Self-Directed IRA vs. a Self-Directed IRA LLC with Checkbook Control
What’s the difference between a Self-Directed IRA and a Self-Directed IRA LLC with Checkbook Control?
In recent years, many investors have sought greater control over their retirement savings and have flocked to self-directed IRAs for exactly that reason.
There are a few variations of self-directed IRAs: traditional self-directed IRAs and a self-directed IRA LLC with Checkbook Control. By the end of this article, you will have a clear understanding of both types of IRAs, allowing you to choose which one will be a better fit for you based on your individual needs.
What is a traditional Self-Directed IRA and how does it work?
An IRA is an Individual Retirement Account that allows individuals to save and invest for retirement on a tax-deferred basis.
A self-directed IRA is a type of Individual Retirement Account that allows the IRA owner to have greater control over selecting the IRAs investments.
A self-directed IRA gives you access to a wide array of non-traditional assets, along with the standard stocks, bonds and mutual funds provided by most large financial institutions. Some of those alternative investment options are real estate, precious metals, private mortgages, private company stock, tax lien certificates, notes, private placements and more.
(Under Internal Revenue Code section 408, federal law only prohibits an IRA from investing in life insurance policies and collectibles, such as stamps, coins, art, gems, antiques or any alcoholic beverages.)
Self-directed IRAs are becoming more and more popular as investors seek investment options outside of the limited stocks, bonds and mutual funds offered by their current custodians.
If you desire the freedom to invest your retirement savings in a wide variety of assets, both traditional and non-traditional, then a self-directed IRA will provide you with just that.
Choosing a Self-Directed IRA custodian
You want to make sure to choose a self-directed IRA custodian that will fit your individual needs. Below are three that all have an A+ rating with the Better Business Bureau (BBB) and, in my first hand experience, are reputable.
Self Directed IRA Services
The Entrust Group
Provident Trust Group
How much will it cost me?
The cost to set up a new account will vary from custodian to custodian. Each custodian will also charge different amounts per transaction, wire fees, precious metals storage, etc.
On average, you can expect to pay between $250 and $395 to set up your new self-directed IRA. These set-up fees can be deducted from the amount that you transfer over to your new IRA.
If you plan on buying and holding a long term investment like gold and silver, a traditional self-directed IRA can be the most cost effective way to do so. Make sure to choose a custodian that has a fixed cost for storage and insurance, and that doesn’t charge based on the accounts value.
If you plan on holding multiple investments and executing transactions frequently, a self-directed IRA can become costly because you will be charged a fee for each transaction.
How do I set up a Self-Directed IRA?
Opening a self-directed IRA is as simple as submitting a basic application. Your new account will be established within 48 hours.
You can fund your new self-directed IRA by the following options:
A direct transfer is the most common method of funding a new self-directed IRA. A direct transfer is moving funds from one or more existing IRA accounts to another.
A direct transfer is not a taxable event nor is it reported to the IRS, because you are moving your funds from one custodian to another.
A direct transfer will typically take 7-10 days depending on your current IRA custodian. This process can be expedited if your current custodian will accept a faxed version of paperwork and you elect to have funds wired rather then sent via check.
An IRA rollover is when you move funds from a qualified retirement plan such as a 401k, 403b or 457b to a self-directed IRA. This typically occurs when you change jobs, turn 59 and a half, or retire. IRA rollovers can take anywhere from 2-6 weeks to complete. Beginning in 2015, each taxpayer is limited to 1 rollover every 12 months.
A direct rollover occurs when your funds are rolled over directly to your new self-directed IRA custodian from your qualified retirement plan. A check will be made out to your new IRA custodian and will either be mailed directly to the new IRA custodian or to you so that you can forward it to them.
An indirect rollover occurs when your qualified retirement plan issues you a personal check to be deposited into your personal account. You then have 60 days to redeposit those funds into your self-directed IRA account to avoid penalty.
If you receive a direct payment of your funds from your qualified plan, 20% may be withheld for taxes. To recover the 20%, you must deposit the funds into your self-directed IRA within 60 days, but you must also include the withheld amount out of your own pocket. Your deposit into your self-directed IRA must be equal to the amount you received plus the 20% that was withheld. You will then receive a refund in the form of a tax credit when you file your tax return. If you don’t make up the difference from the amount withheld, it will be considered a distribution and taxed as income. If you are under 59 and a half, you will also be penalized at 10% of the amount distributed.
As you can see, Indirect Rollovers can be complicated. Whenever you can, make sure to do a Direct Rollover and avoid the unnecessary headaches.
If you’re eligible to make an annual contribution within the IRS guidelines, you may contribute up to the maximum of $5,500 if under age 50, or up to $6,500 if age 50 or over.
Once your Self-Directed IRA is funded, you simply select the investments you’d like to hold in your new IRA and acquire them.
Your new self-directed IRA has an almost limitless array of investment opportunities. Below are few of the more popular ones:
Trust & Mortgage Deeds
Private Real Estate Investment Trusts
Tax Lien Certificates
Public Mutual Funds
Oil & Gas Investments
Public Limited Partnerships
As you can see, a self directed IRA liberates your retirement funds to the point that your investment options are virtually endless. Whether you want to invest solely in alternative assets or a combination of traditional as well, a self-directed IRA will allow you the freedom to invest in what you want when you want.
