quicker to get the money to the title company. I've since moved away from that approach and invest them money with a broker in a pool The IRA LLC isn't nearly as necessary.
If you go the IRA-LLC route, set it up with a reputable company. I used Guidant for mine. I just received and e-mail that this business has been purchased by a law firm called iDirect. We will see how that goes.
Hello,
I too am just starting. I would not want to imagine the hassle of using a Custodian to write every check. We are doing buy and hold for rental.
We did the LLC route within the SDIRA. We used UDirect for the 'custodian' and they refered us to the law office of Mark Kohler who does a lot of SDIRA work (and has some good youtube videos explain things also). I was very happy with both of them, and found it painless. I DID do a lot fo home work upfront to be able to understand how and why we wanted things set up like we did, which is a three way partnership.
Good Luck. Dan
Dumb question: if retirement accounts are protected from creditors why would you need an LLC in one?
Not a dumb question. The reason you may need an LLC in one is to give you control of the cash. In a regular Self Directed IRA the custodian needs to approve any investment you make. So if you buy a house -- a few days to get approval. More painful is if you wish to spend $50 on new screens -- the custodian needs to approve it.
With an LLC in the IRA the custodian just approves the investment in the LLC. Then the managing member (you) approves all investments from the LLC. Much easier.
Brian, be careful of one thing. You get hit with some tax penalties if you're running a business from your IRA, and rehabbing can be seen as that. Research UBIT.
The IRA is supposed to be for fairly hands off investment. Not saying that some rehabbing can't be done, but seek professional advice to keep yourself clear of tax issues.
Hello,
Micheal B. covered the reasons pretty well from the operations side of things for the reasons to have an LLC within the SDIRA.
One other thing to think about is the liability protection offered. If it was 'just your retirement account' that owned the property, and not an LLC, in theory it would be much easier for a worker, renter, etc.... to try to sue you for personal recourse in the event of some incident.
To me, I see almost no reason NOT to have the LLC, with the possible exception of the states that have a high yearly fee like Cal. etc.....
Dan Dietz
Hi Everyone,
So, from what I'm understanding (from the post and other sources) is the SDIRA is essentially buying stock in the LLC; and you can't personally touch any money that's in the SDIRA.
So, if your SDIRA only holds (for example) a 40% stake in the LLC, you can still do whatever you want to with the 60% proceeds that is personally owned by you. For example, if you're doing well enough, you could live off of it.
Is this correct?
Bariki
I have seen IRA's that own shares of a private trust with a 3rd party trustee who writes the checks. LLC filing & annual fees wouldn't apply, which can be a significant amount in some states like CA ($800 minimum /yr)
I feel like I constantly flog the fantastic benefits of SD401K's, but what the hell, they are just far superior to IRA/LLC's and seem to be utterly overlooked by 99% of investors. You can transfer all of your IRA, old 401K, and pension payouts into the self directed 401K.
A recent comment in another thread:
"Annual state LLC fees are an additional burden for the IRA/LLC. The much better avenue is the SD401k, which has checkbook control but does NOT require an LLC. I used www.mysolo401k.net to establish mine and have been very pleased. They have all kinds of great info on their web site to guide you.
For a "sponsoring business" for the SD401k, you can simply sign up to be a distributor for a great product (such as a nutritional product, for example, there are thousands of possibilities). This typically costs very little to sign up.
The benefits of the SD401k relative to an SDIRA are huge. Search other posts for SD401k or Solo 401k if interested.
There also remains a bit of taint surrounding the IRA/LLC in terms of potential future IRS action against these arrangements, that you do not have to worry about with the SD401K."
In my view I feel for the best asset protection, ease of use and maintaining would be a series LLC outside of the IRA. The series LLC is very useful when you grow and have many properties. All cells flow through the main LLC and you only have to file on main LLC . A series setup in Delaware even has another layer of protection. Once you have your own company I would setup a self directed solo 401k as well. Solo 401k is more flexible on what you want to do. All solo 401ks are not created equal. Just my opinion from learning the hard way.
@David Beard , I am in complete agreement. Self directed 401k is a powerful investment tool that is often overlooked for some reason.
Bariki & All,
If I am understanding right, you are asking if you can live off of the 'other part' of the SDIRA that is not invested in the properties. I assume you are asking if you have 100K in the SDIRA, and buy a property for 40K, can you use the remaining 60K for living expenses?
I think it would depend on if you are 59 1/2 yet, which is the age you can withdrawal with no penalty. It would be no different than a traditional IRA in that regard.
