According to Wikipedia…
In an effort to reduce fees, paperwork, and processing delays, some self-directed IRA investors choose to employ a Limited Liability Company (LLC) IRA structure. In such a structure the account holder directs his IRA custodian to invest into a limited liability company that the account owner manages himself. The account owner can then execute transactions on the LLC level without the involvement of the IRA custodian, thus reducing fees and eliminating custodian transactional fees and delays. The profits of the LLC pass through to the IRA with nearly identical tax favorable treatment. Some claim that this IRA LLC strategy has been legitimized through a tax court case: Swanson v. Commissioner, 106 T.C. 76 (1996). Others disagree on the validity of the court case. Some refer to this structure as “checkbook control” because the IRA account holder often has sole signing authority for the LLC and its bank accounts.
The Self Directed IRA LLC “Checkbook Control” Process
STEP 1: A Self-Directed IRA account is established with an IRS approved and FDIC backed passive custodian.
STEP 2: Retirement funds are transferred to the new Self-Directed IRA account tax-free.
STEP 3: A Limited Liability Company (LLC) is formed with the IRA account owner designated as Manager and the IRA as owner (member) of the LLC.
STEP 4: At the direction of the IRA owner, the passive custodian invests the IRA funds into the newly formed IRA LLC. One or more IRAs can be used to fund the LLC, including Traditional, Roth, and SEP IRAs.
STEP 5: The Manager of the new IRA LLC (the IRA owner?) directs all, or a portion, of the IRA funds held in the new LLC bank account for investment.
STEP 6: The LLC makes an investment using IRA funds and all income and gains generally flow back to the LLC tax-free.
Why are they popular?
- Legal Document preparers market it as the best way to manage the SDIRA.
- Legal document preparers market it as a cheaper alternative to going through the custodian directly.
- The document preparer typically charges $2,000 to $5,000 to create the entity.
Benefits of LLC’s in IRA’s
- Asset Protection
- Specific uses like Tax Liens
- Perceived cost savings
Disadvantages of LLC’s in IRA’s
- Cost to create the LLC ($)
- Documents have to be drawn up correctly.
- Annual Fees to the State ($)
- 990T Tax Return ($)
- Additional Record Keeping (Time)
- Annual Valuations (Time & $)
- Penalties if not managing the entity correctly abiding by all state laws and IRC 4975 ($)
- Additional Scrutiny by the IRS (Time)
- Its unlikely it is a cheaper option than going through HTC directly.
- I would selfishly love it if every client had an LLC because I could cut my staff in half, save a lot of money and build up my bottom line
- The risks to the client are great. It does provide certain freedoms but there is a higher level of responsibility and scrutiny.
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