Now that you have a much better understanding of self-directed IRA’s, let’s take a look at the self-directed IRA LLC with Checkbook Control.
What is a Self-Directed IRA LLC with Checkbook Control and how does it work?
A self-directed IRA LLC with Checkbook Control is different from a self-directed IRA in that it owns a LLC (Limited Liability Company) that you are the managing member of. The term “Checkbook Control” is used because the IRA owner has complete signing authority over the IRA funds.
What gives you “Checkbook Control” is that the LLC is owned by your IRA. Once the LLC is established, you’ll set up a business checking account in the name of your LLC at the bank of your choice. This will require your EIN number and Articles of Incorporation.
You will now direct your self-directed IRA to invest in its only asset, the LLC, and you will receive a check or wire capitalizing that checking account.
The self-directed IRA LLC manager (you) can now make investments from the LLC checking account without consent from the custodian, and, therefore, eliminate transaction fees and processing delays.
When you find something you would like to invest in with your IRA funds, just write a check directly from your self-directed IRA LLC checking account. It’s as simple as that. If you plan on investing in assets that require you to move quickly, this is an invaluable benefit of the self-directed IRA LLC.
Is a Self-Directed IRA LLC right for me?
Here are a few points to take into consideration when deciding if a self-directed IRA LLC is a good fit for you:
What type of investments do I plan on holding?
If you plan on acquiring investments that require moving money quickly, an IRA with Checkbook Control cannot be beat because you are able to avoid any transactional delays. Real estate, real estate options and tax liens fall into this category.
If you plan on acquiring and holding precious metals long term and do not want to take physical possession of them, then a traditional self-directed IRA is typically your best and most cost effective bet.
How often am I going to make investments?
If you plan on investing in assets that require frequent transactions like hard money loans, auctions, etc., a self-directed IRA LLC would be best as you will save in transaction costs.
If you are going to be actively working your IRA account, consistently searching for investments to acquire, then you will want Checkbook Control. If you are going to hold a few passive investments for the long haul, then a traditional self-directed IRA typically would work best.
How much money do I need to fund the account?
A self-directed IRA LLC is not cheap to set up. (You will find set up costs below.)
For example, if you only have $20,000 in your current IRA, it will cost $1,500 to set up a self-directed IRA LLC; that may be cost-prohibitive.
A simple rule of thumb is the larger the account and the more transactions you will be executing, the more a self-directed IRA LLC makes sense.
Do I want to invest internationally?
The IRS does not prohibit you from investing internationally with your traditional self-directed IRA, but finding a custodian that will allow you to is another story.
The advantage of a self-directed IRA LLC is that you don’t have to request permission from your custodian if you would like to make an international investment – you simply write a check.
Would I store my precious metals myself?
If you would like to own precious metals with your IRA and take possession of them, then you must have a self-directed IRA LLC.
Depending on who you speak to, you may get a few different responses on your ability to do so, but here are the facts:
Internal Revenue Code Section 408(m) identifies what precious metals are permitted in a self-directed IRA, namely gold, silver, platinum and palladium.
Section 408(m) also states that gold, silver, platinum and palladium bullion must be held in the physical possession of a trustee; a trustee being either a U.S. Bank or financial institution.
Many tax professionals believe that storing precious metals bullion in a safety deposit box in the name of your self-directed IRA LLC would suffice the “physical possession” requirement of Internal Revenue Code Section 408(m).
Unlike precious metals bullion, the Internal Revenue Code does not require IRS-approved coins be held in the “physical possession” of a U.S. trustee. It therefore appears that IRS-approved coins, such as American Eagles, can be acquired with a self-directed IRA LLC and stored personally and do not require being held by a U.S. Bank or financial institution.
How much does a Self-Directed IRA LLC cost?
Setting up a self-directed IRA LLC will run you anywhere from $1,295 to $1,995 with a reputable firm.
Each year, you’ll have a custodial fee ranging, on average, from $250 to $360.
Where can I get a Self-Directed IRA LLC set up?
Choosing a self-directed IRA LLC provider is an important task. Getting your account set up properly by professionals is imperative.
Below are 3 reputable providers from my first hand experience:
IRA Financial Group
Are Self-Directed IRA LLCs with Checkbook Control legal?
Yes. In 1996, this question was brought before the Tax Court in the case of Swanson vs Commissioner (IRS). Mr. Swanson created a special entity that was owned by his IRA but managed by himself to invest with. The IRS attempted to argue that the creation of the special entity triggered a prohibited transaction, but they lost the case.
The IRS confirmed the Swanson ruling via Field Service Advice (FSA) Memorandum 200128011. It confirmed that the creation of an entity owned by an IRA for the purpose of self-directing assets was not a prohibited transaction pursuant to Code Section 4975.
On October 29, 2013, the IRS again confirmed that the use of an LLC that’s owned by an IRA and managed by the IRA holder did not constitute a prohibited transaction, as referenced in T.C. Memo. 2013-245.
As referenced in the Swanson case and T.C. Memo. 2013-245, it’s clear the Tax Court believes that the creation and use of an LLC within a self-directed IRA will not trigger a prohibited transaction and is 100% legal.
For individuals interested in seeking greater control over their retirement savings, there are multiple options to consider, including traditional self-directed IRAs and self-directed IRA LLCs with Checkbook Control. Knowing your personal needs and what investments you will be making will help you choose which option is best for you.