IRAs and LLCs - How they Work Together

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New Direction clients are often curious about how IRAs and LLCs work together. Many clients ask if their self-directed IRA needs an LLC to invest in alternative assets (assets which lie outside of publicly-traded securities). An IRA does not need an LLC to purchase alternative assets. The IRS legally allows retirement accounts to invest in any asset except for life insurance or collectibles. However, some IRA investors do utilize an LLC with their retirement accounts in order to have closer control over their funds.
The most common relationship between self-directed IRAs and LLCs is for retirement investors to create an LLC as a subset of an IRA. Like other self-directed IRA assets, an LLC in an IRA can have combined investors. The IRA holder can combine personal funds or cash from other investors or other IRAs to fund the LLC.
To own an LLC with an IRA, many account holders establish what is called a Checkbook IRA. Though an investor can own all or part of an LLC without a Checkbook IRA, the advantage of using this account structure is that it can make it easier for an investor to open and manage an LLC. A Checkbook IRA can be a Roth or Traditional IRA account structure.
The main reasons an investor may choose a Checkbook IRA are the speed with which funds can be disbursed, and avoiding administrative fees. Once the IRA buys 100% of the LLC or entity, the majority of the work and responsibility for investments shifts to the Checkbook IRA account holder, who is also the entity manager. Purchase, sale, and management of assets within the IRA’s LLC can proceed without an IRA provider, so transactions can typically be accomplished quickly and without oversight.
While owning an LLC in a Checkbook IRA can provide some flexibility for investors, it requires greater responsibility on the part of the IRA holder. The LLC or entity will need a bank account, Tax ID number, financial books, filing systems, and accounting/recordkeeping.  For many clients, allowing the IRA provider to handle the processing of a Checkbook IRA account’s transactions is well worth the associated fees. It is up to the LLC manager to understand and abide by all the IRS laws pertaining to IRA investing.
A self-directed IRA can purchase assets without an LLC. This includes real estate, precious metals, private equity, and more. To learn more about the pros and cons of a Checkbook IRA and an IRA LLC, feel free to contact New Direction IRA today.

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