Can a Self-Directed IRA LLC be created in a Series LLC Cell?

Question

Hi. This is my first post here on BiggerPockets and I hope someone can shed some light on a question of mine.

I am going to create a self-directed IRA (SDIRA) LLC (aka a checkbook IRA), and I have spoken with several firms in that area, e.g., uDirect, IRA Financial Group. I can't get an answer to this question: rather than paying their charge of $1,400-2,200 to create a Traditional IRA LLC plus another $1,400-2,200 to create a Roth IRA LLC, I want to create two new cell/series in a Texas Series LLC to save myself the bulk of the setup and ongoing LLC costs.

Can anyone confirm this is ok? How do I go about doing so? Are there any issues associated with using  series LLC cell for this purpose that would be unique to an IRA LLC?

Thanks! P.

Brian Eastman · Answer

@Doreen Chaisson

I'm sorry, but that is simply not good advice.  I hate to call another poster out, but felt I really had to here.

A partnership LLC comes with all kinds of restrictions including prohibitions on future funding and the necessity for partnership tax returns.  This is something that a tax attorney who specializes in ERISA law and has specific knowledge of self directed IRA LLC structures will be aware of and able to advise a client on.  A typical corporate or real estate attorney will not have that kind of knowledge and could lead a client into potential trouble.

@Patrick Plummer is not, of course, required to work with one of the specialty firms that offer checkbook IRA plans, and could work with an independent tax attorney familiar with these concepts.  Often times that can end up being more expensive, however, based on the hourly rate of the attorney and how much assistance the client may require.

As to Mr. Plumber's question about a series LLC, I'm going to punt on that one.  Our tax attorney is not a fan of the series LLC since it is a concept that has yet to be fully tested in the courts.  It seems good in theory, but will it really stand?  As such, this is not an area we have delved into at the level of detail required to answer the question at hand.

I would add that a Texas series LLC would only be beneficial if the investments were to take place in Texas.  I noticed Mr. Plumber is in Pennsylvania and would not recommend a Texas LLC for real estate investments in Pennsylvania.

Brian Eastman · Answer

@Eric Tomlin

Each fractional Roth conversion will require appraisals.  As noted, you would want a CPA or attorney guiding you through the process and they do not work for free.

Find yourself a qualified tax attorney to discuss your plan with.  My guess is they will try to talk you out of it.

Eric Tomlin · Answer

@Brian Eastman

If I had the funds laying around to buy the land outright, I would. But since I don't - and I don't want to take out a loan to buy the property - I figured why not use a portion of my retirement portfolio to buy it?

1) The purchase is first and foremost an investment. I intend to buy and hold the land, and do nothing to it for at least 5 to 7 years. At that point, I will re-evaluate what I do with it (as one would do with any investment).

2) I have no intention of building on or improving the land while the LLC is owned by the SDIRA. So there is no risk of prohibited transactions.

3) Once the LLC is fully owned by the ROTH IRA, if I decide that I want to build/live on the land, I can take the land as a distribution tax free. Then it is mine to do with as I wish.

4) Other than minor expenses of setting up the LLC, I don't see how this is "expensive". Can you elaborate? Is there some cost aspect that I am simply missing out on?

Thanks! I love getting input from many sources (as opposed to someone who just "yes-es" me to make me happy.

Brian Eastman · Answer

@Eric Tomlin

If you want to use the property personally, just buy the property with non-IRA funds.  If that means taking smaller distributions of cash over a period of years rather than a lump sum, great.

What you have proposed is complex, expensive, and does have some risk associated with it.  It is possible, but you would want to be working hand-in-hand with a skilled ERISA/Tax attorney all the way through the process.  This is not a "setup an IRA LLC and just go invest" type of project.

There are folks who are comfortable with adding funds to a partnership LLC so long as it is done proportionally.  There have not been any clear rulings on this topic and we take a conservative approach.

