When an LLC is 100% owned by an IRA or combination of IRAs, it is commonly referred to as a Self-Directed IRA LLC or Checkbook Self-Directed IRA LLC. While an IRA owns the LLC through the purchase of membership units, it’s important to note that the same prohibited transaction rules applicable to the IRA generally apply to the IRA owned LLC.

Self-Directed IRA Owned LLC stems from famous court case

The tax court ruled in favor of a taxpayer in Swanson versus the Commissioner, 106 Tax Court 76, 1996, essentially ruling that the initial full investment in an entity by an IRA was not prohibited. In this particular court case, Swanson’s IRA was the sole investor/shareholder in a Corporation. As a result, the tax court ruled that since Swanson’s IRA was the initial investor in the corporation (i.e., the corporation had not previously issued any shares prior to Swanson’s IRA purchase of corporation shares) it was not considered a prohibited transaction. In sum, based on the Swanson court case and Field Service Advisory 2001-28011, the purchase of units in an entity such as an LLC or purchase of shares in a C-Corporation by a Self-Directed IRA or/and the IRA owner is not prohibited provided the units or share are issued for the first time and the purchase is made simultaneously.

The Checkbook Self-Directed IRA LLC

Deemed single member for tax filing purposes – An LLC that is solely owned by an IRA is considered a Single Member LLC for tax filing purposes; therefore, the Checkbook Self-Directed IRA LLC does not file a tax return. However, the IRA is subject to filing a tax return (Form 990T) in the event that UBTI or UDFI taxes are generated.

Why a Checkbook Self-Directed IRA LLC?

There are many reasons why the Checkbook Self-Directed IRA LLC is the investment vehicle of choice for investing retirement funds, including the following:

Alternative Investments

Besides still retaining the option to invest in equities (stocks and mutual funds), since 2002 the Self-Directed IRA Owned LLC has steadily grown in popularity as the common form of business for placing real estate purchases in addition to tax liens, precious metals, trust deeds and private company shares, to name a few.

Checkbook Control over Retirement Funds

A Checkbook Self-Directed IRA LLC is manager managed as opposed to member managed. As such, as the named LLC manager, you are in full control over placing the Checkbook IRA LLC investments in any investment not prohibited under the IRS regulations. Checkbook Self-Directed IRA LLC investment purchases are generally made by writing a check from the LLC checking account and processed in the name of the LLC.

Reduced Fees and Timely Place Investments

While alternative investments also may be placed directly through a Self-Directed IRA opened through a Self-Directed IRA custodian such as New Vision Trust Company, which was the dominant method up until the last 5 years, instead of using a IRA Owned LLC, now IRA investors are opting for the Self-Directed IRA Owned LLC to greatly reduce processing fees, holding fees and to process time-sensitive investment purchases such as real estate and tax liens.

How does it work?

After transferring retirement funds such as 401(k), 403(b), 457 plan and IRAs to the new Self-Directed IRA and then capitalizing the Self-Directed IRA owned LLC, start placing alternative investment purchases by writing checks directly from the LLC checking account. A Checkbook Self-Directed IRA LLC results in flexibility to invest retirement funds while still taking advantage of the tax benefits offered under the Traditional IRA and Roth IRA.

Step 1: Establish a Self-Directed IRA

Process starts with the drafting of a specialized Self-Directed IRA Operating Agreement containing specific IRA language, registering the LLC with the state and obtaining an EIN from the IRS.

Step 2: Transfer Retirement Funds

Transfer/rollover funds from former employer retirement plans or IRAs to new Self-Directed IRA Custodian that allows for investing in an LLC.

Step 3: Checking Account

As the named manager of the LLC, you establish a checking account for the LLC at any bank of your choice.

Step 4: Funding a Checkbook Self-Directed IRA LLC

The Self-Directed IRA custodian then processes the investment directive and funds the Self-Directed IRA Owned LLC by wiring the funds to the LLC checking account.

Step 5: Investing

After the Self-Directed IRA Owned LLC checking account is funded, begin processing investment purchases.

Diverse Investment Options

A Self-Directed IRA Owned LLC can invest in any investment not restricted by law. Examples of acceptable investments include: real estate, precious metals, private shares, tax liens and trust deeds and more.

Tax Deferred or Tax Free Gains

Because investment gains flow back to the Self-Directed IRA Owned LLC and are then reinvested, the IRA Owned LLC continues to accumulate tax-deferred funds, or in the case of a Self-Directed Roth IRA Owned LLC generate tax free gains.

Minimal Custodian Involvement 

The Checkbook Self-Directed IRA LLC manager is responsible for the administrative review of alternative investment purchases, a function generally performed by the Self-Directed IRA custodian. Therefore, the Self-Directed IRA custodian’s role in connection with the IRA is greatly reduced to, for example, issuing annual Form 5498, processing annual valuation directive of Self-Directed IRA Owned LLC, which is provided by the LLC manager to the custodian, and processing and reporting IRA distributions once distributions commence, to name a few.