What we do with the portion that we have 'rolled' into our SDIRA from our regular ROTH is put it in a 'brokerage account' in the name of the LLC that is owner by our SDIRA. In essence, the LLC is investing the 'surplus funds' (until we find another property that fits our criteria) in either stocks, ETFs, mutual funds, etc....
Also, we have not rolled our entire regular ROTHs all at once into the SDIRAs. Just enough extra to have funds for repairs, taxes, etc.... and the most we think we would need for Earnest Money to make an offer on another property (15K total).
Solo401K Question..... My understanding is that if you create your own 'business' to enable the setting up of a solo401k program, you could only contribute the amount of 'profit' from that business, not as much as you want. Meaning if your 'side business' made a profit of 5K, but you could afford to contribute 20K from your NON self employed job, you are still limited to ONLY 5K that is related to your self employed business. Is that correct from what the rest of you understand?
Solo401K comment....... I agree they sound like a great idea, but in my case I converted all my IRAs to ROTHs the first year I was able to, so I think it would not make sense in the case of ROTHs.
Dan Dietz
I have a question: The reason I went IRA LLC was because it was easier to understand the mechanism. Can you explain more about the "sponsoring business?" I remember that was the part that I didnt understand enough to go that direction, whereas I am very familiar with the basic structures of an LLC.
Originally posted by Daniel Dietz:
Solo401K Question..... My understanding is that if you create your own 'business' to enable the setting up of a solo401k program, you could only contribute the amount of 'profit' from that business, not as much as you want. Meaning if your 'side business' made a profit of 5K, but you could afford to contribute 20K from your NON self employed job, you are still limited to ONLY 5K that is related to your self employed business. Is that correct from what the rest of you understand?
Solo401K comment....... I agree they sound like a great idea, but in my case I converted all my IRAs to ROTHs the first year I was able to, so I think it would not make sense in the case of ROTHs.
Dan Dietz
Dan -- you are correct about only the earnings of the business being eligible to contribute to the solo401k. The beauty is to do rollovers of IRAs, old employer 401ks, and pension lump sum payouts into the solo 401k. However, for those that are truly self-employed (that is their livelihood) with no employees, then the solo 401k is the best option for deferring earnings. For those who still work a W2 job, then they can use their employer 401k or other non-employer accounts to defer earnings.
You're also right that you cannot roll a Roth IRA into a Roth Solo 401K.
Originally posted by Lisa Phillips:
Lisa -- you simply need to have an active business to sponsor the solo 401k. I've mentioned that this can be as simple as signing up to be a Juice Plus distributor, as an example. (i.e. -- it can be mucho small business). That business would simply file a Sch. C for it's (potentially very meager) revenue and expense activity each year. In my case, I'm a licensed agent, so I just have my real estate agent activity as the sponsoring business, but this is a very easy requirement to meet. This makes the most sense when you are rolling over funds, as noted in the preceding post.
A 401K consulting company will create the document which governs your 401K plan. That company does not act as a custodian like Equity Trust or Entrust, they are essentially just an administrative firm staffed by attorneys and benefit plan specialists. They will also help with the annual IRS filing. No LLC is necessary. You'd simply have a checking account at your local bank titled something like "Lisa Phillips Solo 401K Trust", for which you are the sole trustee. You write all checks, make all deposits, simple as that.
Originally posted by David Beard:
Originally posted by Lisa Phillips:
Lisa -- you simply need to have an active business to sponsor the solo 401k. I've mentioned that this can be as simple as signing up to be a Juice Plus distributor, as an example. (i.e. -- it can be mucho small business). That business would simply file a Sch. C for it's (potentially very meager) revenue and expense activity each year. In my case, I'm a licensed agent, so I just have my real estate agent activity as the sponsoring business, but this is a very easy requirement to meet. This makes the most sense when you are rolling over funds, as noted in the preceding post.
A 401K consulting company will create the document which governs your 401K plan. That company does not act as a custodian like Equity Trust or Entrust, they are essentially just an administrative firm staffed by attorneys and benefit plan specialists. They will also help with the annual IRS filing. No LLC is necessary. You'd simply have a checking account at your local bank titled something like "Lisa Phillips Solo 401K Trust", for which you are the sole trustee. You write all checks, make all deposits, simple as that.
What you posted is correct. Simple has to be sponsor for the 401k.
Thank you both @Steven Hamilton II , @David Beard This gives me a good direction to start my research in, so I appreciate it. I'm not going to act like I haven't done at least 2 distributor businesses in my past. This is very good knowledge that's not as clear on the blog sites that have mentioned them.
Originally posted by Lisa Phillips:
Feel free to ask your questions.