Eric Tomlin · Answer

@Brian Eastman

I am in a similar boat as @Patrick Plummer with regard to a multi-member LLC funded by two SDIRAs (one traditional, one ROTH). In my case, both SDIRAs belong to my wife, if that makes any difference. We have also been told that if we needed more money in the LLC, we could make additional contributions to the SDIRAs in the proportion of the LLC ownership of each SDIRA. I had seen this thread previously, so I asked the attorney specifically about this and he said that according to IRC 4975(d)(9), and because there is no actual financial benefit to either IRA (or the IRA owner), that this is perfectly acceptable, and that he has set up many LLCs in this manner. Do you disagree that 4975(d)(9) exempts the IRAs from being a DP to the LLC? Is there any code that outlines the true rule in this case, or are we dealing with one of those situations where it simply hasn't been ruled on yet? This is fascinating to me, especially because two educated people seem to have such strong opinions on each side.

On another note (and as an explanation as to why I want to set up my LLC this way), please look at my plan below. Please feel free to let me know if you see any pitfalls, or areas where I could/should do something differently:

Here's my plan (at a high level):

1)Open a self-directed IRA (funded by means of a traditional pre-tax IRA rollover)

2)Open a self-directed ROTH IRA (funded by after-tax cash contributions)

3)Open an LLC

i)Using a single LLC means I will not have to change the title of the property as ownership of the LLC shifts from the traditional to ROTH SDIRA (more on that below).

ii)If I bought the property with two single member LLCs, the percentage of ownership would have to be listed on the title. The percentages will change as I move the investment into the ROTH

4)Direct the IRA custodian to invest the SDIRA and ROTH SDIRA into the LLC

i)Custodian of both SDIRAs will write checks to the LLC

ii)I will take the checks and deposit into a checking account in the name of the LLC

5)Identify/purchase a piece of property by writing a check from the LLC bank account

i)Property will be owned by, and titled in the name of, the LLC

ii)At this point, I cannot personally benefit from the property because it is owned by an entity that is funded by my SDIRAs. To benefit in any way from this property at this point would be considered a "prohibited transaction"

6)Over the next 5 (or so) years, I will transfer the SDIRA into the ROTH SDIRA

i)Each year, I will have to pay taxes on the amount of SDIRA I convert into ROTH SDIRA

ii)This allows us to spread the tax burden over a several year span as opposed to getting hit with a big tax bill all at once.

7)Once the SDIRA is fully converted to ROTH SDIRA (and wife is at least 59.5 years old), she can take the property as a distribution from the ROTH IRA without any tax consequence.

I know this was a bit long. I really appreciate your opinion as I am trying to find a consensus among the many opinions I have been getting.

Mark Nolan · Answer

@Patrick Plummer

Feel free to reach out to me directly with any questions.

Patrick Plummer · Answer

@Cameron Skinner, thanks for the insight...that's great advice...I will initiate with mysolo401k.net.

Merry Christmas!

Cameron Skinner · Answer

@Patrick Plummer in a former life I practiced in US Tax court, I strongly suggest if you qualify for the solo 401k go that route, and roll your ira into the solo 401k it is much more flexible in real estate transactions, and the compliance cost and reporting requirements are much less.  The SDIRA is a dinosaur compared to the solo401k.  The SDIRA have just been around longer giving them more popularity.  Go to mysolo401k.net they have lots of good info, also try 401kadm.com. Even if you currently don't qualify they can help you set up the structure of your business correctly to qualify next year.

Hope this helps, good luck

Patrick Plummer · Answer

Thanks a TON!!! That's great insight. Let me know if I can ever help you out! P.

Brian Eastman · Answer

@Patrick Plummer

It sounds as if you may qualify for the Solo 401k and yes, it would greatly simplify your situation.

Unlike an IRA which is an individual arrangement, a 401k is an employer sponsored retirement plan.  As such, you can within the 401k have multiple individual participant accounts - one for you and one for your wife - assuming your wife is a documented employee of the business.

You could not roll a Roth IRA into such a 401k, but I think you mentioned that your funds were in a traditional IRA.

With the 401k, there are still proscribed methods for documenting and bookkeeping so as to independently value your account and that of your wife, but the ability to combine the funds for investments is much easier than in the IRA realm.

Can a Self-Directed IRA LLC be created in a Series LLC Cell?

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