Minimal Custodian Fees

Because investments are placed through the Self-Directed Owned IRA LLC by the IRA participant as the named LLC manager, investment purchase fees generally charged by Self-Directed IRA Custodians are eliminated. With the exception of precious metals, which the regulations require be stored with an approved depository institution.

In addition to stocks, bonds, mutual funds and other securities a Checkbook Self-Directed IRA LLC may be invested in the following types of investments:

Real Estate:

  • Residential Property
  • Commercial Property
  • Developed Land
  • Foreclosures
  • Rehabs/Flips
  • Mobile Homes
  • REITs

Promissory Notes & Tax Deeds:

  • Mortgages
  • Deeds of Trust
  • Secured Promissory Notes
  • Unsecured Promissory Notes
  • Tax Lien
  • Tax Deed

Other Types of Investments:

  • Precious Metals
  • Annuities
  • Foreign Currency Exchange
  • Equipment Leasing
  • Private Equity
  • Structured Settlements
  • Cryptocurrency

$895

Optional Maintenance and Support Fee: $150 annually

Our establishment service includes:

  • A dedicated account manager.
  • Establishment of (1) one Special Purpose LLC.
  • All state, legal and filing fees are billed separately.
  • Preparation & filing of Articles of Organization.
  • Preliminary name search.
  • Preparation of EIN filing and acquisition of an EIN number.
  • Obtaining a Certificate of Organization from the Secretary of State.
  • Assistance in the establishment of an IRA LLC business bank account.
  • A customized & IRS-compliant Operating Agreement.
  • Assistance in the completion of documents to transfer funds to the LLC.

Checkbook IRA refers to a Self-Directed IRA that is invested in an LLC, which the IRA participant manages. Following is a breakdown of the Checkbook IRA process and regulations.

Generally it only makes sense to open a Checkbook Self-Directed IRA LLC if:

  1. You plan to invest in alternative investments such as real estate, promissory notes, passively in private company shares, tax liens and precious metal, to name a few.
  2. You want to manage and safe-keep the IRA investments.
  3. You want to greatly reduce IRA custodian involvement and more importantly high custodian fees. By having checkbook control over your IRA, which defers from a Self-Directed IRA whereby the IRA custodian processes the investment purchases and thus charges a processing fee, the IRA custodian fees are greatly reduced.
  4. You want to process investments timely. Reason being, since you have checkbook control over your IRA, you place the IRA alternative investments by writing checks and bypass the IRA custodians review of the paperwork, which is usually performed with their interest in mind not yours. In other words, when the IRA custodian reviews investment paperwork, they are not reviewing it with the intention to determine if it is legal since they are not serving in a fiduciary capacity but rather a custodian capacity. Therefore, the custodian simply reviews the investment paperwork to determine if they can hold the investment on their books. Often time, the IRA custodian’s initial review of the investment paperwork takes days and the final review even longer.

Reasons not to open a Checkbook Self-Directed IRA LLC

For those who do not have the time to manage their own Checkbook Self-Directed IRA LLC, a Self-Directed IRA may make more sense. While the end-result is the same (i.e., the IRA can be invested in alternative investments such as real estate, promissory notes, tax liens, private placements and precious metals), the IRA custodian involvement is much greater.

Checkbook Self-Directed IRA LLC Do’s and Don’ts

Whether investing in alternative investments such as real estate, promissory notes, tax liens, private company shares and precious metals, it is important to understand the Checkbook Self-Directed IRA LLC rules.

The Checkbook Self-Directed IRA LLC Do’s

Do open the Checkbook IRA bank account in the name of the LLC, not in your personal name.

Do use the LLC employer identification number (EIN) when opening the Checkbook IRA bank account.

Do title Checkbook IRA investments in the name of the LLC, not your personal name.

Do pay investment expenses associated with the Checkbook Self-Directed IRA LLC assets (e.g. for a real-estate property, this entails paying property taxes, property insurance and repair costs) using Checkbook IRA funds not personal funds.

Do deposit investment gains into the Checkbook Self-Directed IRA LLC bank account.

Do manage the Checkbook Self-Directed IRA LLC but do not receive compensation for doing so.

Do make IRA annual contributions to the Self-Directed IRA first not the Checkbook Self-Directed IRA LLC.

The Don’ts

Do not use the Checkbook Self-Directed IRA LLC funds for your personal use.

Do not obtain a credit card in the name of the Self-Directed 401(k) or in your name.

Do not use the Checkbook Self-Directed IRA LLC assets (e.g., for a personal rental property, do not live or vacation in the property).

Do not perform repairs on real-estate property owned by the Checkbook Self-Directed IRA LLC as you are a disqualified party.

Do not deposit personal funds into the Checkbook Self-Directed IRA LLC bank account.

Do not take RMD’s on any distributions from your Checkbook Self-Directed IRA LLC.

Court cases that support the Checkbook Self-Directed IRA LLC arrangement

Swanson v. Commissioner

Hallweg v. Commissioner

ERISA Advisory Opinion 97-23A

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